Precision in No-Leakage Reps: From no undisclosed liabilities rep language to anti-sandbagging disclosures interaction

Step 1 — Define the core rep and risk problem

A “no undisclosed liabilities” representation (sometimes called a “no-leakage” rep) is a seller affirmation that, except as disclosed in a disclosure schedule, the target has no liabilities not reflected on its balance sheet or otherwise disclosed. At its heart this rep is about temporal and informational allocation of risk: it defines what the seller promises about the target’s obligations at signing and—if a bring-down or accuracy-at-closing condition applies—what the seller promises about the target at closing. Sellers typically seek to cap exposure by narrowing the rep, carving items out to the schedule, and limiting survival; buyers seek a broad, unqualified promise to capture unknown or undisclosed liabilities that could impose post-closing costs.

Why does precision matter? Ambiguity in wording creates uncertainty about whether a particular post-closing claim fits within the rep. This uncertainty fuels contentious negotiations, expands due diligence scope, and leads to litigation over semantic disputes: was a liability “disclosed”? Is it “reasonably likely”? Does a knowledge qualifier shift responsibility to the buyer’s diligence? The downstream cost is not merely legal fees—it's an unpredictable allocation of economic risk. Thus, careful drafting changes who bears the cost of unknown liabilities, and does so in ways that are enforceable and predictable.

Consider the core policy choices the parties face: do they want to allocate risks according to what the buyer could have discovered with reasonable diligence (favoring knowledge qualifiers and disclosure schedules), or do they want to require the seller to bear unknown risks that were not disclosed (favoring unqualified, broad reps)? Is it acceptable to let the buyer bring a claim based on post-closing changes that reveal hidden liabilities, or should the contract limit claims to liabilities that existed at signing? These choices must be translated into precise language.

Step 2 — Qualifiers and precision

Qualifiers are the principal tools for shaping the scope of a no-undisclosed-liabilities representation. The typology is simple but legally potent: unqualified, knowledge-qualified, materiality-qualified, and combined (knowledge plus materiality). Each moves the needle on scope and enforceability.

• Unqualified reps: An unqualified rep states, in plain terms, that there are no undisclosed liabilities. This is the broadest buyer-friendly formulation. It places the burden on the seller to disclose anything of consequence. It is most protective of buyers because it does not invite reliance on the buyer’s ability to discover matters through due diligence. However, sellers resist unqualified language because it exposes them to claims for trifling or immaterial items. Courts sometimes interpret unqualified reps strictly for the seller’s obligations, but the absence of limiting language generally favors buyer claims.

• Knowledge-qualified reps: A knowledge qualifier narrows the seller’s assertion to matters within the seller’s actual or constructive knowledge. Typical formulations use defined terms like “Seller’s Knowledge” or “Company Knowledge,” often further defined by reference to officers or the accounting team. The effect is to allocate to the buyer the risk that the seller simply did not know about a liability. Knowledge qualifiers are popular when seller representatives lack complete visibility into localized operations. The trade-off: buyers accept a narrower scope, making claims harder to prove because they must show the seller actually knew (or should have known, if the qualifier includes constructive knowledge) of the liability.

• Materiality-qualified reps: Adding a materiality threshold limits claims to liabilities that meet a defined significance test—often “material” or “material and adverse.” Materiality qualifiers prevent claims over trifling items and focus enforcement on economically meaningful liabilities. But materiality is itself a litigated concept: parties must decide whether to use a subjective standard (material to the company, material to the transaction) or an objective monetary threshold. Each choice shifts predictability: monetary thresholds are clearer but may be arbitrary; subjective standards are flexible but contestable.

• Combined qualifiers: Combining knowledge and materiality narrows scope further—only liabilities that are both known to the seller and material are actionable. This is the most seller-favorable formulation for limiting post-closing exposure.

Sentence-level drafting choices have distinct trade-offs. For example, “The Company has no liabilities except those reflected on the balance sheet or disclosed in Schedule X” is strong for buyers. By contrast, “Except as set forth on Schedule X, to the Company’s knowledge, there are no liabilities” shifts risk to buyers because they must show a lack of disclosure or seller knowledge. Drafting must also be precise about the defined knowledge standard (actual vs. constructive), and the definition of materiality (general legal concept vs. a specified dollar cap) to avoid later disputes about interpretation.

Step 3 — Bring-down mechanics and timing

Representations can be statements of fact as of signing, or they can be required to be “true and correct at closing” (a bring-down or accuracy-at-closing condition). The distinction matters: signing-only reps allocate risk up to the signing date, often leaving post-signing deterioration or newly discovered liabilities to be addressed by indemnities or price adjustments. Bring-down reps require the seller to ensure the representation remains accurate at closing, bridging the gap between signing and effectiveness of the transaction.

