- Purchase agreements typically include a representation that there's no pending or threatened litigation against the business beyond what's specifically disclosed.
- In an asset purchase, it's more often a question of what loss the non-disclosure itself caused — reputational damage, a lost customer, unexpected legal costs defending against spillover…
- - An indemnity claim for breach of the litigation representation — the standard path in most agreements, subject to whatever basket, cap, and survival period apply.
You closed the deal, started running the business, and then found out — from a customer, an employee, or a stack of mail addressed to the old owner — that the business is being sued, and the seller knew about it the whole time. Nothing in the disclosure schedule mentioned it. The representations in your purchase agreement said otherwise.
Discovering that a seller hid a pending lawsuit during a business purchase raises a specific and important question: was this an honest oversight, or something closer to deliberate concealment — and does that difference actually change what you can do about it?
This article walks through how Ontario purchase agreements typically treat this situation, and what a buyer's realistic options look like.
Why the Seller's Knowledge Matters
Purchase agreements typically include a representation that there's no pending or threatened litigation against the business beyond what's specifically disclosed. Many of these representations include a "knowledge qualifier" — for example, a promise that there's no undisclosed litigation "to the seller's knowledge." Whether the seller actually knew about the lawsuit affects two separate things:
- Whether the representation was breached at all. If the representation was qualified by the seller's knowledge and the seller genuinely didn't know, there may be no breach in the first place — an unfair outcome for the buyer, but a real one depending on the wording.
- Whether this rises to fraud. If the seller did know and stayed silent — or was reckless about it — this starts to look like fraudulent misrepresentation, which is treated differently, and often more favourably to the buyer, than an ordinary breach.
Share Purchase vs. Asset Purchase: Does the Lawsuit Follow You?
| Share purchase | Asset purchase | |
|---|---|---|
| Who the lawsuit is actually against | The corporation itself, which the buyer now owns | Typically the selling corporation, which the buyer did not acquire |
| Does it become the buyer's direct problem | Generally yes — the corporation and its liabilities came with the shares | Generally no, unless the buyer expressly assumed that liability — though the underlying dispute can still affect the business the buyer now runs |
| The buyer's main recourse | Breach of representation or indemnity claim against the seller for the undisclosed liability | Breach of representation or indemnity claim, focused on the loss non-disclosure caused rather than the lawsuit judgment itself |
This is one of the clearest illustrations of why deal structure matters so much: in a share purchase, an undisclosed lawsuit is a liability the buyer is now directly carrying. In an asset purchase, it's more often a question of what loss the non-disclosure itself caused — reputational damage, a lost customer, unexpected legal costs defending against spillover claims — even if the lawsuit's judgment technically stays with the seller's corporation.
The Remedies on the Table
- An indemnity claim for breach of the litigation representation — the standard path in most agreements, subject to whatever basket, cap, and survival period apply.
- A claim that bypasses the usual limits, if the facts support genuine fraud. Many purchase agreements carve fraud out of the basket, cap, and any "exclusive remedy" clause that would otherwise confine the buyer to a capped indemnity claim — but proving actual knowledge and concealment, rather than an honest gap, is a real evidentiary burden.
- A claim against a holdback or escrow, if one exists, giving the buyer a practical fund to draw against rather than pursuing the seller directly.
- Rescission, in rare cases — generally only realistic where the concealment was severe and the deal can still practically be unwound, which becomes harder the longer the buyer has operated the business.
What "Hiding" Actually Has to Look Like to Matter
Not every gap in disclosure is concealment. The practical difference tends to come down to:
- Genuine ignorance — the seller truly didn't know about the claim.
- Knew and said nothing — the seller was aware and simply didn't disclose it, which points toward a stronger claim, and potentially a fraud-based one.
- Willful blindness — the seller had strong reason to know but avoided confirming it, which courts can treat similarly to actual knowledge in some circumstances.
Sorting out which of these applies is a fact-intensive exercise built on emails, internal records, and timing — exactly the kind of evidence a lawyer will want preserved and reviewed early.
Steps to Take When You Find Out
- Document what you've learned and when — the trigger for discovering the lawsuit, and any evidence suggesting the seller knew beforehand.
- Pull the purchase agreement's litigation representation and disclosure schedule to confirm exactly what was, and wasn't, disclosed.
- Check your notice deadline under the agreement's indemnity provisions — this clock generally starts running the moment you discover the issue, not when you've finished investigating it.
- Give notice in the form the agreement requires, even while you're still gathering the full picture.
- Get legal advice on whether the facts support a straightforward indemnity claim, a fraud-based claim outside the usual limits, or both.
Frequently asked questions
Does it matter if the lawsuit was filed before or after closing?
Yes. If the underlying claim or dispute existed — even informally, as a threat or demand — before closing, non-disclosure is the central issue. If it was only filed after closing based on events that happened after you took over, that's a different question entirely, unrelated to the seller's pre-closing disclosure obligations.
Can I sue the seller personally, or only the corporation?
It depends on how the purchase agreement was structured and who actually made the representations. In many share purchases, individual sellers are themselves parties to the representations, which can support a personal claim — but this needs a specific read of your agreement.
What if the seller claims they simply forgot about the lawsuit?
Genuine forgetting is different from concealment, though a court or arbitrator may be skeptical of a claim to have forgotten something as significant as active litigation. This is exactly the kind of factual dispute where documentary evidence and timing matter most.
What if I structured my deal as an asset purchase specifically to avoid this risk?
An asset structure generally protects you from the lawsuit itself becoming your direct liability, but it doesn't automatically compensate you for other losses the non-disclosure caused — a damaged customer relationship, unexpected costs, or a business worth less than what you paid for it. Your remedy still runs through the representations you negotiated.
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