Sandbag Homes, Not Transactions: Why Louisiana Should Not Allow Sandbagging in Mergers & Acquisitions

Comment

By H. Ryan Flood*

INTRODUCTION

          In his infamous work The Prince, which counsels Lorenzo de Medici on how to rule, Machiavelli writes that “. . . since [all men] are wicked, and would not be faithful to you, you also do not have to be faithful to them.”[1]  Although Machiavelli’s advice may have been worth consideration for leaders of nations or principalities competing with one another in a regional Hobbesian state of nature,[2] it is less significant in the realm of twenty-first century commercial transactions.  The law imposes obligations that dictate how parties ought to conduct business and provides remedies when parties breach those obligations.  However, in the modern world of mergers and acquisitions (M&A), Machiavelli’s advice remains particularly relevant to the practice of “sandbagging.”[3]

          Sandbagging is a practice in M&A transactions where the buyer sues the seller for a reduction in price based on the seller’s pre-closing misrepresentations, breaches of warranty, or both.[4]  What makes sandbagging so controversial is that it only happens when the buyer already knew of the misrepresentations, breaches of warranty, or both before closing but elected to say nothing and sue after closing the deal.[5]  In the jurisdictions that allow it, sandbagging is a powerful weapon for buyers and a dangerous threat to sellers.  Sandbagging allows the buyer to avoid potentially endangering the deal by questioning the seller’s representations or warranties while still securing a reduction in price along with other potential damages.  It discourages buyers from being “faithful” based on an assumption that the seller was not “faithful” in the first place.[6]

          Although parties sometimes specifically address whether they will allow or prohibit sandbagging within their contracts, contracts are often silent on the issue.[7]  Such silence leaves the default rule of the governing jurisdiction to control whether the buyer may sandbag the seller.[8]  There are two categories of sandbagging jurisdictions: those that are pro-sandbagging,[9] and those that are anti-sandbagging.[10] The remaining jurisdictions are silent on the issue.

          Louisiana is a jurisdiction that is silent as to sandbagging; neither legislation nor court opinions specifically address the issue.  However, Louisiana’s civilian tradition and principles underlying analogous Civil Code articles clearly indicate that, when the issue arises, Louisiana ought to join the ranks of the anti-sandbagging jurisdictions.[11]  Contrary to Machiavelli’s advice,[12] Louisiana, and the civilian tradition in general, imposes a constant underlying duty of good faith[13] and does not allow for recovery absent actual harm.[14]  Based on these principles, Louisiana should not allow sandbagging, most significantly because sandbagging is contrary to Louisiana’s duty of good faith.

          In light of Louisiana’s civilian tradition and imposed duty of good faith, this Comment proposes that Louisiana should adopt a mandatory anti-sandbagging rule—that parties cannot contract out of—thereby completely disallowing sandbagging in Louisiana.  Section II details the history and background law of sandbagging and some of the different jurisdictional approaches across the United States.  Section III analyzes sandbagging under the civilian legal tradition and analogous Louisiana laws and proposes that (1) Louisiana should adopt an anti-sandbagging default rule, and (2) Louisiana should not allow parties to contract around that default rule, essentially making the rule mandatory.  Section III defends the position that Louisiana should be an anti-sandbagging state because of Louisiana’s constant[15] underlying duty of good faith, the principles underlying the warranty against redhibitory defects, and Louisiana’s willingness—beyond the willingness found at common law—to limit contractual freedom for public policy reasons.  Section III also proposes an expansion of Louisiana’s warranty against redhibitory defects to include incorporeal things to better protect parties to M&A transactions.

I. SANDBAGGING IN THE UNITED STATES

          The term “sandbagging” is not unique to M&A.  The first sandbaggers were nineteenth century robbers who used bags of sand to knock their victims unconscious before robbing them.[16]  Since then, the term has departed from its literal meaning and come to also describe poker players, golfers, and others, who initially conceal an advantage to better capitalize on it later.[17]  In all of its uses, sandbagging carries a somewhat negative connotation.  Eventually, an M&A attorney named Rick Climan started using the term in the M&A context, and it was gradually adopted throughout the legal community.

While in college, [Rick] and other students held regular late-night poker games.  The term “sandbagging” described a “check-raise” gambit—in which a player (usually with a strong hand) would check early in a round of betting in order to lure another into making the opening bet, and then proceed to raise that bet.  Years later, Rick began using the term “sandbagging” in internal law firm training sessions to describe a buyer who, knowing of a material breach of a seller’s warranty, would wait for the transaction to close before suing the seller.  The terminology caught on with colleagues on the ABA Mergers and Acquisitions Committee before becoming a common term of art. [18]

Today, sandbagging is a widely accepted term in M&A relating to breach of warranty claims, and buyers and sellers have their own respective views on the matter.  Naturally, buyers benefit from pro-sandbagging rules, while sellers face some risk from pro-sandbagging rules and prefer anti-sandbagging rules instead.

          This Section discusses the parties’ preferences on sandbagging, the parties’ contractual freedom to provide for or against sandbagging within a contract, and the default rules and rationale supporting various jurisdictions’ default rules, which apply when the contract is silent on the issue of sandbagging.

A.    The Parties’ Positions on Sandbagging

          Buyers generally prefer pro-sandbagging rules.[19]  Buyers conduct extensive due diligence[20] in the process of establishing and closing deals.[21]  Buyers who discover a breach of warranty during due diligence may still not know of the potential impact of that breach—which may be as small as an inconvenience or as large as exposing buyers to significant liability—until after the transaction closes.[22]  Without the ability to bring claims after closing, buyers feel that warranties are less efficient because the due diligence process essentially puts the onus on buyers and gives sellers an easy out.[23]  Thus, buyers view sandbagging as a safety net that allows them to proceed with their deals while maintaining the ability to subsequently reduce the total price paid upon discovery of a breach or its impact—without jeopardizing their deals on the whole.[24]  Buyers argue that sandbagging is inherent to a seller’s warranties and the price paid for the acquisition because buyers effectively pay for “a right to rely on the information disclosed by the sellers,” and, “thus, [should] be able to bring an indemnity claim in case of false information,” “[r]egardless of their own previous knowledge.”[25]  A unique issue for buyers is the discovery of breach of warranty between signing and closing, which buyers argue would leave them without remedy under an anti-sandbagging rule.[26]  In sum, buyers feel most protected under a pro-sandbagging rule and generally believe that they pay for the protection offered by sandbagging as part of the transaction.

          Conversely, sellers generally prefer anti-sandbagging rules.[27]  The purpose of the due diligence period is for buyers to discover anything that may impact the negotiation of the deal,[28] and sellers argue that the proper approach to any discovery of breach is to bring the discovery to the negotiating table rather than a courthouse.[29]  Under a pro-sandbagging rule, buyers are able to use the due diligence period to build the basis of their subsequent lawsuits, which is not the purpose of due diligence.[30]  In sum, sellers feel that pro-sandbagging rules allow buyers to take advantage of sellers and unfairly obtain post-closing indemnification for issues that should have been addressed pre-closing.[31]

          In light of these preferences, buyers and sellers sometimes negotiate for a contractual provision that is either pro-sandbagging or anti-sandbagging, respectively.  The next Subsection discusses the process, considerations, and complications associated with addressing the sandbagging issue within the four corners of the contract rather than allowing the governing jurisdiction’s default rule to dictate the matter.

