How do indemnification claims work after a business sale closes?

An indemnification claim is a seller’s contractual promise being called on after closing. The agreement decides most of how that works: what must be sent, to whom, by when and against what money. The provincial limitation statute sits underneath, and the two can interact. As a seller you want to know when the exposure ends, so read both together rather than relying on either alone.

What the agreement controls

Look for the notice requirements, which describe how a buyer must give written notice of a claim and what detail it must contain. Look for the survival period, which says how long each representation can support a claim, and for any threshold or ceiling on the amounts recoverable. Check whether a holdback or escrow secures payment, and whether the agreement says what happens to a disputed claim. See reps and warranties vs indemnities.

The statutory time limit

Ontario’s Limitations Act, 2002 provides that a proceeding may not be commenced after the second anniversary of the day the claim was discovered, with a separate cut-off under section 15 at the 15th anniversary of the act or omission. Section 22 says the periods apply despite any agreement to vary or exclude them, subject only to the exceptions it lists; for a business agreement, meaning one in which no party is a consumer under the Consumer Protection Act, 2002, those exceptions let the parties vary or exclude the periods other than the section 15 one by an agreement made on or after October 19, 2006. Ask your lawyer whether your survival clause does that. British Columbia’s Limitation Act also uses two years from discovery, subject to that Act. In Québec, the Civil Code prescribes an action to enforce a personal right by three years where no other period is set, and the day the right of action arises starts the period.

If the claim is disputed

Ask whether the agreement names a process, such as negotiation, an independent accountant for numbers disputes, arbitration or court. Keep every notice and reply in writing, and diarize the survival and limitation dates separately. Other provinces have their own limitation statutes, so confirm the one that applies to your agreement and parties. For the buyer’s side, see what happens if a warranty turns out to be wrong after closing.