16 LEXPERT
|
2018
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WWW.LEXPERT.CA
SANDBAGGING
CONTRACTING
PARTIES HAVE A DUTY
OF GOOD FAITH,
BUT "SANDBAGGING"
PROVISIONS ARE STILL
A GOOD WAY TO
STAVE OFF LITIGATION
AND EXPOSE
MISREPRESENTATIONS
BY JOHN GREENWOOD
Clearing
the Weeds
IN CANADA, the courts generally take a dim view of market
participants who fail in their duty to bargain in good faith. Not
surprisingly, the practice of lying in wait, or "sandbagging," arouses
strong feelings.
Sandbagging in mergers and acquisitions refers to situations in
which a buyer may agree to a transaction despite knowing that one
or more of the claims made by the seller is false, with the intention
of potentially suing for damages once the deal has closed. Some say
such behaviour is the opposite of good faith, but others aren't so
sure. "e term sounds pejorative, and to a layperson it might not
ever sound fair that a buyer of a business can sandbag the seller," says
Patricia Olasker, a partner at Davies Ward Phillips & Vineberg LLP
in Toronto.
In the course of a deal, the vendor typically provides a list of rep-
resentations and warranties regarding the asset up for sale, plus some
sort of indemnity for the buyer if one of those "reps and warranties"
turns out to be untrue. e idea is to protect buyers, but according
to critics, sandbagging transforms it into something else entirely.
Imagine you're about to purchase a home. In the course of your
inspection of the property you discover the building contains a pro-
hibited insulation product contrary to the vendor's statement. But
instead of raising the issue with the vendor and renegotiating the
price, you go ahead with the deal and sue the vendor for misrepre-
sentation. Not surprisingly, it's vendors who are the most critical of
sandbagging, experts say. To the vendor, the buyer is being disin-
PHOTO:
SHUTTERSTOCK