B.    Freedom of Contract: Parties Providing for or Prohibiting Sandbagging

          At common law, parties are generally free to contract for anything that is not illegal or against public policy.[32]  Under Louisiana law, parties may contract for anything that is not illegal, immoral, or against public policy.[33]  According to a 2017 American Bar Association study of M&A deals, “42% contained a [pro-]sandbagging provision, 6% contained an anti[-]sandbagging provision, and 51% were silent on the issue.”[34]  When an M&A contract is silent on sandbagging, the default rules of the jurisdiction that governs the deal apply.[35]  A typical pro-sandbagging provision secures the buyer’s right to sue by having the seller acknowledge the buyer’s reliance on the seller’s representations and warranties.  A typical pro-sandbagging provision may appear as follows: 

The rights of Buyer to indemnification or any other remedy under this Agreement shall not be impacted or limited by any Knowledge that Buyer acquired, or could have acquired, whether before or after the Closing or the Closing Date, nor by any investigation or due diligence inquiry conducted by Buyer.  Seller hereby acknowledges that, regardless of any investigation or due diligence inquiry conducted by or on behalf of Buyer, and regardless of the results of any such investigation or inquiry, Buyer has entered into this Agreement and the Transaction in express reliance upon the representations and warranties of Seller made in this Agreement.[36]

Essentially, the pro-sandbagging provision seeks to contractually establish that the buyer relied upon the seller’s representations and warranties and, therefore, establish the buyer’s cause of action, regardless of whether the buyer actually relied on the representations and warranties at issue.  Conversely, a typical anti-sandbagging provision expressly limits the buyer’s ability to recover when the buyer knows of the breach of warranty prior to closing, which leaves the buyer with remedies only for misrepresentations and breaches that the buyer did not know about.  A typical anti-sandbagging provision may appear as follows:

Buyer acknowledges and agrees that it has had an opportunity to conduct a thorough investigation and due diligence inquiry on the Company, and in no event shall Seller have any liability to Buyer with respect to the breach of any representation or warranty in this Agreement to the extent Buyer knew of such breach as of the Closing or the Closing Date.[37]

Contracts provide the law between the parties for the transaction.  However, contracts are frequently silent on sandbagging because of the risk associated with introducing the topic.  Buyers often hesitate to suggest a pro-sandbagging provision because doing so may prompt the seller to suspect that the buyer knows of a misrepresentation or breach and fight for an anti-sandbagging provision—and likely a price increase—instead.[38]  On the other hand, sellers often hesitate to suggest an anti-sandbagging provision because doing so may cause the buyer to suspect a misrepresentation or breach and fight for a pro-sandbagging provision—and likely a price reduction—instead.[39]  Rather than risk this back-and-forth in the negotiations process, the parties more frequently than not elect to remain silent[40] and leave the default rule to govern any post-closing claims.[41]

C.    Default Sandbagging Rules: Jurisdictional Differences and Rationale

          When the contract is silent on the issue, the governing jurisdiction’s default rule on sandbagging applies.[42]  Whether a jurisdiction is pro-sandbagging or anti-sandbagging is determined by whether it follows the traditional or modern approach to breach of warranty claims.  Traditionally, breach of warranty was handled in tort, and courts addressed these issues separately, outside of the contract with which the allegedly breached warranties were associated.[43]  The jurisdictions that follow this traditional rule are anti-sandbagging by default.  Alternatively, as breach of warranty claims evolved, some jurisdictions eventually allowed these claims as contractual matters rather than tort matters.[44]  The jurisdictions that follow this modern rule are pro-sandbagging by default.  Across the United States, jurisdictions are growing increasingly supportive of the modern rule, allowing for more sandbagging in absence of contractual agreement on the matter.[45]  Because sandbagging default rules and their precise reasoning still vary between jurisdictions,[46] this Subsection generally summarizes the dominant views and rationales of the traditional anti-sandbagging and modern pro-sandbagging approaches.

          Anti-sandbagging jurisdictions (including California, Colorado, Kansas, Maryland, Minnesota, and Texas)[47] generally follow the traditional tort-based rule for a buyer’s post-closing claim, which dictates that the buyer must have actually relied on the seller’s warranty      to recover. [48]  The traditional tort-based rule allows sellers to paint the buyer’s decision to close as an act of waiver of any claims against the seller.[49]  California is the leading anti-sandbagging jurisdiction,[50] and its case law is instructive as to its reasoning for adopting such a rule.

          In the 1991 case Kazerouni v. De Satnick,[51] California first established its reliance requirement for breach of warranty, and therefore its anti-sandbagging default rule.  In Kazerouni, plaintiff-buyers brought suit against defendant-seller for misrepresentations in sale documents regarding monthly receipts and monthly net profits of the seller’s business.[52]  The appellate court affirmed the trial court’s ruling that the buyers did not rely on the seller’s misrepresentations because the buyers also “received accurate financial records . . . including corporate tax returns for two years and three financial statements, and personally observed the operation of the business for a two-week period.”[53]  The appellate court rejected the buyers’ arguments that reliance was not required for breach of express warranty because the buyers’ argument hinged on a California statute that only applied to sales of goods, not to acquisitions of businesses as in Kazerouni.[54]  Thus, Kazerouni established California as an anti-sandbagging state that requires reliance on a breach of warranty claim.  However, California also carved out an exception to this general rule fifteen years later in Telephia, Inc. v. Cuppy.[55]

          In Telephia, plaintiff-buyer Telephia entered into a security purchase agreement (SPA) with defendant-sellers for the purchase of Criterion, Inc.[56]  The SPA included a contractual provision that “[n]o information or knowledge obtained in any investigation pursuant to this Section [] shall affect or be deemed to modify any representation or warranty contained in this Agreement . . . ” and “No investigation made by or on behalf of the [Buyer] with respect to [Sellers] or the Securityholders shall be deemed to affect the Company Affiliates’ . . . reliance on the representations, warranties, covenants, and agreements made by Criterion.”[57]  Both the buyer and the sellers were aware that the parties’ agreement was not finalized when they entered into the SPA.[58]  Therefore, the sellers argued that the buyer did not rely on the breached warranties which the buyer had discovered prior to finalizing their agreement.[59]  The sellers relied on Kazerouni to support their position that the buyer did not rely on the breached warranties and therefore could not recover for those breached warranties.[60]

          The Telephia court rejected the sellers’ argument and distinguished Kazerouni, noting that Kazerouni only decided that reliance was required because the California Uniform Commercial Code did not apply to M&A.[61]  The court also noted that Kazerouni did not consider whether “a bargained-for, risk-shifting provision such as the one at issue in this case should be enforced,” and Kazerouni did not “involve contractual language explicitly addressing reliance such as that found in . . . the [Telephia] SPA.”[62]  The Telephia court ultimately ruled in favor of the buyer, holding that Kazerouni’s reliance requirement does not apply when the language of the contract is clear and indicates that the parties intended to waive the reliance requirement.[63]

          The thrust behind the anti-sandbagging argument is that a buyer that did not rely upon the warranty to its detriment should not recover in the absence of actual harm.  This motivation, among other things, is why Louisiana should adopt an anti-sandbagging approach.

          Pro-sandbagging jurisdictions follow the modern rule, which allows a buyer to bring a breach of warranty claim as a contract matter.[64]  This rule is based on the notion that the buyer negotiated and paid for the seller’s warranties as part of the contract.[65] These pro-sandbagging jurisdictions hold that a breach of an express warranty is covered by the contract, so it is irrelevant whether the buyer actually relied on the warranty.[66]  Most states (including Connecticut, Delaware, Florida, Illinois, Indiana, Massachusetts, Michigan, Missouri, Montana, New Hampshire, New Mexico, New York, Pennsylvania, West Virginia, and Wisconsin)[67] employ the modern rule, wherein “traditional reliance is not required to recover for breach of an express warranty: the only ‘reliance’ required is that the express warranty is part of the bargain between the parties.”[68]  However, most M&A deals occur under New York or Delaware law,[69] so the rationale employed in those jurisdictions is most relevant.

          New York is the leading pro-sandbagging state, and most states have adopted its rule as their own.[70]  In CBS Inc. v. Ziff-Davis Publishing Co., CBS (buyer) and Ziff-Davis (seller) entered into a contract for sale of businesses, and the contract included “the seller’s express warranties as to the truthfulness of . . . previously supplied financial information.”[71]  During the due diligence phase, the buyer came to believe that some of the seller’s warranted information was false.[72]  When the buyer expressed concerns about the warranties, the seller insisted that the warranted information was true and that the sale should proceed as planned.[73]  The buyer brought a claim for breach of express warranty, which the New York Supreme Court dismissed on the grounds that the buyer did not believe the warranties were true and therefore did not rely on them.[74]

          On appeal, the New York Court of Appeals considered whether “the buyer’s manifested lack of belief in and reliance on the truth of the warranted information prior to the closing relieve[d] the seller of its obligations under the warranties.”[75]  The New York Court of Appeals ruled in favor of the buyer, holding that the buyer only needs to rely “on the express warranty as being part of the bargain between the parties.”[76]  The court’s explanation, which emphasized the parties’ freedom of contract, solidified New York’s modern pro-sandbagging rule:    

The express warranty is as much a part of the contract as any other term.  Once the express warranty is shown to have been relied on as part of the contract, the right to be indemnified in damages for its breach does not depend on proof that the buyer thereafter believed that the assurances of fact made in the warranty would be fulfilled.  The right to indemnification depends only on establishing that the warranty was breached.[77]

