Can a buyer just take the money without telling us why

The situation

'Can they just take the money without telling us why?' That was the question Wilson asked on the call where he first told us what had happened, and it is worth answering directly before anything else: no, not under this contract, but the reason took some unpacking to explain properly.

Wilson was a university professor who sat on the board of a mid-sized parent company that had, roughly eight months earlier, sold one of its operating divisions for a price in the thirty-to-fifty-million-dollar range. The deal had closed cleanly at the time. As is standard in transactions of this size, a portion of the purchase price, several million dollars, had been held back in escrow for a set period after closing to cover any claims the buyer might later raise about the division's condition at the time of sale.

Kenneth, another board member who managed a department at a local hospital in his day job, had been the one to notice the discrepancy first, when the routine holdback statement arrived showing a deduction of just over two million dollars that neither he nor Wilson had heard anything about beforehand. The buyer's side, represented by Simone, had apparently identified what it characterized as an undisclosed liability in the divested division and simply deducted the amount from the holdback rather than raising it as a claim first.

Wilson's reaction, by his own account, was not measured. He believed the deduction was not just wrong but taken in bad faith, and he wanted to send a formal demand letter within the day accusing the buyer of breach. Kenneth was less certain the underlying issue was baseless, having seen the division's operations closely enough to know the liability in question was not entirely invented, even if the amount seemed inflated. The two board members were not aligned on how serious the underlying claim was, and that disagreement was making the conversation with us harder than it needed to be.

Complicating matters further, the sale had closed on reasonably good terms eight months earlier, and both board members had described the relationship with the buyer's organization up to that point as cordial, even collegial. The abrupt deduction, arriving with no warning and no accompanying explanation beyond a single line item on the holdback statement, felt to Wilson like a betrayal of that goodwill, and his instinct was to respond in kind. Kenneth, more measured by temperament, worried that an aggressive response might damage a relationship the parent company still had reasons to preserve, since two smaller ongoing arrangements between the companies remained in place after the sale.

What the law actually said

The purchase agreement, like most agreements that use a holdback to protect a buyer after closing, did not give the buyer unrestricted discretion to deduct from it whenever it believed it had a claim. It set out a specific process: written notice describing the claim in reasonable detail, a defined period for the seller to respond or dispute it, and only after that period, or after the dispute was resolved, could funds actually be released or withheld from the holdback account.

Simone's client had skipped that process entirely. Instead of giving notice and waiting, it had gone straight to the holdback agent and directed a deduction, treating the set-off as something it was entitled to execute unilaterally the moment it believed it had a valid claim. That is a common misunderstanding of how holdback and set-off rights actually work in a negotiated agreement. A set-off right does not usually mean a buyer gets to act first and justify itself later. It means the buyer gets to withhold funds through a defined process that gives the seller a chance to respond before money actually moves.

This distinction mattered enormously to how we advised Wilson and Kenneth to respond. If the underlying liability claim turned out to be legitimate, that was a separate question to be resolved on its own merits, through the dispute process the contract set out. But the deduction itself, taken without notice and without following that process, was improper regardless of whether the claim behind it had any substance. That gave the parent company a clean, procedural basis to demand the funds be returned to the holdback account immediately, without first having to win or lose an argument about whether the liability was real.

We explained to Wilson that this distinction was also the reason not to send the letter he had drafted overnight, which combined an accusation of bad faith with a demand that the underlying claim be dropped entirely. Conflating the two problems, the procedural defect and the substantive dispute, would have let Simone's client respond to the weaker of Wilson's two arguments and ignore the stronger one.

There was also a practical reason to lead with the procedural point rather than the substantive one. A dispute over whether an undisclosed liability actually existed would likely require reviewing the division's records from before the sale, interviewing former employees, and possibly retaining an accountant to assess the figures, a process that could take months and would not resolve the more immediate problem of money sitting outside the escrow account it belonged in. The procedural argument, by contrast, did not depend on any of that. It rested entirely on the plain wording of the agreement and what had, or had not, been done before the deduction was made.

