Glossary
Indemnity
A contractual promise, usually by the seller, to compensate the buyer pound for pound for a specific, identified loss or liability if it arises after completion.
In plain English
Where due diligence identifies a particular risk, such as a tax exposure, a dispute or a contractual problem, the buyer may ask for an indemnity instead of relying on a general warranty. An indemnity is usually easier for the buyer to claim under, because it does not require proof that a statement was untrue.
A tax covenant or tax indemnity, covering pre-completion tax liabilities, is standard in share sales.
Why it matters
Indemnities can create open-ended exposure for sellers, so their scope, caps and time limits are negotiated carefully, often alongside escrow or retention arrangements.
What to watch for
- Identify likely indemnity requests early and consider fixing the underlying issue before a process.
- Negotiate caps, time limits and the process for claims.
- Understand how indemnities interact with retentions and deferred consideration.
Transaction language and legal treatment depend on the agreement and the jurisdiction. Written by Motion Advisory Partners as general guidance, not legal advice.