How to Review an Indemnity in M&A: a Clause-by-Clause Checklist

What an M&A indemnity does, and how to read it An indemnity in an M&A deal is a promise by one party (usually the seller) to reimburse the other for a defined loss, on a pound-for-pound basis, if a specified event occurs. It differs from a warranty in a way that matters commercially. A warranty is a statement of fact; if it is false, the buyer has to prove loss, prove the breach caused it, and deal with duties to mitigate and rules on remoteness. An indemnity short-circuits most of that: if the trigger happens, the indemnifier pays the specified loss. So when you review an indemnity, you are really reviewing a risk-allocation engine, and the whole game is in the trigger, the measure of loss, and the limits. This article is general guidance, not legal advice. The law here varies by jurisdiction, so have a qualified professional review your specific deal before you rely on it. ## The clause-by-clause checklist ### 1. The trigger

Read exactly what event starts the obligation to pay. A specific indemnity targets a known risk found in due diligence, for example an ongoing tax dispute, an environmental liability, or a defective title. A general indemnity (a covenant to pay) can cover a whole category such as pre-completion tax. Make sure the trigger describes the real risk and is not narrower than the problem you are worried about. ### 2. The measure of loss Check how loss is calculated and whether it is a true pound-for-pound reimbursement or is cut down by standard damages concepts. A buyer wants the indemnity to pay the actual outflow (including costs and, sometimes, a grossed-up amount). A seller wants to import mitigation, exclude consequential loss, and deduct any related savings, insurance recoveries or tax reliefs. ### 3. Caps Confirm whether the indemnity is subject to the overall liability cap or sits outside it. Specific indemnities for serious known risks are often uncapped or capped at the full price, while general warranty-style limits may not apply. Market practice for general caps clusters well below the purchase price (a Nixon Peabody deal survey reported a median indemnity cap around 10% of the price), with fundamental matters, tax and fraud carved out to a higher cap or left uncapped. Check which bucket your indemnity sits in. ### 4. Baskets, deductibles and de minimis See whether a basket (a threshold the aggregate claims must pass) and a de minimis (a per-claim floor) apply to the indemnity. A tipping basket pays from the first pound once the threshold is passed; a deductible pays only the excess above it. For a specific indemnity covering a known risk, a buyer should usually resist any basket or de minimis at all, because the risk is already identified. ### 5. Survival period Check the time limit for bringing an indemnity claim. General matters commonly survive 12 to 24 months (one survey reported a median of about 18 months), tax usually runs to the local tax limitation period, and fundamental matters and fraud often survive much longer or without limit. A survival period that is too short for a slow-burning risk (like tax or litigation) is a red flag. ### 6. Conduct of claims If the indemnity covers a third-party claim, read who controls the defence. Sellers often want the right to run the defence of a claim they are paying for; buyers worry about reputational control and settlement. Check notice periods, cooperation duties, and whether the indemnifier can settle without the buyer's consent. ### 7. Double recovery and mitigation Look for anti-double-recovery wording (you cannot claim the same loss under both a warranty and an indemnity) and any duty to mitigate. These usually favour the seller, but a fair deal has them. ### 8. Security for payment Check how payment is secured: an escrow or holdback, a retention from the price, a parent guarantee, or warranty-and-indemnity (W&I) insurance. An uncapped indemnity from a seller with no assets after the deal is worth little without security. ## Red flags to stop on - A trigger drafted more narrowly than the risk it is meant to cover.

• A basket or de minimis applied to a specific indemnity for a known problem.
• A survival period shorter than the time the risk realistically takes to surface.
• No security (escrow, holdback, guarantee or W&I) behind a meaningful indemnity.
• Seller controls the defence of a third-party claim with a free hand to settle. ## Warranty or indemnity: which to push for For an identified, specific risk a buyer almost always wants an indemnity, because it removes the proof and mitigation hurdles and pays the real loss. For the general health of the business, warranties plus a disclosure letter remain the standard tool. A seller will try to keep known risks inside the warranty regime (with its caps and baskets) rather than give a clean indemnity. Spotting which risks have slipped from indemnity into warranty, and back, is most of the review. ## A note on jurisdiction Indemnity drafting is broadly similar across common-law M&A markets, but enforceability details differ. Whether an indemnity can be reduced for failure to mitigate, how tax and insurance recoveries are netted, and the availability and cost of W&I insurance vary by jurisdiction. In India, indemnities interact with the Indian Contract Act, 1872 and with tax and FEMA rules on cross-border deals. Confirm the local position with counsel. ## Where one contract workspace helps An M&A indemnity is a web of linked terms: trigger, measure of loss, cap, basket, survival period, conduct of claims and security, and a change to one quietly changes the others. Keeping that web consistent across the agreement, the tax deed and the disclosure letter is exactly the kind of cross-clause work that is easy to get wrong by hand. Drafting, reviewing, tracking and governing an indemnity and the documents around it can live in one AI workspace tuned to how your deal team works. Adira is designed around keeping that web in one place.