Purchaser's Knowledge Of Inaccurate Vendor Representations & Sandbagging Tactics

Introduction

In virtually all transactions, parties make representations and warranties to build trust and induce contracting with each other, especially for facts not verifiable through due diligence.1 Representations are often subject to intense negotiations, and their accuracy is vital since untruths give rise to misrepresentation claims by the other party.

An issue can arise if a purchaser becomes aware, before closing, that a material representation of the vendor is inaccurate or untrue. Upon such a discovery, a purchaser has three options. It may (i) disclose this discovery to the vendor and terminate or (ii) disclose and seek to renegotiate the agreement based on the new facts, or (iii) it may remain silent on the discovery and commence an action after closing for the misrepresentation of the vendor.

The latter option is a tactic known as sandbagging. A sandbagging purchaser attempts to ambush the vendor, catching the vendor off guard. Parties may explicitly allow or prohibit the practice of sandbagging within the contract, or parties may remain silent on the issue altogether. How does the common law treat this practice and how should parties act to protect their interests?

The Effect of a Purchaser's Knowledge of an Untrue Representation

A party claiming misrepresentation must prove that the false representation was material and that it induced the claiming party through reliance to enter into the contract.2 This is a question of fact, often turning on what parties knew at the time. As a result, a party's knowledge is a critical factor in any claim for misrepresentation.

Purchasers who know that a representation of the vendor is false but proceed to close a deal in the face of it, may struggle to prove their reliance on that representation. For example, in one recent case, an experienced investor had knowledge of a company's financial viability and chose not to investigate further prior to buying shares. When the investor attempted to rely on false representations about share valuation made by the company's director, the Court ruled that it was not reasonable in the circumstances for the investor to rely solely on the director's representations.3

Similarly, purchasers cannot rely on wilful ignorance when a vendor discloses information that warrants reasonable enquiries, particularly where the conveyance of assets in a transaction is on an "as is" basis.4 This was the outcome where a sophisticated purchaser had knowledge of the...