Indemnities

Indemnities are promises by the seller to compensate the buyer for specific, clearly named risks. If one of these risks materialises, the seller must bear the resulting loss. They protect the buyer specifically against legacy issues that already existed before the acquisition.

The difference from warranties is fundamental: a warranty describes a state of affairs whose inaccuracy must first be proven and whose breach typically falls under de minimis thresholds, baskets and liability caps, while an indemnity allocates a specifically identified risk to the seller in full, regardless of fault or knowledge. That is why exclusion through disclosure does not apply here: a matter made known in the data room is precisely the reason for an indemnity. Typical subjects are taxes for periods up to completion, pending or threatened litigation, environmental contamination at named sites, intellectual property disputes, open questions on subsidies, and regulatory breaches identified in diligence. Negotiation covers not only scope but also procedure: who conducts the defence against a third-party claim, who decides on a settlement, what duties to cooperate apply, and how double recovery from insurance or provisions is avoided.

Economically indemnities are often backed by a holdback or escrow, because a claim is only worth as much as the seller's ability to pay. Warranty and indemnity insurance regularly excludes known risks. It is advisable to agree a cap, a time limit and a procedure for every indemnity, because an unlimited and open-ended obligation is barely calculable for the seller and delays completion. The crediting of tax benefits accruing to the buyer from the indemnified matter also needs settling, as does the treatment of provisions already made, since otherwise the same matter works twice in the buyer's favour.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.