Sandbagging Clauses: A Quiet Drafting Shift

A sandbagging provision tells the parties what happens if a buyer closes a deal knowing - or having reason to know - that a seller's representation is inaccurate. A pro-sandbagging clause permits the buyer to recover for the breach anyway. An anti-sandbagging clause does the opposite: knowledge defeats recovery. The default rule in the absence of a clause is unsettled in most U.S. jurisdictions, which is why the parties typically address it expressly.

For most of the last decade, the middle-market drafting default in sponsor-friendly deals was pro-sandbagging language, and it was rarely a contested point. That has shifted. In our recent deals, we are seeing the issue contested more often, the language drafted with more nuance, and the outcome more often a negotiated middle position rather than a clean pro- or anti-sandbagging result.

The shift has two drivers. The first is the rise of representations and warranties insurance. With RWI in place, the practical question of who pays for a known breach has changed shape: it is no longer 'buyer eats the loss' or 'seller pays under indemnity' but 'does the policy cover known matters?' The standard RWI exclusion for buyer-known matters means the sandbagging clause now interacts with the policy in a way that earlier deals did not present. A pro-sandbagging clause that purports to allow recovery from the seller for buyer-known breaches sits in tension with a policy that excludes those same matters; the result is an indemnification regime that may not actually deliver the protection the buyer thought it had bargained for.

The second driver is the increasing rigor of pre-signing diligence. The practical content of 'buyer knowledge' has expanded as buyer-side diligence packages have grown. Modern data rooms, virtual diligence sessions, and seller-prepared QofE reports collectively give buyers more information than was typical a decade ago. The seller's argument that the buyer should not be permitted to recover for a breach the diligence record disclosed has more substantive force than it used to.

The drafting response we recommend has three elements. First, name the standard. 'Knowledge' is too vague; the clause should specify whose knowledge counts (named individuals on the deal team, with or without the diligence advisors), and the standard (actual knowledge, with or without a constructive-knowledge component). Second, distinguish between disclosed and undisclosed matters. A workable middle position permits recovery for matters not disclosed in the data room while precluding recovery for matters that were specifically and prominently disclosed. Third, align the clause with the RWI policy. The drafting team should be reading the indemnification provisions and the policy in parallel, with the explicit goal of ensuring that recovery in fact follows the contractual scheme.

The negotiated middle positions we see most often are: (a) anti-sandbagging only with respect to matters specifically disclosed in the disclosure schedules or the data room index; (b) pro-sandbagging with a knowledge standard limited to a defined set of buyer representatives; (c) pro-sandbagging with the understanding that the RWI policy will be the primary recovery vehicle and the seller's residual indemnity will be limited to matters the policy excludes.

The point is small, but the dollars are not. When a known issue surfaces post-closing, the indemnification framework is what determines who pays, when, and through what mechanism. A few sentences of careful drafting at signing routinely save several months of litigation later.

What we are watching

We will return to this topic across the coming quarter. If you are actively negotiating a transaction where these issues are live, we'd welcome a confidential conversation.

Three takeaways

• The market is settling, but the diligence bar is rising.
• Preparation, not posture, is the source of speed.
• The right structure can move price more than another round of negotiation.