In the Mergers & Acquisitions (M&A) context, a buyer “sandbags” a seller when the buyer, despite knowing pre-closing that the seller materially breached a representation or warranty, closes the deal anyway and subsequently seeks indemnification from the seller for the damages arising out of the breach. Traditionally, most courts are “anti-sandbagging” courts that require buyers to rely on the warranty without knowledge of the breach to prevail. The modern trend, however, generally considers buyers’ knowledge of the breach to be immaterial. While parties can and do contract around the rule, empirical studies show parties are often silent—allowing a state’s default rule to fill the interstice. Accordingly, state default rules are often outcome-determinative of sandbagging claims.

Dealmakers have long considered Delaware a “prosandbagging” state following the modern trend. A recent decision by the Delaware Supreme Court, however, calls into question the strength of that assumption. In Eagle Force Holdings, LLC. v. Campbell, both the majority and dissent characterized Delaware’s sandbagging default rule as an open question. This has generated substantial concern from dealmakers, who are now unsure whether to advise their clients to expend the significant resources necessary to contract around Delaware’s sandbagging default rule. Given the size, volume, and velocity of Delaware deal flow, as well as the influence of its corporate law, clarifying Delaware’s sandbagging default rule is a pressing matter that courts should quickly resolve.

In light of the confusion engendered by the decision, this Note engages in an economic analysis of the impact of anti-sandbagging vis-à-vis pro-sandbagging default rules to help courts appreciate the economic tradeoffs between the two. Contrary to past work on the subject, this Note concludes that a clear pro-sandbagging default rule is more efficient than its anti-sandbagging counterpart. This finding not only sheds light on how efficiency-minded courts and legislatures should approach the enactment of a sandbagging default rule, but also contributes to the growing law and economics literature on default rules by offering a novel approach to comparing the merits of two competing standards.