In the area of post-closing indemnification clauses, there exists a subset of provisions sometimes referred to as the sandbagging, or anti-sandbagging, provision. A sandbagging provision, often labeled as “Expectations” or “Benefit of the Bargain,” will generally provide that the right to indemnification is not affected by the knowledge of either party at any time.[1]In contrast, an anti-sandbagging provision will deny the right to indemnification if the party seeking indemnification knew of the breach prior to closing.[2]

            It quickly becomes clear that a normal sandbagging provision is generally buyer-friendly. Arguably, it allows a buyer to discover information during the due diligence investigation, proceed to closing, and then, using the information discover prior to closing during the due diligence investigation, to sue for breach of warranty. However, the buyer bargained for the benefit of the warranties made by the seller, regardless of the information the buyer brings to the closing table.

            The buyer understandably sees this as bordering on bad faith negotiations. The buyer has the opportunity to discover some latent defect, proceed to closing with the intention of immediately suing the seller for breach of warranty, obtaining not only the benefit of the bargain, but additional damages from a warranty that was never relied upon. But, to even entertain a pro-seller, anti-sandbagging provision, one must immediately confront the issue of knowledge: who knew about the breach; when was the knowledge obtain; was the knowledge enough to prevent indemnification. This effectively shifts the argument to what the buyer knew, and not if there was an actual breach.

            While the provision can be explicitly bargain for, when they are not, it is left up to the states to determine whether indemnification should be reliant on the buyer’s knowledge. Unfortunately, many states have not addressed the issue, either in the relevant statutes, or through the courts. Those states that have addressed the issue, have taken a wide range of stances providing no consistency for parties involved in the deal.

            This Note will first examine the current law of three jurisdictions—California, New York, and Delaware—in Part I.[3]In Part II, the issue of whether a model rule is needed or even desired.[4]Part III will set forth a proposed model rule based on the existing available law.[5]

[1]           A sample sandbagging provision is: “The right to indemnification based upon any breach of any representation or warranty will not be affected by any investigation conducted, or any knowledge acquired at any time, with respect to the accuracy or inaccuracy of such representation or warranty. Negotiating “Sandbagging Clauses” in the M&A Context (Apr. 25, 2013),

[2]           For an example of an anti-sandbagging provision: “No party shall be liable for any losses resulting from any breach of any representation or warranty if the party seeking indemnification for such losses had knowledge of such breach before closing.” *Id.*

[3]           Seediscussion infra Part I.

[4]           Seediscussion infra Part II.

[5]           Seediscussion infra Part III.