- A representation is a statement of fact about the business as of a specific date.
- An indemnity obligation isn't open-ended.
- Most purchase agreements include an "entire agreement" clause stating that the written document — including its disclosure schedule — represents the complete deal, and that earlier…
Ask most buyers what an indemnity clause does, and you'll get an answer that's roughly right but missing important detail: "it means the seller has to pay if something's wrong." True, as far as it goes — but that shorthand hides some real misconceptions that cause genuine problems when a dispute actually arises.
This article works through what an indemnity clause actually promises, using four misunderstandings that come up often, in plain language.
Myth: "Indemnity" and "Warranty" Mean the Same Thing
They're related, but distinct. A representation is a statement of fact about the business as of a specific date. A warranty is the contractual promise that the statement is true — if it isn't, that's a breach. An indemnity is a separate promise: to compensate the other party for a defined category of loss, which can exist independently of any representation being false at all.
This matters because a purchase agreement can include a specific indemnity for a known issue — say, a disclosed dispute with a former employee — entirely apart from the general representations and warranties, and often without the same basket, cap, or survival period that applies to the rest of the deal.
Myth: The Seller Guarantees the Business Forever
An indemnity obligation isn't open-ended. It generally operates within three boundaries, all individually negotiated: a survival period (how long after closing a claim can be brought), a basket (a minimum threshold of loss before a claim counts), and a cap (a ceiling on total recovery). Different categories of representations — general business matters, fundamental matters like ownership and authority, and tax matters — are commonly given different treatment within these boundaries. There's no fixed rule under Ontario law for exactly how any of these should be set; the specific numbers live entirely in your agreement.
Myth: If It's Not Written Down, It Still Counts
Most purchase agreements include an "entire agreement" clause stating that the written document — including its disclosure schedule — represents the complete deal, and that earlier verbal assurances or side conversations don't survive as enforceable promises. If a seller told you something reassuring during negotiations that never made it into the agreement itself, that statement generally isn't something you can indemnify against later. This is exactly why buyers should insist that anything material they were told gets reflected as an actual representation in the document, not left as an informal understanding.
Myth: An Indemnity Clause Is the Same for Buyer and Seller
Indemnity obligations are typically asymmetric, and reasonably so. In a share purchase, the buyer inherits the corporation's entire history — so the seller's indemnity tends to be the buyer's primary protection against undisclosed historical liabilities. The buyer's own indemnity of the seller is usually narrower, generally tied to the buyer's own representations and its post-closing conduct. In an asset purchase, liabilities not expressly assumed generally stay with the seller in the first place, which shifts — but doesn't eliminate — how much weight the indemnity clause has to carry.
What an Indemnity Clause Actually Promises, in Practice
Once the myths are cleared away, an indemnity clause in a typical Ontario purchase agreement is doing a fairly specific job:
- Naming which categories of loss are covered — breach of representation, breach of covenant, and any specifically negotiated known issues.
- Setting the procedure for making a claim — notice requirements, timing, and how disputes get resolved.
- Setting the financial boundaries — the basket, the cap, and any carve-outs from either.
- Setting the time limits — the survival period for each category of representation.
- Identifying the funding source — direct payment from the seller, a holdback or escrow, or a combination.
Where This Fits in Your Purchase Agreement
Whether your deal uses a Share Purchase Agreement (SPA) or an Asset Purchase Agreement (APA), the indemnification section is typically one of the most heavily negotiated parts of the whole document — precisely because it's where risk allocated elsewhere in the agreement actually gets enforced if something goes wrong.
Frequently asked questions
Is a verbal promise from the seller enforceable if it's not in the purchase agreement?
Generally not, if the agreement includes a standard "entire agreement" clause, which most do. This is a strong reason to make sure anything material you were told during negotiations is actually written into the representations before you sign.
Can a buyer negotiate for broader indemnity protection than what's typical?
Yes — indemnity terms are negotiated, not fixed by law or convention. A buyer can ask for a longer survival period, a lower basket, a higher cap, or additional specific indemnities for known concerns; whether the seller agrees depends on leverage and the overall deal.
Does an indemnity clause protect against problems that existed before the seller even owned the business?
It can, if the representations are drafted broadly enough to cover the business's history rather than just the seller's own period of ownership. This is worth checking specifically rather than assuming.
What if my purchase agreement doesn't have an indemnity clause at all?
That would be unusual for a negotiated Ontario business sale — without one, a party's remedies for a false representation would generally fall back on general contract law principles, which are less predictable and harder to enforce than a clearly drafted indemnity. This is worth flagging to a lawyer immediately if you're reviewing an agreement that's missing one.
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