Indemnity
An indemnity is a contractual promise by one party to compensate the other for defined losses. In a business sale it is the mechanism that turns a breached representation into an actual payment, without the buyer having to prove a damages claim from scratch.
Representations state facts; indemnities provide the remedy. Without one, a buyer who discovers an undisclosed tax liability has to sue for breach of contract and prove their loss. With one, the agreement already says the seller pays, and often says where the money comes from.
The limits that come with it
- A basket or deductible — claims below a threshold cannot be brought, so small items do not consume everyone’s time
- A cap on aggregate liability, often a percentage of the purchase price
- A survival period after which no claim may be made
- Carve-outs where fundamental matters such as title, tax and fraud are capped higher or not at all
Where the money actually comes from
An indemnity is only as good as the party giving it. Buyers frequently pair it with a holdback or escrow, so there is a fund to claim against rather than a seller who has already distributed the proceeds and moved on.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryIndemnity Baskets and Caps in an Ontario Business Sale
- 03Treadstone LawLegal commentaryHow Long Do Representations and Warranties Survive After an Ontario Business Sale?
- 04Treadstone LawLegal commentaryEscrow and Holdbacks in an Ontario Business Sale
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