They found the problem in diligence and sued you anyway

Often yes. Delaware’s trial courts treat a representation as risk allocation, so a buyer’s pre-closing knowledge does not bar the indemnity claim. Some states require reliance, and knowledge defeats it there. Silence in your agreement hands the question to the governing law clause. Your protection is the schedules, not the data room.

Can a buyer that found the problem in diligence still sue you after closing?

Often yes. A buyer that finds an unscheduled problem, closes without mentioning it, and then claims on the inaccurate representation can recover under Delaware trial-court authority, because representations allocate risk and a contract claim requires no proof of reliance. States that treat reliance as an element reach the opposite result.

Delaware’s working rule is now stated plainly at the trial level. In a January 2025 post-trial decision, the Court of Chancery held that a buyer’s pre-closing knowledge that a representation was false does not bar a post-closing indemnification claim for that breach. Unlike fraud, a contract indemnity claim does not require the buyer to prove it believed anything. One qualification: Chancery is a trial court, and the Delaware Supreme Court has not squarely decided the question.

Case: In re Dura Medic Holdings, Inc. Consolidated Litigation, 2025 WL 323796 (Del. Ch. Jan. 29, 2025).

The older Delaware authority points the same way. In one Chancery case the seller argued that facts sitting in diligence should have aroused the buyer’s suspicions and destroyed its reliance. The court rejected that: a breach of contract claim does not depend on justifiable reliance. By giving the representation, the seller took the risk it was wrong.

Cases: Cobalt Operating, LLC v. James Crystal Enterprises, LLC, 2007 WL 2142926, at *28 (Del. Ch. July 20, 2007), aff’d, 945 A.2d 594 (Del. 2008); Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 548 (Del. Super. Ct. 2005), aff’d, 886 A.2d 1278 (Del. 2005).

Now apply it. Your buyer’s accountants read the contract file and see that a large customer gave notice of nonrenewal. Your customer representation and schedules say nothing about it. Nobody raises it. You close. Eleven months later, inside a survival period running from closing, the claim notice arrives.

The consequence can be worse than the missed item, but only if your agreement lets it be. Multiple-based damages are not automatic. In the January 2025 decision the agreement expressly permitted a multiple, and the court used the EBITDA multiple that set the price. Otherwise the buyer must prove its loss. Where a multiple is available, understating recurring earnings by two hundred thousand dollars in a five-times deal supports a million-dollar loss theory.

A representation is not a statement of what you believed. It is a promise about who pays if the fact turns out to be wrong.

What are the three ways a purchase agreement can handle the buyer’s knowledge?

Purchase agreements sit in one of three states on buyer knowledge. A pro-sandbagging clause preserves the claim regardless of what the buyer knew. An anti-sandbagging clause bars recovery where the buyer had actual pre-closing knowledge. Silence says nothing, and in the agreements studied by the bar association, silence is the most common choice.

The figures below come from the American Bar Association’s Private Target Mergers and Acquisitions Deal Points Study, stated as of August 2026. The study reads publicly available agreements from deals far larger than an owner-operated sale, and does not sample sales that close through a business broker. Nothing in the table is a default you can call market for your deal.

Source: ABA Business Law Section, Private Target Mergers and Acquisitions Deal Points Study, 2023 and 2025 editions.

Read your own draft first. Silence is not neutral. It is a choice to be governed by whichever state’s law the agreement names.

If the purchase agreement says nothing about knowledge, which state’s law decides?

Where the agreement is silent, the governing law clause usually decides. Delaware protects the claim, and New York protects it subject to a waiver gloss. Older federal decisions applying Minnesota and Kansas law, and a California appellate decision, required reliance, which pre-closing knowledge destroys. Courts enforce a governing law choice in most, not all, cases.

New York’s leading case is a clean illustration. The buyer investigated after signing, came to believe the warranted financial information was false, said so, and closed under an express reservation of rights. The Court of Appeals let the warranty claim proceed. The warranties were bargained-for terms, and that supplied the required reliance.

Case: CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990).

New York then added a gloss that turns on the route the information traveled. The Second Circuit has held under New York law that where the buyer learns of the breach from the seller and closes without preserving the point, the claim can be waived. That is a limit on the New York rule, not a separate group of states, and later decisions read it narrowly.

Case: Galli v. Metz, 973 F.2d 145 (2d Cir. 1992).

The older reliance rule survives elsewhere, in thinner authority. Federal courts applying Minnesota and Kansas law have treated reliance as an element of a warranty claim, and a California appellate decision is cited the same way. These are decades-old decisions, not recent pronouncements from those states’ highest courts. A buyer with pre-closing knowledge faces a real reliance defense there, not a certainty.

Cases: Hendricks v. Callahan, 972 F.2d 190 (8th Cir. 1992) (Minnesota law); Land v. Roper Corp., 531 F.2d 445 (10th Cir. 1976) (Kansas law); Kazerouni v. De Satnick, 228 Cal. App. 3d 871, 279 Cal. Rptr. 74 (Ct. App. 1991).

Delaware itself was genuinely open until recently. In 2018 the Delaware Supreme Court acknowledged in a footnote that it had not resolved whether a party can recover on a warranty the parties knew was untrue at signing, and a concurrence pointed the other way. As of August 2026, Chancery has answered it for silent agreements, and the answer is pro-buyer.

