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Selling a San Diego Business: Minimizing Contractual Indemnity Obligations
If you are selling a San Diego business, almost certainly, the contract for purchase/sale will contain provisions requiring various indemnifications. In a companion article, we discussed the definition and general basics of indemnification clauses. In this article, we discuss how your trusted and talented San Diego corporate lawyer can limit and constrain a seller’s indemnification obligations. If you are selling a San Diego business, you need a good lawyer to help.
San Diego Business Law: Minimizing Contractual Indemnity Obligations
In general, indemnity obligations can be limited in three ways – temporally, monetarily, and via subject matter. It is recommended that all three be used.
Temporal Limits:
With respect to the first, a one-year time limit is recommended as “good” for a seller. Note also that the time limit should be in the nature of a statute of repose in that the time limit will preclude indemnification regardless of whether the other party might be able to argue that he/she/it did not have knowledge of the whatever facts might have given rise to indemnification. Under California law, any shortening of a statute of limitations must be “reasonable.” Thus, carve-outs for fraud and concealment probably should be included.
Monetary Limits:
With respect to monetary limitations, these come in a number of varieties including:
- Minimum thresholds: No indemnity obligation arises unless a certain threshold of damage/injury is reached; best for an obligor if combined with the idea of a deductible; otherwise, indemnification obligor still liable for the whole loss
- Deductibles: Indemnity obligation only for damages above the deductible; but obligation to indemnify arises immediately at first loss
- Caps or ceilings on the total monetary obligation: Often coupled with an escrow or insurance policy and often related to the value of the deal (such as “limited to a value equal to 20% of the purchase price …”)
- Offsets or adjustments for damages/costs covered by insurance or obtained/allowable tax benefits or other payments
Subject-Matter Limits:
With respect to subject matter limitations, generally, these come in four types:
- Materiality requirement
- Foreseeability limitation
- Specific subjects excluded or included
- Specific representations in the agreement excluded or limited
Materiality goes to the idea of importance, the question of whether the loss or damage arises from an important or essential or central aspect of the transaction or the agreement. As an example, if the business is a retail store, a materiality limit might prevent the buyer from arguing for indemnification for new tires on the delivery truck.
A foreseeability limit absolves the indemnifying party from having to indemnify for unforeseeable damages and costs. The covers “freak accidents” and attenuated claims for damages.
Contact San Diego Corporate Law Today
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has the experience and skill to draft indemnification clauses that will protect you as a buyer or a seller. Every business needs a good business attorney. Mr. Leonard can be reached at (858) 483-9200 or via email.
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