What we did

1. Reviewed the purchase agreement's holdback and set-off provisions in detail before responding to the buyer at all, confirming exactly what notice and waiting period the contract required and that neither had been followed. This became the foundation of everything that followed, since acting before this review was complete risked committing to an argument the contract itself did not actually support.
2. Talked Wilson through why the procedural argument was stronger than the bad-faith accusation he wanted to lead with, since a demand letter alleging bad faith invites a fight over intent, while a demand grounded in a specific missed contractual step is much harder to argue against. This conversation took longer than expected, because Wilson needed to be convinced the calmer approach was not a weaker one.
3. Drafted a formal notice to the buyer's counsel identifying the precise procedural defect, citing the exact holdback mechanism the agreement required and requesting the deducted funds be restored to the escrow account pending proper notice of any claim. The letter was deliberately factual in tone, listing the specific contractual steps that had not been taken rather than characterizing the buyer's motives.
4. Kept the letter narrowly focused on the process failure, deliberately avoiding any concession or admission about whether the underlying liability claim had merit, so that question remained open and separate rather than getting folded into the procedural dispute. This preserved the parent company's position on the substantive issue for later, if it ever needed to be argued at all.
5. Coordinated with Kenneth on the technical facts behind the alleged liability, not to argue the point publicly yet, but so the board understood realistically how strong or weak the buyer's underlying claim actually was before deciding how firmly to push back. Kenneth's operational knowledge of the division gave us a clearer read on the claim's real exposure than either board member had going into the dispute.
6. Held a call with Simone's team to explain the position directly, rather than letting the dispute run entirely through written correspondence, which reduced the chance of the disagreement hardening into entrenched positions before either side had fully explained itself. A direct conversation also let us gauge, informally, whether the buyer's team had realized the process had been skipped before we raised it.
7. Proposed a corrected process going forward, restoring the deducted funds and inviting the buyer to submit proper notice of its claim if it wished to pursue the underlying liability issue through the process the contract actually provided for. This gave Simone's client a clear, face-saving path to correct the error without having to admit any bad intent.
8. Advised the board on how to respond if the corrected claim notice arrived, setting out the exact response period the contract allowed and walking Kenneth through what a proper dispute of the technical substance would need to include, since the board's first reaction to the original deduction had been to react under pressure rather than to plan. That preparation meant the smaller claim, when it eventually arrived through the proper channel, could be evaluated on its own timeline rather than under pressure a second time.

The outcome

Simone's client restored the full amount to the holdback account within two weeks of receiving the notice, without disputing that the original deduction had skipped the required process. It did not abandon its view that the division had an undisclosed liability, and it later submitted a proper claim notice through the correct channel, but that claim was for a smaller amount than the original deduction and was still being assessed on its own merits when the holdback period expired.

Because the procedural defect was addressed early and separately from the underlying dispute, the parent company avoided what could have become a much larger conflict: a buyer accustomed to deducting first and justifying later, and a seller responding with accusations rather than the contract's own terms. Neither side's relationship with the other, which mattered because two smaller commercial arrangements between the companies were still in place, was permanently damaged by the exchange.

Wilson later acknowledged that the letter he had wanted to send that first morning would likely have escalated the dispute rather than resolved it. Kenneth's caution about not overstating the buyer's bad faith, paired with our focus on the procedural defect rather than the substance of the claim, kept a genuinely tense situation from becoming a formal legal fight neither side particularly wanted.

The smaller claim Simone's client eventually submitted through the proper channel was still being assessed when the holdback period expired, and the parent company retained its full right to dispute it on the merits if the two sides could not agree. That outcome, an open question resolved through the process the contract actually set out rather than through a unilateral deduction, was the entire point of catching the problem early. Nothing about the underlying liability dispute was resolved in the parent company's favour outright, but the improper shortcut that had triggered the original alarm was closed off before it could set a precedent for how future disagreements between the two companies might be handled.

What you can learn from this