          The Ziff-Davis rule has been subsequently modified by two important New York decisions.  In Galli v. Metz—only two years after Ziff-Davis—the court added a caveat to the Ziff-Davis rule that actual reliance may be necessary when the buyer learns of the breach of warranty directly from the seller.[78]  The Galli court said that, “[w]here a buyer closes on a contract in the full knowledge and acceptance of facts disclosed by the seller which would constitute a breach of warranty under the terms of the contract, the buyer should be foreclosed from later asserting the breach.”[79]  Then, in Gusmao v. GMT Group, Inc., the Second Circuit refined the Galli rule by concluding that “where the seller is not the source of the buyer’s knowledge, e.g., if it is merely ‘common knowledge’ that the facts warranted are false, or the buyer has been informed of the falsity of the facts by some third party, the buyer may prevail in his claim for breach of warranty.”[80]  Altogether, the New York pro-sandbagging rule does not require actual reliance on the breached warranty if the buyer learns of the breach from anyone other than the seller, but the buyer’s claim will be precluded when the seller itself disclosed the breach.[81]

          Delaware is ambiguously pro-sandbagging.[82]  Although Delaware was historically viewed as one of the two leading pro-sandbagging states—the other being New York—[83] Eagle Force Holdings, LLC v. Campbell raised doubt as to its pro-sandbagging position in 2018.[84]  In Eagle Force, the Delaware Supreme Court “sent ripples of uncertainty into the market as practitioners and academics wondered if the state’s highest court was considering a shift away from a pro-sandbagging default rule.”[85]  In a footnote, the Eagle Force court said that Delaware had not yet decided whether reliance on a breach of warranty was required.[86] In the same footnote, however, the court acknowledged that the majority of states have adopted New York’s rule, first established in Ziff-Davis, that “traditional reliance is not required to recover for breach of an express warranty: the only ‘reliance’ required is that the express warranty is part of the bargain between the parties.”[87]  Although the Eagle Force court said the issue remains unresolved, its acknowledgment of the Ziff-Davis rule seems to indicate that Delaware remains a pro-sandbagging state, at least in theory.  Regardless, the leading rationale for pro-sandbagging jurisdictions is derived from the Ziff-Davis ruling and its emphasis on contractual freedom.  

II. LOUISIANA SHOULD ADOPT A MANDATORY ANTI-SANDBAGGING RULE

          Louisiana is silent on sandbagging, and its courts have yet to address the issue.  However, analogous legal principles suggest that Louisiana should join the ranks of anti-sandbagging jurisdictions.  The basis for Louisiana taking a unique stance on sandbagging is rooted in the differences between the common law and Louisiana’s civil law traditions.  Most European countries, which are generally civil law jurisdictions, use an anti-sandbagging approach.[88]  Further, Louisiana, as a civil law jurisdiction, is willing to impose more restrictions on contractual freedom than common law jurisdictions.  This more stringent approach is a result of Louisiana’s unique constant underlying duty of good faith and equitable protection of parties through various legal doctrines.  This Section proposes that Louisiana should (1) adopt an anti-sandbagging rule and, (2) unlike California, mandate adherence to the rule and prohibit parties from contracting out of the rule when Louisiana law governs.  This proposal is supported by both the Civil Code’s duty of good faith and the principles of warranties in sale.  Since each of these principles indicates that sandbagging violates traditional civilian public policy, Louisiana should not allow parties to include sandbagging provisions in their M&A contracts.

A.    Louisiana’s Constant Underlying Duty of Good Faith Requires an Anti-Sandbagging Rule

          Although both common law and Louisiana law impose a duty of good faith on parties to a contract, subtle differences between common law and Louisiana law highlight why Louisiana should adopt an anti-sandbagging standard.

1.     Louisiana imposes an explicit, rather than implicit, duty of good faith.

          Both common law and Louisiana law impose a duty of good faith.  At common law, there exists an implied duty of good faith in every contract.[89]  Breach of the implied duty of good faith can provide a party with a defense or cause of action for breach of contract.[90]  According to the Second Restatement of Contracts, the extent of the duty of good faith varies with the circumstances and facts of each situation.[91]  Depending on the jurisdiction and circumstances, the duty of good faith may prohibit a party from exercising its contractual rights,[92] or it may allow parties to exercise any right that does not take “opportunistic advantage of the other party’s vulnerability.”[93]

          Under Louisiana law, however, there exists an explicit constant underlying duty of good faith in all obligations.  The Civil Code dictates that “[c]ontracts have the effect of law for the parties and may be dissolved only through the consent of the parties or on grounds provided by law.  Contracts must be performed in good faith.”[94]  Although it may seem trivial at first glance, the fact that Louisiana’s duty of good faith is explicit, while the common law duty of good faith is implicit, emphasizes Louisiana’s intent to protect parties in contract.  The Civil Code further provides that “[g]ood faith shall govern the conduct of the obligor and the obligee in whatever pertains to the obligation.”[95]

          In Louisiana, a contract of sale is a bilateral onerous contract, whereby the parties have reciprocal obligations.[96]  Thus, each party to a contract of sale is at the same time both obligor and obligee with respect to the sale.  Regarding the delivery of the object of the contract, the seller is the obligor, and the buyer is the obligee.  With respect to the payment of the price, the buyer is the obligor, and the seller is the obligee.  Each party has reciprocal obligations, and, therefore, each party also has reciprocal rights.  Since “[g]ood faith shall govern the conduct of the obligor and the obligee in whatever pertains to the obligation,” the seller and buyer are each bound by the explicit duty of good faith in their respective roles as both obligor and obligee.[97]  The reciprocal nature of the parties’ duties of good faith is further solidified by Civil Code article 2003, which provides that a party may not recover damages when the other party’s breach was caused by his own bad faith or concealment of material facts.[98]

          Louisiana should prohibit sandbagging because the practice is inconsistent with Louisiana’s constant underlying duty of good faith.  Under Louisiana law, each party to a contract of sale has a twofold duty of good faith in its respective capacity as both obligor and obligee.[99]  Sandbagging is arguably a breach of the buyer’s duty of good faith as the obligee.  As obligee, the buyer has a duty to accept delivery of the object in good faith.[100]  When the buyer sandbags, he “conceal[s] from the [seller] facts that he knew or should have known would cause a failure” via breach of warranty.[101]  The sandbagging buyer would have already learned of the seller’s misrepresentations that constituted a breach but elected to remain silent with the intent to subsequently sue for reduction of price and breach.  This silence hardly constitutes good faith and is entirely distinguishable from a buyer’s maintained silence for the purpose of obtaining a business advantage.[102]  Rather, a sandbagging buyer’s silence is predicated upon his intent to gain an unjust advantage over the seller after perfecting the sale      and would therefore be bad faith under Louisiana law.

2.     The constant underlying duty of good faith also supports limiting the parties’ ability to contract around the proposed anti-sandbagging rule.

          The Civil Code provides no outright definition of good faith; instead, a revision comment explains when a party is acting in bad faith, thereby leaving the full extent of the duty of good faith unrestricted by codified boundaries.  An obligor who intentionally and maliciously fails to perform his or her obligation is in bad faith.[103]  Thus, it follows that an obligor who does not either intentionally or maliciously fail to perform his or her obligation is not in bad faith, and therefore is probably in good faith.  However, the absence of an actual definition suggests that there is no floor or ceiling to the duty of good faith.  Good faith obligors in breach of contract are only liable for foreseeable damages, while bad faith obligors in breach of contract are liable for any damages that may arise from the breach.[104]  In effect, this distinction rewards good faith parties by limiting their liabilities for breach, while also protecting good faith parties from opposing bad faith.  Louisiana’s constant underlying duty of good faith has essentially been elevated to public policy by Civil Code article 2004, which states that a clause that limits liability for intentional or gross fault is against public policy because it would destroy “the overriding principle of good faith.”[105]  And since parties may not contract for anything against public policy,[106] they should not be allowed to contract for sandbagging, which is bad faith by Louisiana’s standards.  Thus, Louisiana’s constant underlying duty of good faith goes above and beyond the common law notion of good faith and, therefore, should not allow parties to contract for sandbagging.

          While it is true that, in some instances, the seller’s misrepresentations and breaches of warranty may be intentionally fraudulent rather than an honest mistake, Louisiana provides adequate remedies elsewhere through its contract defenses that vitiate consent.[107]  Since there are other remedies when the seller acts in bad faith, intentionally misrepresents, or breaches warranties, sandbagging would only be relevant in Louisiana when the seller’s misrepresentations and breaches were in fact honest mistakes.[108]  The contractual defense of error provides adequate remedies if the buyer has also made an honest mistake,[109] therefore prohibiting sandbagging would not prejudice buyers acting in good faith.  With adequate remedies for buyers in good faith to rescind for any other situation, it is clear that a sandbagging buyer would be in bad faith under Louisiana law.  Louisiana’s unique emphasis on good faith, as evidenced by the Civil Code’s explicit requirements of good faith and principles like negotiorum gestio,[110] simply requires more of parties to a contract.

