Three Indemnification Terms a Buyer Should Never Accept (Again)
By Christian A. Atwood and Stephen M. L. Cohen
An edited version of this article was published in Buyouts magazine on April 13, 2009.
You know the drill. You’ve spent countless hours going back-and-forth on the purchase agreement, the
lion’s share of which seem to have been spent haggling over the indemnification terms. At the eleventh
hour, with the finish line in sight, you decide to engage in some amount of “horse trading” to get the deal
done. Unfortunately, in this situation buyers often agree to indemnification terms that they should not –
and should never have to – accept. The list of no-no’s is considerable, but here are the top three.
Limitations on Consequential Damages
A term commonly found in seller first drafts, and a mainstay of purchase agreements served up in any
well run auction, is a provision such as the following:
“No party will have any indemnification liability for consequential, special, incidental, indirect, punitive,
exemplary, or other non-direct damages (such as diminution of value, lost profits, income, revenues
or business opportunities, or reputational harm), regardless of whether the same were foreseeable.”
A seller’s attorney will often attempt to justify such a provision by saying: “It’s not that we’re unwilling to
indemnify you – subject to the basket, cap, minimum claim size, etc. – for losses arising out of breaches
of our reps and warranties. It’s just that we want to know that we’re on the hook only for actual damages
you suffer as a result of our breach.” The problem with this agreement, although it sounds reasonable, is
that it’s specious. Subject to any agreed upon cap on damages, buyer should be entitled to
indemnification for all damages – of whatever stripe – that it may incur as a result of seller’s breach.
Consider the following example: In the purchase agreement relating to the acquisition of a manufacturing
company, seller gives a “standard” set of