Indemnity Baskets and Caps in an Ontario Business Sale, Explained

A buyer who discovers a covered loss after closing usually assumes the next step is simple: send notice, get paid. In practice, two negotiated limits — the basket and the cap — sit on either end of that claim and decide how much of the loss, if any, is actually recoverable. Understanding how they work together, not just what each one means on its own, is what tells you what you'd really walk away with.

Two Different Jobs: Floor and Ceiling

The basket is a floor: a minimum amount of loss that has to accumulate before a claim counts at all. The cap is a ceiling: the maximum total amount recoverable, regardless of how large the actual loss turns out to be. A claim has to clear the basket and stay within the cap to be fully recovered — missing either one changes the outcome.

Following a Loss From Discovery to Recovery

Say a buyer discovers, after closing, that a representation about the business's contracts was inaccurate, causing a real financial loss. Here's how that loss typically moves through the basket-and-cap structure:

1. The loss is measured. The buyer quantifies what the breach actually cost, with supporting documentation.
2. It's compared against the basket. If the loss, alone or combined with other qualifying claims, doesn't clear the negotiated threshold, it generally doesn't count toward a claim at all — unless it falls into a carve-out that bypasses the basket entirely, such as fraud or a specifically negotiated known issue.
3. The relevant category of representation is identified. General business representations, fundamental representations, and tax representations are commonly subject to different caps, so which category the breach falls under matters as much as the size of the loss.
4. The applicable cap is applied. The buyer's recovery for that category is limited to whatever cap applies — even where the actual loss is larger.
5. Recovery is pursued from the holdback or escrow first, if one exists, before the seller is chased directly for any remaining amount within the cap.
6. Anything beyond the applicable cap is, absent a carve-out, generally the buyer's own risk to absorb — the seller isn't required to pay past that ceiling.

Why the Basket and Cap Are Negotiated as a Package

A basket and cap that look reasonable individually can produce very different real-world outcomes depending on how they interact. A low basket paired with a generous cap favours buyers — more claims qualify, and more of each one is recoverable. A high basket paired with a tight cap favours sellers on both ends of the same claim. Because of this, the two terms are rarely negotiated in isolation — conceding ground on one often means asking for something in return on the other, and the same is true of the survival period and any holdback that funds the claim.

A Two-Question Test Before You Sign

Before agreeing to basket and cap language, it's worth working through with your lawyer:

• If a real problem surfaced tomorrow, in the category you're most worried about, would this basket and cap combination actually produce a meaningful recovery — or would it be eaten up by the threshold on one end and the ceiling on the other?
• Does the cap structure treat the representations you care most about — fundamental ownership issues, a specific known risk, tax exposure — differently from routine operational matters, or is everything lumped under one number?

Answering these honestly before signing is far more useful than trying to renegotiate the structure after a loss has already happened.

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