          Additionally, common practices of other civil law jurisdictions support the conclusion that Louisiana should deem sandbagging to be bad faith.  For example, French courts typically view sandbagging as contractual bad faith.[111]  The Napoleonic Code, the civilian ancestor of both the Louisiana Civil Code and the modern French Civil Code, dictated a broad concept of contractual good faith.[112]  Further, the Napoleonic Code’s original article on good faith[113] remained unchanged until 2016, and the French concept of contractual good faith “includ[es] pre-contractual good faith, which commands the parties to be loyal in the negotiation and execution of the contract . . . [beyond the] good faith applied solely to the execution of the contract.”[114]  French courts have ultimately concluded that sandbagging is bad faith, but have nevertheless upheld the practice because of the binding force of contracts.[115]  In an attempt to find the balance between the important doctrines of contractual good faith and the binding force of contracts, French scholars have suggested distinguishing “between knowledge of the breach and knowledge of the impact of the breach, or knowledge of the breach and knowledge of the scope of the breach.”[116]  French courts have not yet considered the scholars' suggestion,[117] but the suggestion’s very existence further underscores the notion that sandbagging is bad faith.  And unlike France, Louisiana has yet to address sandbagging at all, and therefore does not need to contend with existing jurisprudence that requires a balancing act between civilian principles and precedent.  Therefore, Louisiana should not allow sandbagging, regardless of whether the parties try to contract for it.

B.    The Warranty Against Redhibitory Defects Analogously Requires an Anti-Sandbagging Rule

          Additionally, the principles underlying Louisiana’s unique doctrine of warranty against redhibitory defects indicates that Louisiana should adopt a broad anti-sandbagging rule.  Both common law and Louisiana law provide for warranties in contracts of sale.  At common law, Article 2 of the Uniform Commercial Code (UCC) governs sales and leases and dictates that every sale is subject to express warranties [118] and implied warranties.[119]  Louisiana’s Civil Code, like UCC Article 2, also provides for express and implied warranties, and breach of warranty may provide a cause of action at both common and civil law.[120]  In Louisiana, certain warranties are inherent in every contract of sale,[121] although parties may waive some of these default warranties or consent to additional warranties via freedom of contract.[122]  Most relevant to M&A is Civil Code article 2520’s warranty against redhibitory defects, which is unique to civil law jurisdictions and implied in every act of sale of tangible things.[123] Currently, like the statute at issue in Kazerouni,[124] the warranty against redhibitory defects does not apply to the sale of incorporeal things such as a business.[125]  However, the very existence of the warranty against redhibitory defects and some of the doctrine’s finer points further differentiate Louisiana’s unique requirements from the common law jurisdictions of the United States, and the principles that support the warranty suggest the need for an anti-sandbagging default rule.

1.     The warranty against redhibitory defects further illustrates that Louisiana should adopt an anti-sandbagging rule.

          Louisiana’s warranty against redhibitory defects illustrates, analogously, why Louisiana should adopt an anti-sandbagging rule.  The warranty against redhibitory defects in a sale of a movable or immovable property provides the buyer with a remedy for any defect in the thing sold that would have influenced the buyer’s decision to purchase the thing.[126]  To recover for breach of warranty against redhibitory defects, the buyer must show that the defect was redhibitory, hidden or nonapparent, and existed at the time of delivery.[127]  A defect is redhibitory when either (1) the defect renders the thing so useless for its intended purpose (like an in-ground pool that had to be installed at least partially above-ground)[128] that the buyer would not have purchased it had the buyer known of the defect, or (2) the defect renders the thing sold so inconvenient (like a car that functioned fine but needed numerous repairs)[129] that, had the buyer known of the defect, the buyer would only have purchased the thing for a reduced price.[130]  In other words, there must be a hidden defect that is so significant that the buyer would only have bought it for a reduced price, if at all, which is a question of fact to be determined “by the trier of fact.”[131]  When the redhibitory defect renders the thing totally useless, the buyer may obtain rescission of the sale or a reduction in price.[132]  When the redhibitory defect renders the thing inconvenient, the buyer may only obtain a reduction in price.[133]  Thus, any kind of defect that would lead the buyer to close the deal only for a reduced price is a redhibitory defect.  This breach of warranty is analogous to the breaches of warranty at issue in sandbagging because the sandbagging buyer sues for a reduction in price based on a breach of warranty.  Article 2520’s warranty against redhibitory defects essentially covers any situation in which a buyer would have a claim for breach of warranty, and, therefore, a sandbagging buyer should be treated the same way.   

          Significantly, Louisiana law does not permit a buyer to recover for defects that were known or should have been known at the time of contracting.[134]  Article 2521 states that “[t]he seller owes no warranty for defects in the thing that were known to the buyer at the time of the sale, or for defects that should have been discovered by a reasonably prudent buyer of such things.”[135] Therefore, for a buyer to recover damages, this article indicates that the defect must be hidden from or non-apparent to the buyer on reasonable inspection.  The very nature of sandbagging is entirely inconsistent with this principle, because a sandbagging buyer knows of the misrepresentation or breach before subsequently suing to recover based on that same misrepresentation or breach.  The sandbagging buyer has not been harmed by the defect at the time of its discovery and in fact seeks to benefit from the defect.  In the civilian legal tradition, it is unjust for buyers to benefit from something that did not harm them.[136]  This injustice is the very reason that many of the anti-sandbagging jurisdictions do not allow sandbagging: the buyer did not rely on the warranty and therefore was not harmed by the warranty.  This same reasoning is entirely consistent with the Civil Code and Louisiana’s civilian tradition in general.

          To determine whether the buyer knew or should have known of a given defect, Louisiana courts consider the buyer’s knowledge and expertise, the buyer’s opportunity for inspection, and any assurances made by the seller.[137]  These considerations reflect the reciprocal duty of good faith in all obligations.  Not only does the seller have a duty to disclose any defects in good faith, but the buyer also has a duty to detect any reasonably apparent redhibitory defects—although the scope of the buyer’s duty to detect may be limited by the buyer’s experience and knowledge.  Thus, sandbagging is in direct opposition to the warranty against redhibitory defects, and if article 2520 did apply to incorporeal things, then a sandbagging buyer would be barred from recovery.  Additionally, the remedies available to a buyer for breach of warranty against redhibitory defects are determined by the seller’s good or bad faith, consistent with conventional obligations in general.[138]  That is, a good faith seller is liable for less damages than a bad faith seller.[139]  Furthermore, an otherwise valid waiver of the warranty against redhibitory defects has no effect against a bad faith seller.[140]  This outcome further emphasizes Louisiana’s strong public policy for requiring good faith and deterring bad faith.  Thus, Louisiana should not allow sandbagging in accordance with its traditional requirement of reciprocal good faith.

          Also consistent with Louisiana’s policy of good faith is the requirement that a buyer provide notice of any redhibitory defect to the seller upon discovery.[141]  A buyer’s remedies are limited when he fails to provide a good faith seller with notice of the defect and an opportunity to repair it, or when he fails to provide a bad faith seller with notice.[142]  Again, the Civil Code, via the warranty against redhibitory defects, incentivizes the reciprocal duty of good faith while deterring bad faith by limiting remedies for a buyer who does not effectively give the seller the benefit of the doubt.  A sandbagging buyer specifically does not provide notice to the seller of the breach, thereby denying the seller the opportunity to address the breach and adjust the price accordingly.[143]  This action by a sandbagging buyer is entirely inconsistent with the ideas behind the warranty against redhibitory defects and the constant underlying duty of good faith.

          The final requirement to recover for breach of warranty against redhibitory defects—that the defect existed at the time of delivery—is largely irrelevant in the sandbagging context.[144]  By sandbagging’s very nature, the defect must still exist at the time of delivery because the buyer has maintained silence as to the defect in an attempt to seek reduction of price and damages.

2.     The warranty against redhibitory defects illustrates that the anti-sandbagging rule should be mandatory and that Louisiana should not allow parties to contract around it.

          Some anti-sandbagging jurisdictions do allow parties to contract for sandbagging,[145] but Louisiana should not adopt this stance because it essentially allows contracting for bad faith, which is prohibited by Civil Code article 2004.[146]  A pro-sandbagging provision is, in effect, the seller’s waiver of defenses against the buyer’s claim for recovery.  Louisiana does allow parties to waive certain defenses and claims, such as a buyer’s waiver of the warranty against redhibitory defects.[147]  However, waivers of warranty against redhibitory defects are ineffective against a party in bad faith.[148]  As noted above,[149] a sandbagging buyer is effectively acting in bad faith based on governing Louisiana law.  Thus, a seller’s waiver of his defenses via a pro-sandbagging provision would be automatically ineffective under the principles of warranty against redhibitory defects.[150]  Even without this automatic negation of such a waiver, Louisiana law has other grounds for prohibiting pro-sandbagging provisions.