Typical bring-down language requires that “the representations and warranties set forth herein shall be true and correct in all material respects as of the Closing Date as if made on and as of such date.” That creates a closing condition: the buyer can refuse to close if a material breach exists at closing (subject to cure rights). A strict bring-down shifts more risk to the seller for liabilities that arise or are discovered after signing but before closing.

The bring-down interacts with remedies. If a rep is represented as true at signing but not required to be brought down, the buyer’s remedy typically is limited to post-closing indemnity claims for liabilities that manifest after closing, but those claims may be harder to prove if the seller can show the liability arose after signing. If the rep is brought down, the buyer can treat a closing breach as a pre-closing inaccuracy, opening rescission or termination remedies in addition to indemnity.

Disclosure schedules are the mechanism through which parties refine the rep’s scope. The interaction depends on whether schedules are permitted to disclose items generically or require specific, itemized disclosures. For example, a schedule that lists specific liabilities with detail—amount, date, parties—more clearly carves them out from the rep. By contrast, a general catch-all disclosure (“Various liabilities arising in the ordinary course”) is less precise and may not be effective to negate a buyer claim, especially if the purchase agreement requires specificity. Precise schedules limit post-closing disputes by clearly logging what the buyer accepted at signing and what remains for potential indemnity.

Step 4 — Anti-sandbagging and survival/fraud carve-outs

Anti-sandbagging clauses decide whether a buyer can assert claims based on facts it knew before closing. A buyer who “sandbags” acquires knowledge at or before closing and nonetheless claims a breach post-closing. Anti-sandbagging provisions can take two main forms: a buyer-friendly provision that preserves the buyer’s right to claim whether or not it had pre-closing knowledge, and a seller-friendly waiver where the buyer’s knowledge is deemed a waiver of claims relating to that knowledge.

Seller advocates prefer a waiver: “Buyer shall be deemed to have waived any claim with respect to a matter disclosed in the Disclosure Schedule or of which Buyer had Knowledge as of the Closing.” Buyer advocates often resist such blanket waivers and will accept only a limited carve-out (e.g., fraud) or negotiation for disclosure consequences (e.g., specific disclosures that do not operate as automatic waivers). The drafting choice affects diligence strategy: if buyers fear a waiver, they will expand due diligence and insist on more detailed schedules.

Survival periods set temporal limits on how long reps remain actionable. Sellers want short survival periods to close out potential liability; buyers want long periods or survival tied to the nature of the rep (e.g., tax reps survive longer). Survival interacts with materiality and remedy thresholds: combining short survival with knowledge/materiality qualifiers can severely limit buyer recourse. The common compromise is tiered survivals—short survival for general reps, longer for fundamental reps, and longest for tax and environmental reps.

Fraud carve-outs are critical: nearly all sellers accept that intentional misrepresentations should not be immunized. Fraud carve-outs preserve remedies regardless of knowledge qualifiers, disclosures, or anti-sandbagging waivers. Drafting must be explicit: if a clause says no claims may be brought with respect to matters of which the buyer had knowledge, the fraud carve-out should state that deliberate misrepresentation or concealment by the seller is excluded from any waiver or survival limitations.

Balancing these competing policies requires deliberate drafting. Sellers who want certainty should insist on knowledge and materiality qualifiers, specific disclosure schedules, anti-sandbagging waivers tied to detailed schedule items, and brief survival periods (except for fundamental reps). Buyers who want strong post-closing protection should seek unqualified reps, robust bring-down obligations, limitations on the effectiveness of blanket disclosures, rejection of anti-sandbagging waivers, and fraud carve-outs that are carefully preserved. Each drafting choice reshapes incentives during diligence and sets the line between known, accepted liabilities and those for which compensation will flow post-closing.

In sum, precision in no-undisclosed-liabilities rep language is not an academic exercise: precise qualifiers, thoughtful timing for bring-downs, disciplined disclosure schedules, and carefully tailored anti-sandbagging and survival/fraud provisions are the levers that translate commercial risk allocation into enforceable contract terms. A practitioner’s job is to convert the parties’ negotiated risk allocation into language that is tight on definitions (knowledge; materiality), explicit on timing (signing vs. closing), and calibrated on remedies (survival; fraud carve-outs), thereby reducing ambiguity and making the agreement’s economic trade-offs predictable and defensible.