Meaning
A contractual clause in a purchase agreement allocates the entire financial risk of a known, pre-identified liability to the seller. Including a specific indemnity protects the buyer from losses arising from a designated issue, such as an ongoing lawsuit or a tax dispute. Unlike general warranties, this protection is not subject to the same disclosure or threshold limitations.
Risk Allocation
Sellers agree to this clause when the buyer identifies a specific risk during the due diligence process. The specific indemnity ensures that the buyer can recover any losses resulting from that risk without having to prove a breach of warranty. This mechanism is an effective tool for closing deals where significant known liabilities exist.
It allows the transaction to proceed while keeping the risk with the seller.
Financial Recovery
Recovering losses under this clause is simpler than pursuing a standard breach of contract claim. The specific indemnity provides a direct pound-for-pound recovery of the losses incurred, without the need to show that the value of the acquired company has decreased. Furthermore, these claims are often not subject to the deductibles, caps, or baskets that apply to general warranty claims.
This ensures that the buyer receives full reimbursement for the specific loss, which preserves the value of the acquisition. Consequently, sellers must carefully negotiate the scope of these clauses to avoid unlimited financial exposure after the deal closes.
Claim Condition
Filing a claim requires the buyer to follow the precise notice and defense procedures set out in the contract. The specific indemnity clause often defines the time limits within which a claim must be brought. These periods are usually longer than those for general warranties, sometimes lasting until the statutory limitation period expires.
Buyers must monitor these timelines to avoid losing their right to recovery.