          Significantly, actions for breach of the warranty against redhibitory defects are not actions for breach of contract.  Louisiana courts “have held unequivocally that actions based on a breach of warranty against defects are to be brought in redhibition instead of as a breach of contract.”[151]  Further, comment (b) to article 2520 provides that “[u]nder this Article, the presence of an express warranty in the sale does not convert the action for redhibition into an action for breach of contract.”[152]  This revision comment displays an explicit legislative differentiation from the rationale of pro-sandbagging jurisdictions.  In Ziff-Davis, the court held that breach of an express warranty is an action for breach of contract and that “the only ‘reliance’ required is that the express warranty is part of the bargain between the parties.”[153]  But under article 2520, a claim for breach of warranty is not a claim for breach of contract.  Therefore, the rationale for a pro-sandbagging rule is inapplicable under Louisiana law, and Louisiana should adopt an anti-sandbagging rule.  Louisiana’s approach to breach of warranty claims is more similar to the traditional rule than the modern rule, but it is still something unique unto itself.  Although redhibitory actions are not contractual claims, they are not tort claims either, instead functioning as their own type of claims.  The relevant prescriptive periods provide ample evidence that redhibitory actions are distinct from those for breach of contract or tort: tort claims prescribe after one year,[154] breach of contract claims prescribe after ten years,[155] and redhibitory actions prescribe after either one year or four years, depending on the circumstances.[156]  While this standard does not necessarily align Louisiana directly with anti-sandbagging jurisdictions and the traditional approach to breach of warranty actions, it is more similar to the traditional approach than the modern approach. 

3.     Louisiana’s existing law on vices of consent already provides adequate protection for buyers.

          Additionally, Louisiana still has adequate remedies to protect all parties to M&A deals in the event of breach.  The four requirements for a valid contract under Louisiana law are capacity, consent, cause, and object.[157]  With consent being the most relevant in the M&A context, a buyer would be able to rescind any contract where the buyer’s consent was vitiated by error or fraud.[158]  A buyer who learns of a breach in the time between signing and closing can rescind the contract for fraud or error.  

          The Civil Code provides that “Fraud is a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other.  Fraud may also result from silence or inaction.”[159]  The Code further instructs that, “[e]rror induced by fraud need not concern the cause of the obligation to vitiate consent, but it must concern a circumstance that has substantially influenced that consent.[160]  Thus, the buyer could rescind the contract for fraud whenever the error induced by fraud substantially influenced the buyer’s consent to the contract.  In the M&A context, the buyer could rescind the contract for any kind of fraudulent representation by the seller, which would also constitute a misrepresentation.

          Buyers are also protected by the right to rescind the contract for error.  Error only vitiates consent when the error is substantial.[161]  Error may be substantial when it concerns the buyer’s principal cause for entering into the obligation or has been explicitly relayed from the buyer to the seller.[162]  That is, generally, the buyer could only rescind for error if the error was the buyer’s reason for entering into the contract.  In the M&A context, the buyer could rescind the contract for error when the seller’s misrepresentations were the basis for the buyer’s consent to the contract.  Thus, buyers are protected by rescission for fraud or error when the buyer may want to rescind the contract altogether. 

          Although error and fraud provide adequate remedies for a buyer who wants to rescind the contract, Louisiana law does not currently provide a remedy for a buyer who still wants to complete the acquisition.[163]  However, this apparent absence of a remedy is should not be cause for alarm.  Buyers who learn of a breach or misrepresentation prior to closing can still close the transaction—they just have to bring their concerns to the negotiating table, not the courtroom, if they want to obtain a reduction in price.  And buyers can still bring indemnity claims after closing, provided that the buyer did not know or have reason to know of such grounds prior to closing, which would encourage even more thorough sellers’ disclosures in due diligence periods.[164]

C.    Louisiana’s Public Policy and Willingness to Limit Contractual Freedom Supports Restricting Parties’ Ability to Contract for Sandbagging

          Louisiana should make its anti-sandbagging rule mandatory and not allow parties to contract for sandbagging.  Although some anti-sandbagging default jurisdictions allow parties the freedom to contract for sandbagging, Louisiana’s legal principles indicate that parties should not be free to contract for sandbagging.[165]  It must be noted that there is a strong countervailing public policy for freedom of contract.[166]  However, Louisiana already restricts the freedom of contract in other areas—beyond the restrictions imposed by common law—where the public policy of good faith outweighs the benefits of freedom of contract.[167]  Louisiana’s adoption of an anti-sandbagging rule is supported by Louisiana’s protections for parties in contracts generally, good faith actors through principles like negotiorum gestio, and parties that may make poor decisions regarding immovables through the principle of lesion beyond moiety. 

          Louisiana obligations law provides significant protection to parties in and even beyond the confines of an explicit contractual setting.  At common law, parties are generally free to contract for anything that is not illegal or against public policy.”[168]  In Louisiana, parties may contract for anything that is not illegal, immoral, or against public policy.[169]  The only notable difference here is that Louisiana applies a restriction on contracts that may be immoral.  Also, outside Louisiana, the UCC governs sales of goods, while common law governs sales of services.[170]  The Louisiana Civil Code governs all contracts of sale, regardless of whether the object of the sale qualifies as a good or a service.[171]  The centralization of Louisiana’s governing law on contracts, regardless of the object of the contract, further evidences Louisiana’s generally heightened oversight of contracts.  At common law a contract requires consideration or some kind of reciprocal obligation between the parties.  Promises absent consideration are generally not enforceable under common law,[172] unless the promise induces reasonable and foreseeable reliance and justice requires enforcement.[173]  Louisiana, however, recognizes promises without consideration, called  “donations inter vivos,” which may depend solely on the will or whim of the donee, as legally enforceable contracts provided that the offeree simply accepts the offer.[174]  While donations inter vivos are an entirely separate concept from contracts of sale, the mere fact that Louisiana recognizes such contracts as legally enforceable absent reasonable and foreseeable reliance—while the common law does not—speaks to the unique level of protection that Louisiana is willing to provide to parties in a contractual setting.

          Negotiorum gestio, codified in Civil Code article 2292,[175] is another principle unique to the civilian legal tradition that supports Louisiana adopting an anti-sandbagging rule.[176]  Negotiorum gestio essentially creates a modified mandatary relationship[177] based on a party’s reasonable belief as to how the other party would want his affairs managed if he were aware of the circumstances.[178]  This creates a quasi-contractual relationship, for which the managing party may be entitled to recovery for the costs and effort of managing the other party’s affairs, even when the other party was not enriched through the managing party’s efforts.[179]  For example, imagine two neighbors, Alex and Dominic.  Alex is out of town, and his neighbor Dominic knows that a hurricane is coming.  Dominic cannot get in touch with Alex, but he takes it upon himself to board up Alex’s windows to prepare Alex’s house for the hurricane.  Under negotiorum gestio, Dominic may be entitled to compensation for his efforts and the cost of managing Alex’s affairs, regardless of whether they were actually necessary or authorized by Alex either before or after Dominic acted.  Although Louisiana distinguishes negotiorum gestio from unjust enrichment,[180] the common law does not.  At common law, such situations are governed by agency law, and the issue before courts is whether the managing party acted within the scope of an agency relationship, assuming such relationship existed:

To make [the other party] liable, he must either have requested the performance of the service, or, after he knew of the service, he must have promised to pay for it.  The great and leading rule of law is to deem an act done for the benefit of another, without his request, as a voluntary act of courtesy, for which no action can be sustained.  The world abounds with acts of this kind, done upon no request; but would more abound with ruinous litigation, and the overthrow of personal rights and civil freedom, if the law was otherwise.[181]

Thus, the civil law tradition of negotiorum gestio is yet another example of Louisiana’s willingness to protect parties beyond the confines of an explicit contractual agreement as is generally required by the common law.

          Lesion beyond moiety is a ground for rescission of a contract that is unique to Louisiana and also supports an anti-sandbagging rule in Louisiana.[182]  Rescission for lesion only applies to sales of immovables when an immovable was sold for less than one-half of its fair market value.[183]  Lesion cannot be waived,[184] and is therefore another one of the unique instances where the Civil Code restricts the parties’ freedom of contract for the sake of protecting a party to a contract.[185]  Even a seller who knows that he is selling the immovable for less than half of its fair market value can subsequently rescind the contract for lesion.[186]  This broad and indiscriminate protection stems from a substantial limit on contractual freedom in that the parties have absolutely no ability to contract around lesion.  Lesion, as an additional example of Louisiana’s willingness to limit contractual freedom to protect parties, further supports that Louisiana should have no issues with limiting the parties to an M&A deal’s ability to contract for sandbagging provisions.

