Excluded liabilities: Overview, definition, and example
What are excluded liabilities?
Excluded liabilities refer to specific obligations, debts, or responsibilities that are not assumed by one party in a contract or agreement. These liabilities are explicitly excluded from the scope of the agreement, meaning that one party does not accept responsibility for them. Excluded liabilities are commonly found in business transactions, such as mergers, acquisitions, and asset sales, where one party is not willing to take on certain liabilities from the other party.
The purpose of identifying excluded liabilities is to clarify which debts, legal claims, or obligations are not part of the transaction and ensure that the party assuming the remaining liabilities is not held responsible for those that have been excluded.
Why are excluded liabilities important?
Excluded liabilities are important because they help limit a party’s exposure to certain risks or obligations that may not be aligned with the deal or transaction. For example, in an asset sale, the buyer may want to exclude certain liabilities, such as pending litigation or debt, to avoid assuming unknown or unwanted risks. By clearly defining which liabilities are excluded, both parties can have a clear understanding of their responsibilities and avoid disputes after the transaction is completed.
For businesses, understanding excluded liabilities is crucial to managing risk, as these exclusions provide clarity on what financial or legal obligations they are not responsible for. For parties entering into a contract, having exclusions in place can prevent unintended assumptions of liability, which could result in costly legal consequences.
Understanding excluded liabilities through an example
Imagine a company, Company A, sells its assets to Company B. In the asset sale agreement, Company A agrees to transfer its inventory, equipment, and intellectual property to Company B. However, the agreement includes a provision that excluded liabilities include any outstanding environmental liabilities or lawsuits related to the assets being sold. This means that Company A retains responsibility for these liabilities, and Company B will not be held accountable for any legal or financial obligations arising from them after the sale.
In another example, a company, Company C, is acquiring another business, Company D. The purchase agreement specifies that excluded liabilities include any tax obligations that arose prior to the acquisition. As a result, Company C does not assume any of Company D’s past tax liabilities, and Company D remains responsible for those obligations.
An example of excluded liabilities clause
Here’s how an excluded liabilities clause might appear in an agreement:
“Notwithstanding anything to the contrary in this Agreement, the Buyer shall not assume, and the Seller shall retain responsibility for, any liabilities arising from claims, lawsuits, or debts incurred prior to the Closing Date, including but not limited to the following: [list specific excluded liabilities].”
Conclusion
Excluded liabilities are a critical part of many business transactions, helping to define the scope of a party’s financial responsibilities. By specifying which liabilities are excluded from the agreement, both parties can reduce the potential for disputes and manage risks more effectively. For buyers and sellers alike, it is important to clearly outline excluded liabilities in contracts to ensure that both sides have a clear understanding of which obligations will remain with the seller and which will be assumed by the buyer.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.