The representations say what should be true. The indemnity says who pays when it is not, how much, for how long, and out of what money. Two deals with identical representations can allocate risk completely differently depending on the four or five numbers in this section.
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A buyer with a broken representation could always sue for breach of contract. The indemnity replaces that messy route with an agreed one. It is a direct promise to pay a defined kind of loss, so the buyer does not have to argue about remoteness, foreseeability or the ordinary rules on measuring damages. It usually also covers third-party claims — a customer suing over something that happened before closing — which a plain damages claim handles awkwardly.
Just as importantly, it is where the seller buys certainty. Without an indemnity section a seller's exposure is open-ended in amount and, subject to the limitation rules, long in time. The cap, the basket and the survival period are the seller's side of the bargain, and a seller who signs an agreement with strong representations and no limits has given away far more than it realises.
Most agreements make the indemnity the sole remedy, so the buyer cannot ignore the limits by re-framing the same complaint as negligent misrepresentation. Fraud is carved out. A sole remedy clause without a fraud carve-out is not something either side should sign.
The cap is the ceiling on what the seller can be made to pay for general representation breaches, expressed as a portion of the purchase price and negotiated deal by deal. Fundamental representations — title to the shares, capacity, authority — and tax are normally excluded from that cap or capped at the full price instead, because a failure there means the buyer did not get what it bought. Fraud is never capped.
The basket is the floor. It stops the buyer bringing small claims. There are two kinds and the difference is real money. A deductible basket means the seller pays only the amount above the threshold. A tipping basket means that once claims cross the threshold, the seller pays from the first dollar. Agreements that just say 'basket' without saying which are a dispute waiting to happen.
Underneath the basket sits a de minimis: individual claims below a stated amount do not count at all and are not aggregated toward the basket. Add a mirror provision on timing — claims must be notified in writing before the survival period ends, with enough detail to identify the breach, and the notice requirement should not be so onerous that a valid claim dies on a technicality.
A cap is only as good as the seller's ability to pay. On private Ontario deals the standard answer is a holdback or an escrow: part of the price is retained, or held by a third party, for the survival period and released net of any claims. It costs the seller nothing but time, and it is far cheaper to arrange than litigation against a shareholder who has since spent the proceeds.
Where the price includes a vendor take-back note or an earnout, a right of set-off against the unpaid amounts does similar work. Where the shares are sold by a holding company, ask for the individual behind it to guarantee the indemnity, or you may have a promise from a corporate shell. Representation and warranty insurance is the alternative on larger deals, shifting payment to an insurer so the seller can take clean proceeds.
Say how a claim runs. Written notice within a stated time of the buyer becoming aware, the seller's right to assume the defence of a third-party claim at its own cost, the buyer's right to take it over if the seller does not, and a rule that neither side settles a claim the other will pay for without consent. Add access to records, since the evidence for a pre-closing claim usually sits in the company the buyer now owns.
Then the exclusions. Consequential and indirect losses are commonly excluded, but define whether a loss calculated as a multiple of lost earnings counts — that single point can be worth more than the cap. Require mitigation. Reduce recoveries by insurance proceeds actually received and by any tax benefit realised, and exclude anything already taken into account in the working capital adjustment so the buyer is not paid twice for the same shortfall.
The cap is the maximum the seller can be required to pay. The basket is the minimum before the seller pays anything. They do different jobs: the cap limits catastrophic exposure, the basket keeps small housekeeping claims out of the process. Both are negotiated as a portion of the purchase price, and both normally have carve-outs — fundamental representations, tax and fraud usually sit outside them entirely.
It should be large enough to cover the realistic claims the buyer identified in diligence and long enough to run past the survival period for the general representations. There is no fixed market rule, and the answer depends on how much of the risk is already handled by a specific indemnity or a price reduction. If diligence found a known problem — an unresolved CRA matter, a disputed contract — that item usually gets its own separate holdback with its own release date.
Yes, provided the agreement is drafted the normal way. Caps, baskets, survival periods and sole remedy clauses are all conventionally expressed as not applying to fraud or intentional misrepresentation. A seller cannot contract out of its own deceit in any meaningful way, and trying to is both unattractive and unlikely to be effective. Define fraud in the agreement so the exception does not become the doorway into every claim.
That is the classic tax indemnity claim, and it is why tax gets its own treatment. In a share deal the corporation carries its whole tax history forward, so an assessment for a pre-closing year lands on the company the buyer now owns. The tax indemnity should sit outside the general cap and basket, survive until the CRA's reassessment window for those years has closed, and set out who controls the response to the audit and any objection.
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