No Canadian appellate court has resolved whether a buyer's pre-closing knowledge of a breach bars an indemnity claim absent an express clause — the Ontario Court of Appeal sent the question to trial in 2003 and it has not come back settled.
Short answer
It depends entirely on whether the purchase agreement has a sandbagging clause, and if it does not, the honest answer is that no Canadian appellate court has settled the question — a buyer's actual pre-closing knowledge of a breach sits in genuinely unresolved territory rather than a predictable default rule either way.
No statute addresses whether a buyer's knowledge of a breach before closing affects its right to indemnification afterward, and this is not a gap nobody has litigated. In Transamerica Life Canada Inc. v. ING Canada Inc., 2003 CanLII 9923 (ON CA), a motion judge struck a seller's pleading that the buyer owed an implied duty of good faith to disclose problems it had found before closing rather than stay silent and sue afterward. The Ontario Court of Appeal reinstated the pleading, holding the law on that implied duty was unsettled enough to need a full trial record. Twenty years on, no Canadian appellate court has resolved what that trial was supposed to decide.
The Supreme Court of Canada's recognition, in Bhasin v. Hrynew, 2014 SCC 71, of an organizing principle of good faith contractual performance gives the buyer-knowledge argument a doctrinal home it did not clearly have in 2003, without settling which way it cuts. It could support the seller (closing silently on a known problem is dishonest performance) or the buyer (a representation is a bargained-for risk allocation regardless of what either side privately knew). Silence in the purchase agreement does not avoid the question — it just defers an unpredictable one to litigation.
An express clause ends the guesswork. A pro-buyer “sandbagging” clause states that the buyer's knowledge, however acquired, does not affect its indemnity rights. A pro-seller “anti-sandbagging” clause does the reverse, conditioning the indemnity on the buyer having been genuinely unaware. Silence is the only scenario where the unresolved Transamerica question actually matters — which is exactly why sophisticated counsel on both sides push to have the clause say something rather than nothing.
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