Indemnification

Indemnification is the seller's contractual obligation to compensate the buyer for losses arising from breaches of the seller's representations and warranties, or from liabilities that arose before closing. It is the primary mechanism through which a buyer recovers losses if the business turns out to be materially different from what the seller represented.

In Canadian acquisition agreements, indemnification provisions specify which losses are covered, the survival period for warranty claims (typically 12–24 months post-closing), basket amounts (minimum claim thresholds below which the buyer cannot seek recovery), and caps (maximum amounts the seller must pay). Specialized representations covering tax and environmental liabilities often have longer survival periods than general business representations.

The holdback or escrow is the most common mechanism for securing a seller's indemnification obligations — the buyer retains funds from the purchase price that can be applied against indemnification claims without requiring the seller to return money after they have spent it.

See also: Representations and Warranties, Holdback, Escrow, Due Diligence, Purchase Agreement.