How an Indemnity Claim Actually Works After an Ontario Business Sale

Six months after closing, you discover the seller's financial statements overstated inventory, or a "disclosed" contract turns out to have a problem nobody mentioned. Your purchase agreement almost certainly gives you an indemnity right for exactly this situation — but knowing the right exists and knowing how to actually use it are two different things.

An indemnity claim isn't a lawsuit you simply file. It's a contractual process with its own steps, deadlines, and mechanics, all set out in the purchase agreement you signed at closing. Understanding that process before you need it can be the difference between a smooth recovery and a claim that falls apart on a technicality.

Where the Indemnity Claim Process Actually Lives

Every well-drafted Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA) includes an indemnification section that spells out, in detail, how a claim must be made, responded to, and resolved. This is the document you need in front of you the moment you suspect a problem — not a general understanding of "indemnity" as a legal concept. The specific wording of your agreement controls every step below.

Step 1: Identifying That a Claim Exists

Before anything else, you need to connect what you've discovered to a specific representation, warranty, or covenant that was breached — or, if one applies, to a special indemnity for a known issue. Vague dissatisfaction with how the business is performing isn't the same as an indemnifiable loss. Document what happened, when you discovered it, and what representation or provision you believe was breached.

Step 2: Giving Notice

Nearly every purchase agreement requires the buyer to give the seller written notice of a claim, describing the nature of the claim and, where possible, a good-faith estimate of the loss. This notice must generally be given within a specific window set out in the agreement itself — and missing that window can mean losing the right to claim at all, regardless of how legitimate the underlying issue is.

If the claim relates to a third-party claim — someone else suing the business, or a government agency raising an issue — the notice requirements are often more detailed, since the agreement may also need to address who controls the defence.

Step 3: The Seller's Response

Once notice is given, the seller typically has an opportunity to respond — disputing the claim, accepting it, or asking for more information. For third-party claims, many agreements give the seller the right to assume and control the defence (often subject to conditions protecting the buyer), since the seller may be the party with more history and information relevant to fighting the underlying claim.

Step 4: Resolving a Disputed Claim

If the parties can't agree, the purchase agreement usually specifies how the dispute gets resolved. It's common for agreements to route different types of disputes differently:

• Financial or accounting disputes — such as disagreements over a working-capital adjustment — are often referred to an independent accountant for a binding determination.
• Other disputes — such as whether a representation was actually breached — are more often resolved through negotiation, arbitration, or litigation, depending on what the agreement specifies.

Step 5: Getting Paid

If a claim is accepted or resolved in the buyer's favour, payment typically comes from one or more of the following, depending on how the deal was structured:

1. A holdback or escrow — funds withheld at closing specifically to secure indemnity claims, often the fastest route since the money is already set aside.
2. Direct payment from the seller, where no holdback exists or the claim exceeds the amount held back.
3. A purchase price adjustment, in some structures, rather than a separate indemnity payment.

A Simple Checklist If You Think You Have a Claim

• [ ] Pull the purchase agreement and locate the indemnification section before doing anything else.
• [ ] Identify the specific representation, warranty, or covenant you believe was breached.
• [ ] Check the notice deadline and calendar it immediately — don't wait to gather every detail first.
• [ ] Confirm whether a holdback or escrow is still available and what its own claim procedure requires.
• [ ] Get legal advice on drafting the notice itself, since a defective notice can undermine an otherwise valid claim.

Frequently asked questions