M&A law and practice are heavily influenced by North American law and practice. Delaware is the American jurisdiction where corporate law and M&A law have developed the most. In M&A, “sandbagging” refers to when a purchaser brings a claim against the seller under the contract for breach of representations and warranties (“R&W”), even though the purchaser had knowledge that such R&W was false before entering into the contract or the closing (Kim M Shah & Glenn D West, 2007). The question becomes whether the purchaser is entitled to damages.

Parties can include a clear pro-sandbagging or anti-sandbagging provision in their agreement, but empirical data suggests that most of them are silent about sandbagging (C. Hutchison, 2024), which may leave the question to the courts of law or arbitration tribunals.

In this article, we agree with the position of C. Hutchison (2024) that absent clear language, sandbagging must be allowed. Delaware is generally regarded as a pro-sandbagging jurisdiction in the absence of an express contractual bar. We believe that both Canadian and Brazilian contract law supports this conclusion.

Delaware confirms it is a “Sandbagging Jurisdiction”

Delaware law had a general pro-sandbagging trend, since Eagle Force Holdings, LLC v. Campbell (Frank J. Favia Jr.et al. 2025). However, In re Dura Medic Holdings, Inc. was one of the first cases to directly address whether a purchaser could recover damages for breach of R&W when they knew that the R&W was untrue or inaccurate (Frank J. Favia Jr.et al., 2025).

In In re Dura Medic, the target company was in the business of supplying durable medical equipment. The business was highly regulated because the company received payment under governmental health insurance programs. In 2016, some regulatory audits found irregular processes in the company’s claims under the governmental programs.

A private equity firm acquired the company in a reverse triangular merger, and a dispute arose about the breach of R&W related to compliance with all applicable laws, including healthcare laws. The Court found that the sellers failed to disclose one of the regulatory audits in the agreement. Sellers argued that the purchaser knew before closing that the audit existed, as it was informed in a pre-closing call. However, the Court rejected this defence.

In this case, the contract was not ambiguous, and for this reason, the disclosure outside the four corners of the merger agreement “has no bearing in the legal analysis”. In addition, Delaware law does not require justifiable reliance in contract claims; the representations made in the contract serve the purpose of allocating risk among the parties. Moreover, there is an efficiency argument for allowing sandbagging; as due diligence is expensive, the R&Ws allow the buyer to reduce due diligence costs by not needing to check on every little aspect of the seller’s business. Finally, the integration clause, stating that the agreement is the entire agreement between the parties on the subject matter, reinforces that disclosure of information not contemplated in the agreement should not amount to a waiver by the buyer, even if such disclosure was made before signing or closing. The Court stated that the integration clause does not bar a fraud claim, but it prevents the party from bringing extrinsic evidence to vary or contradict the contract. In the end, the Court found no evidence that the information was disclosed to the purchaser.

Lack of Clear Law in Canada

Canadian law is unclear on the issue of sandbagging in M&A, as there are only two leading cases that briefly touch on this matter (C. Hutchison, 2024, p. 318).

In Transamerica Life Inc. et al. v. ING Canada Inc., the Ontario Court of Appeal reversed the motions judge’s decision that applied a rule similar to in Re Dura Medic. The seller argued that the purchaser was barred from asserting the claim due to its implied duties of good faith and fair dealing. The purchaser became aware of the issues and did not inform the seller. The appeal was allowed based on the understanding that the duty of good faith was not settled in Canadian law, and the pleading stage was not appropriate to finally determine if the duty of good faith was unavailable as a defence to the seller.

In Eagle Resources Ltd. v. MacDonald, the respondent represented and warranted that, to the best of its knowledge, there was no fact that materially and adversely affected the business, prospects, or financial condition of each target company and any of the assets. Part of the assets involved certain lands and oil reserves. The purchaser received a report with information about producible reserves of oil in the main pool of the targets. However, a later report indicated that the reservoir was less than previously reported, which was not disclosed to the buyer. The trial court found a breach of warranty. The Court of Appeal confirmed that the clause in the purchase agreement did not speak to the purchaser’s knowledge, and, for that reason, the respondent’s argument based on the purchaser’s knowledge was rejected. Thus, “reliance” was not required to allow the purchaser to recover damages for breach of warranty.

However, two Supreme Court cases about the general principle of good faith in contract law may pose a serious question on the issue of sandbagging in Canada (C. Hutchison, p. 318). None of those cases speak directly to M&A and sandbagging, but they provide general rules of contract law and performance of contracts.