Case: Eagle Force Holdings, LLC v. Campbell, 187 A.3d 1209 (Del. 2018).

Does the governing law clause really change what you owe?

The governing law clause is a substantive economic term, not boilerplate. On a silent agreement it decides whether a buyer’s full pre-closing knowledge is a complete defense or no defense at all. That is the difference between a claim worth nothing and one worth several times the missed item.

Buyers’ counsel will propose Delaware without comment, and it looks like housekeeping. It is not. Delaware law plus silence on knowledge gives the buyer full diligence access, no duty to speak up before closing, and a preserved claim afterward.

Two points follow. If you concede Delaware law, negotiate the knowledge language expressly, because a court will normally apply the law you chose. If the buyer refuses, the governing law choice is worth real money and should be traded, not conceded in the last markup.

Is a document in the data room the same as a disclosure schedule exception?

Usually not. Unless your agreement says otherwise, only the disclosure schedules qualify the representations, and courts read the schedules as written rather than as intended. Check the definition of disclosure schedule and any deemed-disclosure language. Uploading the customer letter proves the buyer saw it. It does not change what you promised.

The exception is worth hunting for. Some agreements define the schedules to include data room material, or deem an item disclosed against every representation it reasonably relates to. If your draft says that, keep it. If not, the data room is only evidence.

Delaware shows how technical this gets. In one Chancery case involving litigation described in the schedule to one representation, the court held that the parties’ use of explicit cross-references cut against reading implied cross-references into the other schedules. Disclosure under one representation did not qualify the others.

Case: Aldrich Capital Partners Fund, LP v. Bray, C.A. No. 2023-1253-PRW (Del. Ch. May 17, 2024).

So the operational rule is not optional. Every problem surfaced in diligence gets carried into the schedules, in writing, under each representation it touches. Not summarized in a call. Not answered in a tracker. Written in and cross-referenced.

The data room is evidence of what the buyer saw. The schedules are the contract. Only one of them limits your exposure.

One more habit. If the buyer asks you to close while both sides preserve positions, that is a preserved claim, and the New York case arose from that posture. Do not sign a side letter reserving the buyer’s rights on a known problem. Schedule the item or price it.

What should you ask for in the purchase agreement?

Sellers have four asks on buyer knowledge, in descending order of ambition. An express anti-sandbagging clause. A knowledge standard limited to actual knowledge of a named deal team. A disclosure-based variant conditioning any claim on the absence of prior written disclosure. A raise-it-or-lose-it notice covenant. Ask for all four and expect to land one.

• Express anti-sandbagging. The indemnity does not cover any loss to the extent the buyer had actual knowledge before closing of the facts constituting the inaccuracy. Expect resistance. These clauses are uncommon even in the studied agreements, so this is a negotiation, not a default you can claim.
• Actual knowledge only, with a named universe. Define knowledge as the conscious awareness of named individuals on the buyer’s deal team. Exclude constructive knowledge, imputed knowledge, and any “knew or should have known” formulation. Address advisor work product, because the buyer’s accountants and lawyers are where diligence findings live.
• Disclosure-based variant. Instead of arguing about what the buyer knew, condition the claim on the item never having been disclosed. The buyer may claim only for matters not disclosed in the schedules or in writing before signing. That shifts the fight to a documentary record you control.
• Raise it or lose it. Add a covenant requiring the buyer to notify you in writing before closing of any inaccuracy it has identified, with an express waiver of unnotified known items. That mechanic fits the fact pattern that starts these disputes.

Two drafting cautions. Keep any fraud carve-out narrow and tied to deliberate misstatement, because a broad carve-out reopens everything the clause just closed. And apply the clause to the indemnity, the closing certificate, and the bring-down condition.

Does representation and warranty insurance help or hurt you here?

Policies of this kind are uncommon in owner-to-owner sales, so assume the contract does the work. Where a policy exists, it excludes matters known to the buyer’s deal team before binding and the insurer takes a no-claims declaration then. A problem found in diligence is generally uncovered, which pushes the claim back onto you.

That cuts both ways. Coverage will not absorb the known item, so the buyer’s only target is the seller indemnity, the escrow, or a seller note offset. Insurers sometimes negotiate affirmative coverage for one identified issue, case by case. Check that the recourse provisions do not make you the fallback for what the policy excludes.

With no policy, which is the common case in owner-to-owner and lender-financed sales, the knowledge clause and the schedules are the whole defense.

What should you do before the next draft of the purchase agreement?

Start with the two clauses that decide the outcome. Read the governing law provision, then read the indemnification article for any sentence about the buyer’s knowledge or investigation. If the agreement is silent, the state named in the governing law clause is deciding the question for you, and you can negotiate accordingly.

• Pull the diligence tracker and data room index. List every problem or exception the buyer raised.
• Check each item against the schedules. Unless your agreement says otherwise, disclosed only in the data room means uncovered.
• Add missing items to the schedules under every representation they touch, with explicit cross-references.
• Ask for the actual-knowledge definition with a named deal team, and for the pre-closing notice covenant.
• Read the damages definitions to see whether a multiple of earnings is available to the buyer.
• If there is a policy, confirm what the known-matters exclusion leaves sitting with you.
• Refuse any arrangement letting the buyer close while reserving rights on a known problem.

The claim you get sued on is almost never the surprise. It is the item everyone discussed and nobody wrote down. Write it down.