Special Indemnities vs. General Indemnities in an Ontario Business Sale

Most of the protection in an Ontario purchase agreement comes from a single general indemnity — one broad promise that if a representation or warranty turns out to be false, the seller will make the buyer whole, subject to negotiated limits. But every so often, due diligence turns up something the parties already know about: a pending claim against the business, a disputed contract, an environmental issue, a tax matter under review. When that happens, lumping it into the general indemnity often isn't good enough for either side.

That's where a special indemnity — sometimes called a specific indemnity — comes in. It carves a known, identified risk out of the general protection and gives it its own bespoke terms, often without the caps, deductibles, and time limits that apply to everything else.

This article explains the difference, why special indemnities are so often uncapped, and what it means for you whether you're buying or selling.

Why Purchase Agreements Split Risk Into Two Buckets

A purchase agreement's indemnity provisions allocate risk after closing — deciding who pays if something turns out to be wrong with the business that was bought or sold. The seller makes a long list of representations and warranties, and a disclosure schedule qualifies them by listing known exceptions.

The general indemnity then acts as the buyer's backstop: if a representation turns out to be inaccurate and the buyer suffers a loss, the seller indemnifies them, generally within agreed limits. That structure works well for the vast universe of things nobody specifically flagged. It works less well for something both sides already know is a live risk before the agreement is even signed.

What the General Indemnity Is Built to Cover

Think of the general indemnity as protection against the unknown. It's designed to catch breaches of the ordinary representations and warranties — that the financial statements are accurate, that material contracts are properly disclosed, that there's no undisclosed litigation — where nobody involved in the deal necessarily expects a problem to exist. Because it's covering uncertainty rather than a specific identified risk, buyers and sellers typically negotiate limits around it:

• A cap, often expressed as a portion of the purchase price, above which the seller isn't liable.
• A basket or deductible, a minimum threshold of loss before a claim can be made at all.
• A survival period, after which claims under the general indemnity can no longer be brought.

What a Special Indemnity Is Built to Cover

A special indemnity addresses something the parties have already identified — a known claim, an ongoing dispute, a specific compliance gap, a particular contract with a change-of-control problem. Because the risk is already on the table rather than hidden, the parties can negotiate terms tailored to that one issue instead of relying on the general framework built for uncertainty.

A special indemnity commonly:

• Applies to one specifically defined issue, described in detail rather than by reference to a general representation.
• Is not subject to the general indemnity's cap or basket — it often sits entirely outside those limits.
• Has its own survival period, sometimes tied to when the underlying issue is actually resolved (for example, until a specific lawsuit or audit concludes) rather than a fixed date.
• Is disclosed and negotiated specifically in the purchase agreement, not buried in a general disclosure schedule alongside routine exceptions.

Comparing the Two Mechanisms

Why Special Indemnities Are Often Uncapped

The logic is fairly simple: caps, baskets, and short survival periods exist to give a seller comfort against being chased indefinitely for problems nobody could have anticipated. That rationale weakens considerably once a risk is already known, quantifiable to some degree, and specifically identified before the deal closes.

A buyer who agrees to close with a known lawsuit still pending has little reason to accept that any resulting loss gets swept into the same limited pool that covers ordinary, unforeseen breaches. The seller typically has the most information about, and control over, a known pre-closing issue, and buyers argue they should bear that specific risk in full.

Sellers don't always accept an uncapped special indemnity without pushback — negotiation often turns on whether it should have its own (higher) cap, a defined end date tied to resolution, or conditions requiring buyer cooperation in managing the underlying claim.

What This Means Depending on Which Side You're On

• If you're selling, disclosing a known issue clearly puts you in a far better position to shape the special indemnity's terms yourself, instead of a buyer discovering it late and demanding broader protection.
• If you're buying, a special indemnity is only as good as how precisely it's drafted — a vague or overlapping issue can leave real gaps exactly where you need coverage most.

Frequently asked questions