Indemnification by buyer: Overview, definition, and example
What is indemnification by buyer?
Indemnification by buyer refers to a provision in a contract (often seen in mergers, acquisitions, or asset sales) where the buyer agrees to compensate or "indemnify" the seller for certain losses, liabilities, or damages that may arise after the transaction. This clause typically protects the seller from any claims, damages, or liabilities that stem from the buyer's actions or from issues that arise after the deal has closed, particularly those related to the buyer’s management or use of the acquired business, assets, or property.
In an indemnification by buyer agreement, the buyer typically assumes responsibility for certain risks, such as post-sale liabilities, operational risks, or claims that occur after the transaction but relate to the buyer's conduct. This clause is often negotiated to ensure the seller is not held responsible for events or issues outside the scope of the sale.
Why is indemnification by buyer important?
Indemnification by buyer is important because it offers protection to the seller against risks that are related to the buyer’s actions, management, or future operations after the sale. Without this clause, sellers could be exposed to future claims or liabilities that arise due to the buyer's behavior after the transaction, which could undermine the benefits of the sale.
For buyers, agreeing to indemnify the seller ensures that they can proceed with the transaction without the fear of being held responsible for pre-existing conditions or claims. It can be a point of negotiation for buyers, where they define the scope of indemnity and limit their exposure to risks that are outside their control or knowledge.
Understanding indemnification by buyer through an example
Imagine a company, Company A, sells its business to Company B. After the transaction is completed, Company B begins managing the business and discovers a customer lawsuit related to the post-sale operations. The sale agreement includes an indemnification by buyer clause, which states that Company B will be responsible for any future claims arising from its operation of the business after the transaction. This means that if the customer lawsuit leads to damages or settlement costs, Company B, as the buyer, would be liable for those expenses, not Company A.
In another example, a real estate sale is taking place between Seller X and Buyer Y. The property is sold with a condition that Buyer Y will handle any future environmental cleanup costs after the closing. The indemnification by buyer clause ensures that Buyer Y takes on this responsibility and agrees to cover any environmental liabilities arising after the sale, thus protecting Seller X from any related claims or expenses.
An example of indemnification by buyer clause
Here’s how an indemnification by buyer clause might appear in a contract:
“The Buyer agrees to indemnify, defend, and hold harmless the Seller from and against any losses, damages, liabilities, and expenses (including legal fees) arising out of or relating to the Buyer’s use, operation, or ownership of the purchased assets after the Closing Date, including any claims or lawsuits related to such use.”
Conclusion
Indemnification by buyer is a crucial clause in business transactions that helps protect the seller from future liabilities and claims arising from the buyer's actions after the sale. It shifts responsibility for certain risks to the buyer, particularly those related to post-sale operations, ownership, or actions. For the buyer, agreeing to this provision ensures that they are taking on any post-transaction risks associated with the business or assets they have acquired. Clear definitions and limitations in indemnity clauses are essential to balance the risks for both parties in the transaction.
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.