The Indemnity Cap Clause Explained (2026)

What an indemnity cap is An indemnity cap is the maximum amount an indemnifying party can be required to pay under an indemnity. It is one of three limits that usually travel together, especially in share and asset purchase agreements and in high-value commercial contracts: - the de minimis threshold, a floor for individual claims, so that small claims cannot be brought at all,

• the basket (sometimes called a threshold or deductible), an aggregate floor that must be crossed before any claim can be recovered, and
• the cap, the ceiling on total recovery. Together they define a band: claims that are too small are ignored, claims only count once they add up to a meaningful amount, and recovery stops at the cap. ## Why it matters An uncapped indemnity is an open-ended promise to pay. The indemnifying party wants certainty about its worst case, and often needs it to price the deal or arrange insurance. The indemnified party wants enough cover to be protected against the specific risk the indemnity was written for. The cap is where those two needs meet. In an acquisition the cap also reflects how much of the risk the buyer is prepared to leave with the seller after closing. A seller who has sold the business and distributed the proceeds does not want a claim years later that reaches back to the full price. ## How the three limits work together A worked sequence makes it clear. Suppose a de minimis of 25,000, a basket of 500,000, and a cap of 10 percent of the purchase price. 1. Each claim is first tested against the de minimis. Anything below 25,000 is dropped and never counts.

2. Qualifying claims are added up. Nothing is payable until the total crosses the 500,000 basket.
3. Once the basket is crossed, recovery runs up to the cap and no further. There are two common basket styles. A deductible basket (or true deductible) means only the losses above the threshold are recoverable, like an insurance excess. A tipping basket (or first-dollar basket) means that once the threshold is crossed the indemnified party recovers everything from the first dollar. Sellers tend to prefer deductible baskets, buyers prefer tipping baskets. ## A sample clause > The Seller shall not be liable in respect of any single Claim unless the amount of such Claim exceeds 25,000 (and such Claims below that amount shall be disregarded). The Seller shall not be liable unless the aggregate amount of all Claims exceeds 500,000, in which case the Seller shall be liable for the full amount and not only the excess. The Seller's total aggregate liability for all Claims shall not exceed an amount equal to ten per cent (10%) of the Purchase Price, save that liability for Claims under the Fundamental Warranties and for fraud shall be limited only to the Purchase Price. ## How to negotiate it Separate fundamental from general claims. Fundamental matters (title, authority, ownership of key assets) and tax are usually given a much higher cap, often the full purchase price, while ordinary business warranties sit under a lower general cap. Carve fraud out of every limit. De minimis, basket and cap should not protect a party against its own fraud or wilful concealment. This is close to universal. Decide the basket style explicitly. A deductible basket and a tipping basket produce very different numbers at the same threshold. Do not leave it to interpretation. Match the cap to the risk, not a habit. A 10 to 25 percent range is often quoted, but the right figure depends on the deal, the diligence done, and whether warranty and indemnity insurance is in place. Insurance can let the parties agree a low cap while the buyer looks to the policy for the rest. Align the survival period. A cap means little if the claim period is too short to discover the problem. Line up the time limits for bringing claims with the cap and the type of warranty. ## Common mistakes Using one cap for everything, so that a fundamental title problem is limited to the same small percentage as a minor operational warranty. Leaving the basket style undefined. Forgetting to exclude fraud. Setting a de minimis so high that real claims are filtered out. ## One workspace to draft, review and track your clauses Most teams do not lose on the wording of a single clause. They lose because the clause lives in a Word file, the risk sits in someone's head, and the key date hides in an inbox. The fix is to keep drafting, review, tracking and governance in one place instead of five disconnected tools. The single-workspace idea is simple. You draft from your own catalogue and house style, the system reads any document and flags positions as favourable, neutral or unfavourable to your company, every edit is tracked with a timeline, and obligations and dates become alerts you can assign. Because the contract is held as a structured clause tree rather than flat text, you can change a clause in plain English and see exactly what moved. Adira is one such workspace, built on Anthropic's Claude and tuned to how your company actually contracts. India is deepest today, with other jurisdictions and a company command centre on the roadmap.