In Bhasin v. Hrynew, 2014 SCC 71, the Supreme Court established that good faith contractual performance is a “general organizing principle of the common law of contract which underpins and informs the various rules in which the common law […] recognizes obligations of good faith contractual performance.” (para. 33). The Supreme Court established a common law duty to act with honesty in the performance of contractual obligations. The law aims to bring commercial certainty to the parties, based on what is the reasonable expectation of commercial parties. The good faith principle imposes on the parties to perform their contractual obligations “not capriciously or arbitrarily” (para. 63). This principle requires the party to be mindful of the legitimate contracting interests of the other party. However, the result depends on the context of each case. The duty of good faith is different from fiduciary duties that require putting the interests of the other party first. Contractual good faith does not impose a duty of loyalty as the fiduciary duty. The Supreme Court imposed a duty of not lying or intentionally misleading the other party “about matters directly linked to the performance of the contract” (para. 73). In Bhasin, the duty of good faith was breached by the party who failed to act honestly in not pursuing a renewal of the agreement and assisted a competitor of the other party in obtaining clients and business from this other party. However, Bhasin did not impose an active duty to protect the other party (C. Hutchison, 2024, p. 321)

C.M. Callow Inc. v. Zollinger, 2020 SCC 45 was another dispute about the non-renewal of an agreement. The Supreme Court went further to say that “lack of a positive obligation of disclosure does not preclude an obligation to correct the false impression created through its own actions” (para. 38).

Hutchison argues that sandbagging is a more efficient rule, giving more certainty to the parties, and it is reconcilable with Bhasin and C.M. Callow. There is no duty to correct any misapprehension not created by the party itself (C. Hutchison, p. 331). Since M&A usually involves sophisticated parties that are advised by legal counsel, only active lies could result in an active duty to correct an incorrect assumption on the other party. C. Hutchison says that the following should not be a violation of the duty of honesty: “(1) failing to notify the seller of a breach of its own representations; (2) indicating willingness to close, despite a breach of the seller’s representations; or (3) indicating satisfaction with the seller’s due diligence disclosures, despite a breach of the seller’s representations.” (p. 331)

Brazil – Differences in M&A Practice and the Lack of Sandbagging Law

Brazilian practice is different when it comes to indemnification clauses in M&A. The purchaser is usually allowed to recover losses for any facts that occurred before closing, which is in addition to remedies for breach of R&W. Despite the seller having disclosed a fact in the R&W, the buyer will still have a remedy when facts occurred before the closing.

Nevertheless, occasionally a cross-border deal may adopt a North American-style indemnification clause or the indemnification may derive exclusively from a breach of R&W, so the issue of sandbagging is still relevant.

There is no jurisprudence in Brazilian law directly addressing this issue, but a case decided by the Court of Appeals of the State of São Paulo dealt with indemnification in the absence of an indemnification clause (Appeal No. 1006988-64.2018.8.26.0624). The issue was whether a purchaser should be allowed to recover damages for losses of the target company caused by undisclosed litigation that preceded closing, so the Court analyzed who was at fault based on the duties of both parties. The buyer had a duty of diligence to seek information that was relevant to the acquisition, while the seller had a duty of good faith to disclose all information that was relevant to the buyer. Thus, they were both at fault. In conclusion, the purchaser was allowed to recover 50% of the loss, proportionally to the number of shares sold. This case confirmed the duty of good faith to inform the counterparty.

The duty of contractual good faith is provided by the Civil Code. This is an objective duty with three important aspects:

• It creates implied duties to a party, such as the duty to protect the legitimate interests of the other party (Civil Code, art. 422);
• It guides the interpretation of a contract based on the objective intent of the parties (art. 113); and
• It rebalances an imbalanced relationship in extreme cases.

Courts used to interfere in contracts based on the duty of good faith, resulting in criticism from scholars and legal specialists. To limit such interference, the current version of Article 421 of the Civil Code provides the principles of “minimal intervention” and “exceptional review” of contracts. In addition, Article 421-A, II assures that the intended allocation of risk by the parties will be observed. As R&W are risk-allocation tools, Article 421-A, II applies, and sandbagging should be allowed in order to respect the risk allocation determined by the parties.

In any case, because Brazilian law also recognizes a duty of good-faith performance, sandbagging may be called into question by sellers and buyers where a dispute arises in M&A.

Conclusion

In sum, we believe that Brazilian M&A law should follow Delaware law, allowing sandbagging in the absence of clear provisions in the agreement. We agree with the arguments of C. Hutchison in terms of efficiency. In addition, it seems that Brazilian law has some similar doctrines applicable to contract law as Canada, as both accept the duty of good faith and honest performance, but this should not prevent recovery by the buyer even when they knew about the breach of R&W before signing or closing. The Civil Code in Brazil provides a strong legal basis for this conclusion when we are dealing with an M&A between sophisticated parties.