'Sandbagging' not a sure thing in Canadian courts


Marlin Horst head shotSandbagging reflects poorly on all parties to a transaction, Toronto corporate lawyer Marlin Horst tells

Horst, a partner with Shibley Righton LLP, explains that the practice arises in mergers and acquisitions when a buyer becomes aware that the seller will be unable to meet all the representations and warranties made in the agreement.

That allows the purchaser to close the deal with the intention of later suing the vendor in court for damages related to the known deficiencies since contracts normally provide indemnities for buyers in the event promises can’t be met.

Horst says examples of sandbagging are relatively rare in Canada, but the issue is growing as parties on both sides take the risk of an episode into consideration when completing transactions. Nevertheless, he says the trend is concerning.

“If vendors are making representations and warranties that are not correct, then it means they’re not doing their own internal due diligence properly,” Horst says. “If the buyer discovers something that the vendor itself doesn’t know, it shows a lack of knowledge about their own business.”

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