II. Is a Change Needed?
While only a small sample of states have been surveyed to this point, it quickly becomes clear that the few states that have determined if reliance is a required element for a breach of warranty claim do not agree with each other. California[1]and Delaware[2]take up the banner of requiring reliance, but New York[3]and Illinois[4]reject the premise. At the same time, the Delaware courts, while finding the requirement exists, do so in the face of case law that “is not replete with discussions of whether reliance is an essential element.”[5]
As the courts work through the case law, or in most instances create the case law, businesses struggle to determine what the likely outcome of a transaction will be. In California, defendants argue for the UCC definition that worked in New York, but are denied.[6]In Delaware, plaintiffs rely on a case that happened to use the rules of another state.[7]New York experience a 30-year period in which the law slowly evolved to what it is today, each new case shifting the balance a bit more.[8]This uncertainty has lead to an outcry for a standard rule across all states,[9] an outcry that I join.
In his Article calling for such a rule, Charles Whitehead reviews a number of deals in order to determine how the jurisdiction of the transaction affected negotiation.[10]Based on the results of his survey, Whitehead found that most deals were consistent in ignoring the rules of the transaction’s jurisdiction.[11]Whitehead attributes this phenomenon to the lack of consistency across and even within jurisdictions, as well as the lack of incentive for either party to bargain for an anti-sandbagging provision—the buyer generally wants the pro-sandbagging provision, while the seller does not want to raise questions regarding the truthfulness of its warranties.[12]Due to this lack of incentive, Whitehead then proposes the default rules should be anti-sandbagging, or requiring reliance, resulting in the parties having to negotiate for pro-sandbagging provisions if desired.[13]
[1] Seediscussion supra Part II.A.
[2] Seediscussion supra Part II.C.
[3] Seediscussion supra Part II.B.
[4] Seediscussion supra Part II.C.3. While not explicitly explored, the Delaware case briefly analyzed the Illinois law while rejecting it.
[5] Kelly, 2002 WL at *9.
[6] Kazerouni, 278 Cal. Rptr. at 873.
[7] Kelly, 2002 WL at *9.
[8] Seediscussion supra Part II.B.
[9] Charles Whitehead, Sandbagging: Default Rules and Acquisition Agreements, 36 Del. J. Corp. L.1081 (2011).
[10] *Id.*at 1089.
[11] *Id.*
[12] *Id.*
[13] *Id.*at 1089–90.