          Finally, truly determined buyers who do not want to be limited by the proposed anti-sandbagging rule can still find ways to sandbag.  This proposed limit on contractual freedom—that Louisiana should not allow parties to contract for sandbagging—is required by Louisiana’s constant underlying duty of good faith, so the parties simply cannot sandbag in Louisiana.[187]  However, for any buyers who remain intent on retaining their sandbagging rights, there exists an easy alternative remedy: include a choice of laws provision that elects to be governed by a pro-sandbagging state’s laws.[188]  Most large businesses use Delaware or New York law when conducting mergers or acquisitions,[189] so there would likely be no material difference in the amount of such large-scale M&A transactions happening under Louisiana law.  Instead, Louisiana’s anti-sandbagging rules would likely apply much more frequently to smaller businesses, which generally have less resources and commercial sophistication.  The proposed anti-sandbagging rules and replacement remedies of error, fraud, and a modified warranty against redhibitory defects, would likely provide the best protections for these sellers and buyers, respectively. Ultimately, this would only restrict the parties’ freedom of contract if they wanted Louisiana law to govern their transaction, as parties retain the freedom to include a choice of laws provision in their contract.

CONCLUSION

          Buyers and sellers do not exist in a Hobbesian state of nature;[190] the leviathan,[191] or rather the pelican, that is the Louisiana state government has established laws to protect parties to contracts.  Further, Louisiana provides remedies for victims of contractual wrong-doing and imposes heightened obligations on the parties, so they need not act under Machiavelli’s advice to fight fire with fire.[192]

          Accordingly, Louisiana should break its silence and impose a mandatory anti-sandbagging rule.  Although there is no law or jurisprudence explicitly on point, the general principle and strong public policy interest of good faith practically requires an anti-sandbagging stance.   In effect, Louisiana is an anti-sandbagging state—it just does not know it yet. Further, the principles underlying the warranty against redhibitory defects and Louisiana’s unique willingness to limit parties’ contractual freedom through doctrines such as negotiorum gestio and lesion beyond moiety, provide ample support for Louisiana’s adoption of a mandatory anti-sandbagging rule.  Of course, Louisiana-based parties would still be free to sandbag through choice of laws of a different jurisdiction.  However, where Louisiana law governs, sandbagging—like Machiavelli’s advice—simply has no place.

Footnotes:

* J.D. Candidate 2024, Loyola University New Orleans College of Law; B.A. Government & Political Philosophy 2021, Belmont Abbey College. Special thanks to Asher J. Friend for getting me interested in this topic and M&A generally, Professor Meera Sossamon for all of her help with the civil law aspects of this Comment, Professor Craig Senn for his guidance in the common law aspects, and the 2023-2024 Loyola Law Review for the invaluable help in bringing this Comment to life.

[1] Niccolo Macchiavelli, The Prince 108 (Leo Paul S. de Alvarez trans., 1980).

[2] Thomas Hobbes, Leviathan i. xiii. 9, (1651) (Life in the state of nature is “solitary, poor, nasty, brutish, and short.”)

[3] The “Machiavellian” adjective is not used in any derogatory way, but rather to indicate that Machiavelli would likely have approved of sandbagging for its crafty (and somewhat shady, although perfectly legal) nature.

[4] Griffith Kimball, Sandbagging: Eagle Force Holdings & the Market’s Reaction, 46 B.Y.U. L. Rev. 571, 573-574 (2021).

[5] Id.

[6] See Machiavelli, supra note 1, at 108.

[7] Charles K. Whitehead, Sandbagging: Default Rules and Acquisition Agreements, 36 Del. J. Corp. L. 1081, 1100 (2011).

[8] Id.    

[9] See id. at 1088.

[10] Id. at 1089.    

[11] See Section III, infra.

[12] “. . . since [all men] are wicked, and would not be faithful to you, you also do not have to be faithful to them.” Machiavelli, supra note 1, at 108.

[13] La. Civ. Code. Ann. art. 1983.

[14] See La. Civ. Code. Ann. art.  2315.

[15] See Part III.A, infra.

[16]  Maxime Panhard, When Contractual Good Faith Meets a Controversial M&A Issue, 51 Int'l Law. 69, 70 (2018).(citing Glenn D. West & Kim M. Shah, Debunking the Myth of the Sandbagging Buyer: When Sellers Ask Buyers to Agree to Anti-Sandbagging Clauses, Who is Sandbagging Whom?, 11 Mergers & Acquisitions L. 1, 3 (2007)).

[17] Panhard, supra note 16, at 70.

[18] Whitehead, supra note 7, at 1115 n. 4 (2011) (Email from Rick Climan to Charles K. Whitehead (Sept. 16, 2011, 11:46PM EST).

[19] Panhard, supra note 16, at 71.

[20] “Although it is a broad term, in the context of commercial business acquisition ‘due diligence’ may briefly be defined as ‘the inspection and investigation of . . . a business entity before a buyer makes the final decision whether to consummate an acquisition.’ Andrew N. Jacobson, A Narrative Real Estate Acquisition Due Diligence Checklist, 17  Prac. Real Est. Law. 7 (2001). More precisely, it is ‘the point in the transaction at which the seller of the business must demonstrate that the representations and warranties made in the course of the negotiations are supported in fact, and the point at which the buyer . . . , must test [his] assumptions about the seller and its business.’ Robert D. Frawley, Due Diligence – The Crucible, 218 N.J. Law. 47 (2002). As the previous writer has explained, ‘the goal of any due diligence investigation from the buyer’s perspective is to fully understand the seller’s business, its markets, customers, financial condition, legal position, and any other risks or uncertainties inherent in acquiring and operating the business.’ Id.”. Levin v. May, 2003-2205, p. 7, 8 (La. App. 1 Cir. 9/17/04), 887 So.2d 497, 501-502.

[21] Panhard, supra note 16, at 71.

[22] Id. at 72.

[23] Id. at 71-72.

[24] Id. at 72.

[25] Id.

[26] Id. at 73.

[27] Id.

[28] See Jacobson, supra note 20, at 7; Frawley, supra note 20, at 47; Levin v. May, 2003-2205, p. 7, 8 (La. App. 1 Cir. 9/17/04), 887 So.2d 497, 501-502.    

[29] Panhard, supra note16, at 73.

[30] Id.

[31] See Jacobson, supra note 20, at 7; Frawley, supra note 20, at 47; Levin, 887 So.2d at 501-502.    

[32]  Jeff Ferriell, Understanding Contracts § 12.02, at 588 (2d ed. 2009).

[33] See La. Civ. Code. Ann. art. 7; La. Civ. Code. Ann. art. 1968; La. Civ. Code. Ann. art. 1971. Essentially, Louisiana goes one step beyond common law by imposing the additional morality requirement to its restrictions on freedom of contract. See Jeff Ferriell, Understanding Contracts § 12.02, at 588 (2d ed. 2009).

[34] Thomas R. Taylor, Sandbagging in M&A Transactions, Mountain W. Cap. Network (Feb. 18, 2021), https://www.mwcn.org/2021/02/18/sandbagging-in-ma-transactions/.

[35] Whitehead, supra note 7, at 1088.

[36] Thomas R. Taylor, “Sandbagging” in M&A Transactions, Dentons (June 12, 2019), https://www.dentons.com/en/insights/articles/2019/june/12/sandbagging-in-m-a-transactions     .

[37] Id.    

[38] Panhard, supra note 16, at 74.

[39] See id.

[40] Contracts are often silent and rely on the default rule as a result of compromise between the parties, since a pro-sandbagging provision weighs heavily in the buyer’s favor, while an anti-sandbagging provision favors the seller. See Whitehead, supra note 7, at 1088; Taylor, supra note 34.

[41] Panhard, supra note 16, at 74.

[42] Whitehead, supra note 7, at 1088.

[43] Panhard, supra note 16, at 77.

[44] Id.

[45] See Whitehead, supra note 7, at 1108-15.

[46] See id. at 1088.

[47] Id. at 1114-1115.

[48] Id. at 1084.

[49] Id.

[50] Id. at 1087.

[51] Kazerouni v. De Satnick, 228 Cal. App. 3d 871 (Cal. Ct. App. 1991).

[52] Id. at 872.

