Sandbagging

What Is Sandbagging?

Sandbagging in M&A refers to the situation where a buyer discovers during due diligence that one of the seller’s representations or warranties is inaccurate, proceeds to close the transaction anyway, and then brings an indemnification claim against the seller for the breach post-closing (Corporate Finance Institute). The key question is whether a buyer who knew about a problem before closing should be able to claim compensation for it after closing.

This is one of the most contentious negotiation points in purchase agreement drafting, with buyers and sellers taking fundamentally different positions.

Pro-Sandbagging vs Anti-Sandbagging

Pro-Sandbagging Clause (Buyer-Friendly)

A pro-sandbagging clause explicitly states that the buyer’s right to indemnification is not affected by any knowledge the buyer may have had before closing.

Buyer’s argument:

• The seller made specific representations in the SPA and should stand behind them
• The purchase price was based on those representations being true
• The buyer should not be penalised for conducting thorough due diligence
• If sandbagging is prohibited, buyers are incentivised to do less diligence (perverse outcome)

Anti-Sandbagging Clause (Seller-Friendly)

An anti-sandbagging clause states that the buyer cannot claim indemnification for any breach the buyer knew about before closing.

Seller’s argument:

• If the buyer knew about the issue and chose to close anyway, they accepted the risk
• The buyer could have negotiated a price adjustment or specific indemnity for known issues
• Allowing claims for known issues creates a “gotcha” dynamic that is unfair to the seller
• The buyer’s knowledge means they were not actually harmed by the misrepresentation

Silent (No Clause)

Many SPAs are silent on sandbagging, leaving the outcome to the applicable jurisdiction’s common law default:

Jurisdiction	Default Position
New York	Generally pro-sandbagging
Delaware	Generally pro-sandbagging
California	Anti-sandbagging tendency
England	Anti-sandbagging tendency
Australia	Varies (generally anti-sandbagging)

Practical Implications

For Due Diligence

The sandbagging position affects how due diligence findings are handled:

• Pro-sandbagging environment — the buyer documents diligence findings but does not need to raise every issue before closing; unresolved issues can become post-closing claims
• Anti-sandbagging environment — the buyer must raise material issues before closing and negotiate price adjustments, specific indemnities, or walk away; staying silent waives the right to claim

For Disclosure Schedules

Disclosure schedules — where the seller lists exceptions to its representations — interact with sandbagging provisions:

• If the seller discloses an issue in the schedules, it is generally not a breach (regardless of sandbagging provisions)
• The question arises when the buyer learns about an issue through diligence that is not in the disclosure schedules

For Purchase Price Negotiations

In anti-sandbagging deals, buyers have greater incentive to:

• Negotiate specific indemnities for known issues before closing
• Seek purchase price reductions for problems discovered during diligence
• Include known issues in the disclosure schedules with associated indemnification

Sandbagging and W&I Insurance

Warranty and indemnity insurance has changed the sandbagging dynamic. W&I policies typically exclude “known” issues — matters the buyer’s deal team knew about before the policy was bound. This creates a practical anti-sandbagging effect, even if the SPA contains a pro-sandbagging clause, because the insurance will not cover known breaches.

Sandbagging in Asia Pacific

Sandbagging practices in Asia Pacific M&A reflect a mix of common law traditions and local norms. In Australia, the common law position generally disfavours sandbagging, and SPAs increasingly address the issue explicitly. In Hong Kong and Singapore, English common law principles apply, generally supporting the view that a buyer who knowingly accepted a defect cannot later claim for it. In Japan, the Civil Code framework approaches the issue differently — the buyer’s knowledge at the time of contract formation may limit warranty claims. In India, the Indian Contract Act provides that a party cannot claim for matters it knew about when entering the agreement. AI-native platforms like Amafi help advisers benchmark sandbagging provisions and negotiate SPA terms that appropriately allocate risk in Asia Pacific transactions.