Common use of Post Closing Indemnification Clause in Contracts

Post Closing Indemnification. The buyer typically will require the seller to represent and warrant to the buyer certain facts about the business being sold. This is usually coupled with an obligation on the seller to indemnify the buyer if these representations are not true, and to indemnify the buyer if a party with a claim against the seller asserts this claim against the buyer except for a liability that the seller agrees to assume. These indemnification provisions typically include provisions regarding how long after closing the buyer can assert a claim against the seller, a threshold in the amount of claims below which the buyer cannot assert a claim, one or more caps on the amount of claims the buyer can assert, and whether any part of the purchase price will be withheld as security for paying the buyer’s claims. These indemnification provisions often are the subject of extensive negotiation. Fortunately, the provisions have become standardized enough such that the parties can negotiate them in concept in the LOI and leave the detailed drafting for the purchase agreement. In addressing the post-closing indemnification, the parties should consider whether to obtain insurance for the seller’s representations and warranties, and if so how the cost of this insurance is borne. Insurance is becoming much more common because of the benefit provided both parties: the buyer gets assurance that there will be a source of funds to satisfy the buyer’s claims, and the seller is relieved from the obligation to pay any claims above a threshold amount.