[53] Id. at 872-73.

[54] Id. at 873-74.

[55] Telephia, Inc. v. Cuppy, 411 F. Supp. 2d 1178 (N.D. Cal. 2006).

[56] Id. at 1182.

[57] Id. at 1188.

[58] Id.

[59] Id.

[60] Id. at 188 n.5.

[61] Id.    

[62] Id.

[63] Id. at 1188.

[64] Whitehead, supra note 7, at 1081, 1084-1085.

[65] Id. at 1085.

[66] Id. at 1084.

[67] Id. at 1108-14.

[68] Eagle Force Holdings, LLC v. Campbell, 187 A.3d 1209, n. 185 (Del. 2018) (citing CBS Inc. v. Ziff-Davis Publishing Co., 553 N.E.2d 997, 1101 (N.Y. 1990)).

[69] Luke P. Iovine III, Sandbagging in M&A Deals: Silence May Not Be Golden, 16 No. 10 M&A L. 10 (2012) (citing Whitehead, Charles K. Sandbagging: Default Rules and Acquisition Agreements, 36 Del. J. Corp. L. 1081, 1093).

[70] Eagle Force, 187 A.3d at 1236 n.     185 (“ . . . a majority of states have followed the New York Court of Appeals’ decision in CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 498 (1990).”).

[71] Ziff-Davis, 553 N.E.2d at 998.

[72] Id.

[73] Id.

[74] Id. at 1001.

[75] Id. at 998.      

[76] Id. at 1001.      

[77] Id.    

[78] Galli v. Metz, 973 F.2d 145, 151 (2d Cir. 1992) (The court did not make a definitive decision on the issue because of factual questions      and instead remanded to the district court with guidance.).

[79] Id. at 151.

[80] Gusmao v. GMT Group, Inc., 2008 U.S. Dist. LEXIS 58462 at *15 (S.D.N.Y. Aug. 1, 2008).

[81] See Ziff-Davis, 553 N.E.2d at 1001; Galli, 973 F.2d at 151; Gusmao, LEXIS 58462 at *15.

[82] Kimball, supra note 4, at 571.

[83] Whitehead, supra note 7, at 1087.

[84] Eagle Force Holdings, LLC v. Campbell, 187 A.3d 1209 (Del. 2018).

[85] Kimball, supra note 4, at 572.

[86] Eagle Force, 187 A.3d at 1236 n. 185.

[87] Eagle Force, 187 A.3d at 1236 n. 185 (citing CBS Inc. v. Ziff-Davis, 553 N.E.2d 997, 1001 (N.Y. 1990) (“This view of ‘reliance’—i.e., as requiring no more than reliance on the express warranty as being a part of the bargain between the parties—reflects the prevailing perception of an action for breach of express warranty as one that is no longer grounded in tort, but essentially in contract.”).

[88] Whitehead, supra note 7, at 1103.

[89] Ferriell, supra note 32, §12.06 at 649.

[90] Id.

[91] Id. at 651 (citing Restatement (Second) of Contracts § 205 cmt. a (1981)).

[92] KMC, Inc. v. Irving Trust Co., 757 F.2d 752, 759-63 (6th Cir. 1986) (holding that a bank’s duty of good faith to one of its borrowers prevented it from exercising its contractual right to cut off the supply of funds to its borrower and demand payment of the debt, until the borrower had an opportunity to refinance); Ferriell, supra note 32, §12.06 at 651.    

[93] Ferriell, supra note 32, at §12.06 at 651 (citing Khan & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990)).

[94] La. Civ. Code. Ann. art. 1983.

[95] La. Civ. Code. Ann. art. 1759.

[96] See La. Civ. Code. Ann. art. 1908 (“A contract is bilateral, or synallagmatic, when the parties obligate themselves reciprocally, so that the obligation of each party is correlative to the obligation of the other.”); La. Civ. Code. Ann. art.  1909 (“A contract is onerous when each of the parties obtains an advantage in exchange for his obligation.”).

[97] See La. Civ. Code. Ann. art. 1983; La. Civ. Code. Ann. art. 1759.

[98] La. Civ. Code. Ann. art.  2003.

[99] La. Civ. Code. Ann. art. 1759.

[100] La. Civ. Code. Ann. art. 2549.

[101] La. Civ. Code. Ann. art. 2003.

[102] Though fraud can be proven through misrepresentation by silence, Louisiana law generally requires a prior relation of confidence between the parties. See La. Civ. Code. Ann. art. 1953; La. Civ. Code. Ann. art. 1954.    

[103] La. Civ. Code. Ann. art. 1997 cmt. (b).

[104] See La. Civ. Code. Ann. art. 1996; La. Civ. Code. Ann. art. 1997.

[105] La. Civ. Code. Ann. art. 2004; La. Civ. Code. Ann. art. 2004 cmt. (a) (“[This article] expresses a consequence of the principle of contractual freedom stated in C.C. Art. 1901 (1870). In Freeman v. Department of Highways, 253 La. 105, 217 So. 2d 166 (1968), the Supreme Court held that, as a matter of principle, clauses excluding or limiting liability for intentional fault (fraud or dol) are invalid because a party would be free to perform or not to perform at will. Hence, his obligation would be subject to a purely potestative condition that would make it null. That reasoning aside, such clauses are against public policy because the overriding principle of good faith would be destroyed if it were possible to contract away liability for fraud. Foreign civil codes contain abundant indication of the universality of this conclusion. See also Hayes v. Hayes, 8 La.Ann. 468 (1852).”). “Fraud is a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other. Fraud may also result from silence or inaction.” La. Civ. Code. Ann. art.  1953.

[106] See La. Civ. Code. Ann. art. 7; La. Civ. Code. Ann. art. 1968; La. Civ. Code. Ann. art. 1971.

[107] I.e., fraud, error, duress. See La. Civ. Code. Ann. art. 93; La. Civ. Code. Ann. art. 1949; La. Civ. Code. Ann. art. 1955.

[108] La. Civ. Code. Ann. art.  1948 (“Consent may be vitiated by error, fraud, or duress.”); La. Civ. Code. Ann. art.  2520.

[109] La. Civ. Code. Ann. art. 1949.

[110] “The institution of ‘management of affairs’ (negotiorum gestio) is a typically civilian institution that derives from the Romanist tradition and is found in all civil codes. There is no counterpart in common-law jurisdictions.” La. Civ. Code. Ann. art. 2292 cmt. (a).

[111] Panhard, supra note 16, at 75.

[112] Id.

[113] Id. at 75 n. 50 (quoting Code Civil art. 1134 (Fr.) (“Les conventions légalement formées tiennent lieu de loi à ceux qui les ont faites. Elles ne peuvent être révoquées que de leur consentement mutuel, ou pour les causes que la loi autorise. Elles doivent être exécutées de bonne foi” [“Agreements lawfully entered into take the place of the law for those who have made them. They may be revoked only by [their] mutual consent, or for causes authorized by law. They must be performed in good faith.”].)) (alterations in original).

[114] Id. at 75 n. 51 (citing Code Civil art. 1104 (Fr.) (“Les contrats doivent être négociés, formés et executés de bonne foi. Cette disposition est d’ordre public” [“Contracts must be negotiated, trained and executed in good faith. This provision is of public order.”])) (alterations in original).

[115] Id. at 76.

[116] Id.

[117] Id. at 76-77.

[118] U.C.C. § 2-313.

[119] U.C.C. § 2-314, 315.

[120] Robert A. Hillman, Principles of Contract Law 117 (3d. ed. 2014); see, e.g., La. Civ. Code. Ann. art. 2520.

[121] See La. Civ. Code. Ann. art. 2475.

[122] See La. Civ. Code. Ann. art. 2503.

[123] La. Civ. Code. Ann. art. 2520.

[124] Kazerouni v. De Satnick, 279 Cal.Rptr. 74, 75-76 (Cal. Ct. App. 1991) (holding that the statute that buyer relied on only applied to tangible goods and did not apply to the sale of a business).

[125] Levin v. May, 2003-2205, p. 11 (La. App. 1 Cir. 9/17/04), 887 So.2d 497, 503-504 (citing Scogin v. Smith, 612 So. 2d 739, 741 (La. App. 1 Cir. 1992) (quoting Williams v. Louisiana Machinery Company, Inc., 387 So. 2d 8, 11 (La. App. 3rd Cir. 1980) (“‘Vice’ or ‘defect’ as used in [Article 2520] contemplates physical imperfection or deformity, a licking of a necessary competent or level of quality.”)).

[126] La. Civ. Code. Ann. art.  2520.

[127] Id.

