Delaware Court of Chancery Confirms Delaware Is a “Sandbagging State”
By Sara Bussiere, Cadwalader, Wickersham & Taft LLP
In a recent post-trial decision in Arwood v. AW Site Services, LLC, the Delaware Court of Chancery found that a seller breached certain representations and warranties in connection with its sale of a waste management business. The buyer alleged that the seller engaged in improper billing practices, causing it to overbill its clients. In its defense, the seller argued that the buyer, who was given complete access to the company’s billing systems during pre-transaction due diligence, knew or should have known about the company’s billing practices and that certain representations were untrue, and, as a result, should be precluded from bringing a breach of representation and warranties claim. The Court rejected seller’s argument, stating, “In my view, Delaware is, or should be, a pro-sandbagging jurisdiction. The sandbagging defense is inconsistent with our profoundly contractarian predisposition.” The Delaware Supreme Court, however, has not definitively weighed in on “whether a party can recover on a breach of warranty claim where the parties know that, at signing, certain of them were not true[.]” Eagle Force Holdings, LLC, et al. v. Stanley V. Campbell, 187 A.3d 1209, 1236 n.185 (Del. 2018). Until it does, contracting parties would be prudent to expressly address this issue in their transaction documents.
Delaware Courts Face Weighty Choice of Law Questions
Over the last few years, the Delaware courts, including the Court of Chancery, have increasingly had to address the potential tension between Delaware courts and other states’ courts regarding consequential choice of law issues. In multiple cases in the last two years alone, Delaware courts steadfastly have applied the familiar “most significant relationship” test to choice of law questions, while still giving due consideration to other jurisdictions’ public policyThis balancing of Delaware and out-of-state interests is important, particularly given, as the courts have acknowledged, that parties often attempt to use Delaware choice of law provisions to “bypass the substantive law of sister Delaware courts frequently rely on other states’ deference to Delaware’s laws regarding the internal affairs of Delaware business entities. Thus, parties’ use of Delaware choice of law provisions to circumvent the law of Delaware’s sister states creates a potentially problematic tension that the Delaware courts appear to appreciate and desire to avoid. That is, if Delaware courts expect other sovereigns to respect their “overriding interest in the interpretation and enforcement of [Delaware] entity laws [they] must show reciprocal respect” to Delaware’s sister So far, the Delaware courts have shown a tendency to do exactly Over the coming months and years, practitioners will want to monitor the Court’s guidance on choice of law questions to see how this tension is further addressed.