Knowledge and anti-sandbagging provisions
English Law Focus
Richard Catling Partner,Corporate Commercial
Anna RobinsonSenior Knowledge Lawyer (Consultant),Corporate Commercial
In mergers and acquisitions (M&A) transactions, the parties typically make various representations and warranties (R&Ws) about the target company and its business, assets, liabilities, and operations. These R&Ws are intended to allocate the risk of any inaccuracies or breaches between the seller and the buyer, and to provide the buyer with a contractual remedy in the form of indemnification or damages if the R&Ws turn out to be false or misleading.
However, a potential issue arises when the buyer becomes aware, before closing the transaction, of a breach or inaccuracy in the seller's R&Ws, but does not disclose it to the seller or waive its right to claim for it. This situation is known as "sandbagging", and it may allow the buyer to "sandbag" the seller by closing the deal and then suing the seller for the breach or inaccuracy, even though the buyer knew about it beforehand.
To prevent or limit the possibility of sandbagging, the parties may include certain provisions in the M&A contract that address the effect of the buyer's knowledge on its ability to claim for a breach or inaccuracy of the seller's R&Ws.
These provisions are known as "knowledge" and "anti-sandbagging" provisions, and they may vary in scope and effect depending on the parties' negotiation and the governing law of the contract.
A knowledge provision is a clause that defines the scope of the buyer's knowledge for the purpose of the seller's R&Ws. For example, a knowledge provision may state that the seller's R&Ws are given "to the best of the seller's knowledge" or "except as disclosed in the disclosure letter". A knowledge provision may also specify the sources of information that constitute the buyer's knowledge, such as the due diligence materials, the disclosure letter, or the buyer's own investigations.
The effect of a knowledge provision is to qualify or limit the seller's liability for a breach or inaccuracy of its R&Ws, by excluding or reducing the buyer's claim if the buyer had knowledge of the breach or inaccuracy before closing. A knowledge provision may also affect the seller's disclosure obligations, by allowing the seller to disclose matters that are already known to the buyer, or by relieving the seller from disclosing matters that are not material or relevant to the buyer's decision to enter into the transaction.
Under English law, the term "knowledge" is generally construed narrowly and objectively, meaning that it refers to the actual awareness of a specific fact or circumstance, rather than a constructive or imputed knowledge based on reasonable inquiry or notice. However, the parties may agree to a different or broader definition of knowledge in the contract, such as a subjective or qualified knowledge based on the buyer's belief or suspicion, or a collective or attributed knowledge of the buyer's representatives or advisers.
Under English law, the term "knowledge" is generally construed narrowly and objectively, meaning that it refers to the actual awareness of a specific fact or circumstance, rather than a constructive or imputed knowledge based on reasonable inquiry or notice.
An anti-sandbagging provision is a clause that expressly states the effect of the buyer's knowledge on its ability to claim for a breach or inaccuracy of the seller's R&Ws. For example, an anti-sandbagging provision may state that the buyer's right to claim is not affected by its knowledge of the breach or inaccuracy, or that the buyer waives its right to claim if it had knowledge of the breach or inaccuracy before closing.
The effect of an anti-sandbagging provision is to clarify or modify the default position under the governing law of the contract regarding the buyer's knowledge and its impact on the seller's liability. Under English law, the default position is that the buyer's knowledge of a breach or inaccuracy of the seller's R&Ws does not preclude or impair its right to claim for it, unless the buyer has expressly or impliedly waived its right to claim, or unless the contract contains a clear and unambiguous provision to the contrary. This position is based on the principle of freedom of contract and the doctrine of estoppel, which prevent the seller from relying on the buyer's knowledge as a defence to a contractual claim.
However, the parties may agree to a different or opposite position in the contract, such as a pro-sandbagging provision that affirms the buyer's right to claim regardless of its knowledge, or an anti-sandbagging provision that bars the buyer's right to claim if it had knowledge. A pro-sandbagging provision would benefit the buyer by preserving its contractual remedy and avoiding any disputes or uncertainties about its knowledge. An anti-sandbagging provision would benefit the seller by limiting its exposure and incentivising the buyer to disclose or resolve any issues before closing.
The scope and effect of an anti-sandbagging provision will depend on the wording and context of the clause, as well as the governing law of the contract. Under English law, an anti-sandbagging provision must be clear and unambiguous to be enforceable, and it may be subject to certain exceptions or qualifications, such as fraud, misrepresentation, or concealment by the seller, or materiality, causation, or mitigation by the buyer.
Knowledge and anti-sandbagging provisions are important clauses in M&A contracts in so far as they address the effect of the buyer's knowledge on its ability to claim for a breach or inaccuracy of the seller's R&Ws. These provisions may vary in scope and effect depending on the parties' negotiation and the governing law of the contract. Under English law, the default position is that the buyer's knowledge does not affect its right to claim, unless the contract provides otherwise. However, the parties may agree to a different or opposite position in the contract, such as a pro-sandbagging or an anti-sandbagging provision, to clarify or modify the risk allocation and the contractual remedy between them.
For further information,please contact Richard Catling and Anna Robinson.
Published in May 2025