[128] Hoffman v. B&G, Inc., 2016-1001,  p. 11 (La. App. 1 Cir. 2/21/2017), 215 So. 3d 273, 279.

[129] Berney v. Rountree Olds Cadillac Co., 33,388, p. 1, 9 (La. App. 2 Cir. 6/21/2000), 763 So. 2d 799, 801-802, 806.

[130] La. Civ. Code. Ann. art. 2520.

[131] Guillot v. Doughty, 2013-1348, p. 9 (La. App. 1 Cir. 3/21/14), 142 So. 3d 1034, 1041.

[132] La. Civ. Code. Ann. art. 2520.

[133] Id.

[134] La. Civ. Code. Ann. art. 2521.

[135] Id.    

[136] See La. Civ. Code. Ann. art. 2315.

[137] Royal v. Cook, 2007-1465 (La. App. 4 Cir. 4/25/2008), 984 So. 2d 156, 163.

[138] See La. Civ. Code. Ann. art. 2003; La. Civ. Code. Ann. art. 2531; La. Civ. Code. Ann. art. 2545.

[139] See La. Civ. Code. Ann. art. 2003; La. Civ. Code. Ann. art. 2531; La. Civ. Code. Ann. art. 2545.    

[140] La. Civ. Code. Ann. art. 2548.

[141] La. Civ. Code. Ann. art. 2522.    

[142] La. Civ. Code. Ann. art. 2522.

[143] Id.

[144] La. Civ. Code. Ann. art. 2520.

[145] Telephia, Inc. v. Cuppy, 411 F. Supp. 2d 1178, 1188 (N.D. Cal. 2006) (“The Court believes this contractual language is clear, and that defendants may be held accountable to the warranties in the SPA regardless of plaintiff's reliance on those warranties.”).

[146] La. Civ. Code. Ann. art. 2004; La. Civ. Code. Ann. art. 2004 cmt. (a) (“[This article] expresses a consequence of the principle of contractual freedom stated in C.C. Art. 1901 (1870). In Freeman v. Department of Highways, 253 La. 105, 217 So. 2d 166 (1968), the Supreme Court held that, as a matter of principle, clauses excluding or limiting liability for intentional fault (fraud or dol) are invalid because a party would be free to perform or not to perform at will. Hence, his obligation would be subject to a purely potestative condition that would make it null. That reasoning aside, such clauses are against public policy because the overriding principle of good faith would be destroyed if it were possible to contract away liability for fraud. Foreign civil codes contain abundant indication of the universality of this conclusion. See also Hayes v. Hayes, 8 La.Ann. 468 (1852).”). “Fraud is a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other. Fraud may also result from silence or inaction.” La. Civ. Code. Ann. art. 1953.

[147] La. Civ. Code. Ann. art. 2548.

[148] Id. 

[149] See supra Section III(A).

[150] See La. Civ. Code. Ann. art. 2548.

[151] Easterline v. Royal Manufactured Hous., LLC, 2007-192, p. 9 (La. App. 3 Cir. 06/06/07), 963 So. 2d 399, 405 (citing PPG Industries, Inc. v. Industrial Laminates Corp., 664 F.2d 1332 5th Cir. 1982); Molbert Bros. Poultry & Egg Co. v. Montgomery, 261 So. 2d 311 (La. App. 3 Cir.), application not considered, 262 LA. 306, 263 So. 2d 46 (La.1972)) (emphasis added).

[152] La. Civ. Code. Ann. art. 2520 cmt. (b).

[153] CBS Inc. v. Ziff-Davis Pub. Co., 553 N.E.2d 997, 1001 (N.Y. 1990).    

[154] La. Civ. Code. Ann. art. 3492.

[155] La. Civ. Code. Ann. art. 3499.

[156] La. Civ. Code. Ann. art. 2534.

[157] See La. Civ. Code. Ann. art. 1918; La. Civ. Code. Ann. art. 1927; La. Civ. Code. Ann. art. 1966; La. Civ. Code. Ann. art. 1971.

[158] La. Civ. Code. Ann. art. 1948 (“Consent may be vitiated by error, fraud, or duress.”).

[159] La. Civ. Code. Ann. art. 1953.

[160] La. Civ. Code. Ann. art. 1955.

[161] La. Civ. Code. Ann. art. 1949.

[162] La. Civ. Code. Ann. art. 1949; Id. cmts. (b)-(c).

[163] See La. Civ. Code. Ann. art. 1948. (“Consent may be vitiated by error, fraud, or duress.”); La. Civ. Code. Ann. art. 1952; La. Civ. Code. Ann. art. 1958.    

[164] Levin v. May, 2003-2205, p. 7, 8 (La. App. 1 Cir. 9/17/04), 887 So.2d 497, 501-502. (“Although it is a broad term, in the context of commercial business acquisition ‘due diligence’ may briefly be defined as ‘the inspection and investigation of . . . a business entity before a buyer makes the final decision whether to consummate an acquisition.’ See Jacobson, supra note 20, at 7 Frawle. More precisely, it is ‘the point in the transaction at which the seller of the business must demonstrate that the representations and warranties made in the course of the negotiations are supported in fact, and the point at which the buyer.., must test [his] assumptions about the seller and its business.’ Frawley, supra note 20, at 47. As the previous writer has explained, ‘the goal of any due diligence investigation from the buyer’s perspective is to fully understand the seller’s business, its markets, customers, financial condition, legal position, and any other risks or uncertainties inherent in acquiring and operating the business.’ Id.”).

[165] See La. Civ. Code. Ann. art. 2292; La. Civ. Code. Ann. art. 2589.

[166] See La. Civ. Code. Ann. art. 1983.

[167] See supra Section III(A)&(B).

[168] Ferriell, supra note 32, § 12.02 at 588-89.

[169] See La. Civ. Code. Ann. art. 7; La. Civ. Code. Ann. art. 1968; La. Civ. Code. Ann. art. 1971.

[170] Ferriell, supra note 32, § 12.02 at 591-93, 599-600.

[171] La. Civ. Code. Ann. art. 2438.

[172] Hillman, supra note 120, at 17. Note, however, that the common law does recognize such promises where performance has already been rendered. Id.

[173] Steven J. Burton & Melvin A. Eisenberg, Contract Law Selected Source Materials Annotated, Restatement (Second) of Contracts § 90 (2020).

[174] La. Civ. Code. Ann. art. 1468 (“A donation inter vivos is a contract by which a person, called the donor, gratuitously divests himself, at present and irrevocably, of the thing given in favor of another, called the donee, who accepts it.”).

[175] La. Civ. Code Ann. art. 2292.

[176] “The institution of ‘management of affairs’ (negotiorum gestio) is a typically civilian institution that derives from the Romanist tradition and is found in all civil codes. There is no counterpart in common-law jurisdictions.” La. Civ. Code Ann. art. 2292 cmt. (a).

[177] Louisiana’s mandate law is equivalent to the common law’s agency law. La. Civ. Code Ann. art. 2989 and cmts. thereto.

[178] La. Civ. Code Ann. art. 2292.

[179] La. Civ. Code Ann. art. 2292 cmt. (e).

[180] Id.

[181] See Glenn v. Savage, 14 Or. 567, 577 (Or. 1887).

[182] See La. Civ. Code Ann. art. 2589    

[183] La. Civ. Code Ann. art. 2589.

[184] Id.

[185] Generally, parties may contract for anything that is not illegal, immoral, or against public policy. See La. Civ. Code Ann. art. 7; La. Civ. Code Ann. art. 1968; La. Civ. Code Ann. art. 1971.

[186] La. Civ. Code Ann. art. 2589.

[187] See La. Civ. Code Ann. art. 1983; La. Civ. Code Ann. art. 1759.

[188] Civil Code article 3515 provides that, when a conflict of laws arises, the laws of whichever state has the most relevant policy concerns should apply. La. Civ. Code Ann. art. 3515. Thus, the seller or buyer would have to have fairly significant contacts with a pro-sandbagging jurisdiction for the chosen jurisdiction’s laws to apply, but this hurdle would likely only affect smaller-scale transactions.

[189] Iovine, supra note 69, at 10 n. 70 (citing Whitehead, supra note 7, at 1093).

[190] Hobbes, supra note 2, at I, xiii. 9.

[191] Hobbes calls government a “leviathan.” Hobbes, supra note 2, at Introduction. He drew the title for Leviathan from the name of “the fearful sea-monster of the Bible.” Robert E. Stillman, Hobbes’s Leviathan: Monsters, Metaphors, and Magic,  62 Eng. Literary Hist. 791, 795 (1995).

[192] Machiavelli, supra note 1, at 108.