The definitive agreement typically requires the Seller to indemnify the Purchaser for any liability arising out of the breach of a representation or warranty. The Purchaser's goal is to preserve its remedies for breach if Seller's business is not exactly as represented. This qualification attempts to allocate the risk of an innocent error to Purchaser and minimize Seller's post-closing liabilities. However, the typical Purchaser often resists this request because the Purchaser will want to preserve its remedies for breach of any representation or warranty, regardless of Seller's knowledge. Typically, the Purchaser's argument is that the purchase price reflects the business as represented by Seller, and the risk of any undisclosed or unknown liability should fall on the Seller.
Any compromise invariably involves a materiality limitation for undisclosed liabilities.
The definitive agreement may include a threshold limitation upon Seller's indemnification obligations, below which the Seller is not responsible to indemnify Purchaser. However, if undisclosed liabilities reach or exceed the threshold, the Seller is typically required to indemnify Purchaser for liabilities exceeding the threshold, or in some situations, for all undisclosed liabilities. Often, the Seller will request a cap on Seller's indemnification obligations. In certain situations, it may be reasonable to cap Seller's indemnification obligations at the amount of the purchase price. However, Purchasers generally resist indemnity caps regarding environmental liability.