Sandbagging In M&A: Why Silence In The Purchase Agreement Is Risky
April 22, 2026
BY: IAN ANDREW LAW
A buyer closes, then later advances an indemnity claim for a breach of representation or warranty. The seller answers that the buyer already knew about the issue before closing, so the claim should fail. That is the sandbagging fight in simple form.
In Canadian practice, the problem is often not only the conduct. It is the drafting silence that allowed the fight to become necessary in the first place.
Key Takeaways
• Sandbagging is a drafting problem before it becomes a litigation problem.
• Canadian law remains uncertain where the agreement is silent.
• Disclosure schedules, due diligence knowledge, and indemnity language all matter.
• Good faith does not by itself resolve the issue cleanly.
• Express pro-sandbagging or anti-sandbagging language reduces risk.
Why The Issue Matters
Representations and warranties are a central part of risk allocation in M&A. If the agreement does not say what happens when a buyer knew or suspected the problem before closing, the dispute moves from commercial drafting into legal uncertainty. That uncertainty can affect post-closing claims, disclosure arguments, indemnity structure, and settlement leverage.
For private deals, the cost of litigating that uncertainty can be disproportionate very quickly.
What The Current Canadian Position Is
The safest description is a cautious one. Canadian law has not definitively resolved the default rule where an agreement is silent on sandbagging. Courts will of course enforce clear contractual language. The problem is the silent agreement. In that setting, arguments may arise around interpretation, the effect of due diligence, disclosure mechanics, and the role of good faith and honest performance.
That means silence does not create a reliable neutral baseline. It creates room for expensive disagreement.
What Stronger Drafting Usually Addresses
A well-drafted purchase agreement can speak directly to whether buyer knowledge affects indemnity rights. It can also define the legal effect of disclosures, organize schedules carefully, and align indemnity language with the broader risk allocation of the deal. In insured transactions, it may also be sensible to think about how known issues interact with the coverage structure.
The important point is that the answer should usually live in the document, not in a future inference exercise.
Why Ontario Deal Parties Should Care
The more sophisticated the deal, the weaker the case for leaving a central risk-allocation issue unspoken. Where the parties care about buyer knowledge, they usually benefit from saying so expressly.
Sandbagging is one of those issues where silence often feels efficient at signing and expensive after closing. In private deal work, that is usually a sign that the drafting should have carried more of the load.
Sources
• Bhasin v. Hrynew, 2014 SCC 71.
• C.M. Callow Inc. v. Zollinger, 2020 SCC 45.
• General Canadian common-law principles on contractual risk allocation, indemnities, and disclosure schedules.
• No single binding Ontario appellate authority currently supplies a complete default rule on silent sandbagging; this article addresses that issue as an unsettled drafting risk.
This article is for general information purposes only and does not constitute legal advice. Reading this article does not create a solicitor-client relationship. If you require advice specific to your situation, contact my office.