- Compare two versions of the same representation: The unqualified versions are absolute — any deviation, however trivial, is technically a breach.
- The most consequential use of "material" in a purchase agreement is usually the Material Adverse Effect definition, often used both as a standalone representation and as a condition to…
- "Material" on its own is a judgment call, and judgment calls invite disputes.
Somewhere in almost every business purchase agreement, a single word quietly reshapes the deal: "material." A materiality qualifier narrows a representation, a covenant, or a disclosure obligation so that it only applies to things significant enough to matter — but "significant enough" is exactly the phrase lawyers spend hours negotiating.
If you are buying or selling a business in Ontario, understanding where "material" shows up in your agreement — and how it is defined — tells you a great deal about who is actually carrying the risk on a given issue.
What a Materiality Qualifier Does
Compare two versions of the same representation:
| Without materiality qualifier | With materiality qualifier |
|---|---|
| "The Corporation is in compliance with all applicable laws." | "The Corporation is in compliance in all material respects with all applicable laws." |
| "There are no contracts that have not been disclosed." | "There are no material contracts that have not been disclosed." |
| "There has been no adverse change in the business since the last financial statements." | "There has been no material adverse change in the business since the last financial statements." |
The unqualified versions are absolute — any deviation, however trivial, is technically a breach. The qualified versions only bite once the deviation crosses a threshold of significance. For a buyer, that threshold decides whether a minor, immaterial slip can support a claim. For a seller, it is protection against being punished for the ordinary imperfections every real business has.
Material Adverse Effect (MAE) Clauses
The most consequential use of "material" in a purchase agreement is usually the Material Adverse Effect definition, often used both as a standalone representation and as a condition to closing (the buyer is not obligated to close if an MAE has occurred between signing and closing).
A well-drafted MAE definition typically addresses:
- What counts. A broad, undefined change to the business, its assets, its financial condition, or its prospects.
- What is carved out. General economic conditions, industry-wide changes, and changes caused by the transaction itself (such as employee departures triggered by news of the sale) are commonly excluded, so the seller is not penalized for events outside its control.
- Whether it is measured against a threshold at all, or left as an open, judgment-based standard for a court or arbitrator to apply later.
Because an MAE clause can let a buyer walk away from a signed deal, sellers push hard for narrow, carved-out definitions, while buyers push for language broad enough to protect them against a real deterioration in the business between signing and closing.
How a Dollar Threshold Makes Materiality Objective
"Material" on its own is a judgment call, and judgment calls invite disputes. Many purchase agreements try to remove the ambiguity by attaching a specific dollar threshold to at least some materiality-qualified provisions — for example, defining a "material contract" as one above a stated dollar value, rather than leaving it to argument after the fact.
Where a deal uses a defined threshold like this, the number itself is entirely a negotiated, deal-specific figure tied to the size of the business and the transaction — there is no standard or default amount, and any number quoted to you as "typical" should be treated with caution. What matters legally is that the agreement states its own threshold clearly, so both sides know in advance what counts.
The "Materiality Scrape" — A Second Layer Worth Watching
A more technical wrinkle that shows up in some agreements is the materiality scrape: a provision stating that, for purposes of calculating indemnity losses (though not necessarily for determining whether a breach occurred in the first place), materiality qualifiers are ignored — effectively "scraped out" of the representations.
Why this matters: without a scrape, a small breach that falls just under a materiality threshold might not count as a breach at all, and a series of small breaches, each individually immaterial, might never add up to a claim. A scrape provision (sometimes limited to the loss-calculation stage only, and sometimes applied more broadly) can change that math considerably. It is a subtle clause, but one that meaningfully shifts risk — worth flagging specifically with your lawyer rather than assuming a standard template handles it correctly.
Where Buyers and Sellers Fight Over "Material"
- Breadth of the MAE carve-outs. Sellers want broad carve-outs (general market conditions, the industry, the transaction's own announcement); buyers want them narrow.
- Whether a materiality scrape applies, and if so, whether it applies only to calculating loss amounts or also to whether a breach exists at all.
- Whether a dollar threshold is used, and if so, how it is set relative to the deal's overall size.
- Consistency across the agreement. A materiality qualifier that appears in one representation but not a nearly identical one elsewhere is often a drafting oversight worth catching before signing, not an intentional distinction.
Frequently asked questions
Is "material" the same thing everywhere in the agreement?
Not automatically. Unless the agreement defines "material" or "Material Adverse Effect" once and applies it consistently, each unqualified use of the word can be interpreted on its own facts. A single defined term used consistently throughout is far safer for both sides than scattered, undefined uses of "material."
Can a seller rely on materiality to avoid disclosing a problem?
Generally, no. Materiality qualifiers limit what counts as a breach of a representation — they are not a licence to withhold disclosure of something the seller reasonably believes a buyer would want to know. Sellers should disclose generously; qualifiers protect against liability for genuinely trivial matters, not against the consequences of hiding real ones.
Does a materiality qualifier affect the disclosure schedule too?
It can. Some agreements only require disclosure of "material" contracts, litigation, or liabilities on the disclosure schedule, which means immaterial items may not need to be listed at all. Whether that is appropriate depends on how the rest of the agreement defines materiality.
Who decides if something is "material" if the parties disagree after closing?
Ultimately, whoever resolves the dispute — a court, or an arbitrator if the agreement provides for arbitration — interprets the term based on the agreement's wording and the surrounding facts. This is exactly why precise drafting up front, rather than relying on the word's ordinary meaning, matters so much.
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