Review the contract scenario below and analyze the indemnification provision in the draft Factory Purchase Agreement provided
Question:
- Review the contract scenario below and analyze the indemnification provision in the draft Factory Purchase Agreement provided by counsel to the Seller.
- Draft a brief (one page) email to your legal team highlighting your principal concerns with the proposed indemnification provision.
- The email can be in bullet point format.
- Tip: Refer to the course tool "Indemnification Key Negotiation Points Overview."
Draft Factory Purchase Agreement:
You are a member of the management team of Able Inc. negotiating for the purchase of a widget manufacturing facility owned by Baker Corp. The factory has been in operation for over 50 years. Baker Corp. is owned by the Baker family, which intends to liquidate the corporation after the sale is completed. Able Inc.'s due diligence investigation has revealed that the manufacturing processes conducted at the facility by Baker Corp. used a number of hazardous solvents and that several times over the past 10 years, the widgets manufactured by Baker Corp at the facility have malfunctioned and recalls were required. As a result, Baker Corp. has agreed that in the Factory Purchase Agreement, it will represent and warrant that there are no current environmental or product liability issues with regard to the plant or the widgets manufactured there.
The board of directors of Able Inc. is anxious to proceed with the factory acquisition and is prepared to pay a purchase price at the very top of the value range. The Able Inc. board has said, however, that Able Inc. must be protected from any liabilities arising from the operation of the facility prior to the closing. The board chair emailed the negotiating team:
"I don't want to spend a dime fixing problems that were on Baker's watch. If any liabilities arise, they need to paycompletely and on a timely basis, with no dilly-dallyingand they need to take ownership of whatever the problem is from Day One. One other thing: Keep in mind that things are a bit up in the air regarding our use of the factory and the surrounding property after the closing; we may transfer title to one of our subsidiaries, for example. Or we may decide to use a portion of the facility for our regional headquarters, which would involve partial demolition and reconstruction of the building. Good luck!"
In an effort to save on legal fees, your senior management has agreed that Baker Corp.'s lawyers will draft the initial draft of the Factory Purchase Agreement, and the document has just arrived on your desk. In a covering email, Baker Corp.'s lawyers comment on the indemnification provision:
"As you'll see, the draft agreement contains a robust indemnification provision, which protects Able Inc. in the event Baker breaches its environmental or product liability representations or has engaged in reckless or willful misconduct with regard to the facility. Our liability is generously capped at half of the purchase price and the provision contains customary (and fair) provisions regarding taxes and insurance so that you don't recover more than your actual losses."
Indemnification:
- Baker Corp ("Seller") and shall indemnify Able Inc. ("Buyer") against any losses, damages or liabilities (collectively, a "Loss") arising out of any third party claim that is caused by: (a) a material breach of any material representation or warranty made by Seller or (b) any gross negligence or willful misconduct on the part of Seller.
[NOTE: In the Representation and Warranty section, the contract states: "Seller represents and warrants that to Seller's knowledge, the Seller has operated the facility in compliance with all material applicable environmental and product liability laws and regulations in all material respects."]
- Notwithstanding the foregoing, the Seller is not obligated to indemnify Buyer for any Loss (a) involving the negligence or misconduct on the part of Buyer, (b) that could have been prevented or reduced by Buyer or (c), involving a fact or circumstance that Buyer knew or should have known prior to Closing.
- Seller shall not be responsible for making any indemnity payment unless and until the Buyer's aggregate Losses exceed $100,000 and Seller's aggregate maximum obligation to make indemnity payments shall be limited to 50% of the purchase price paid under this Agreement.
- Seller's obligation to make indemnity payments shall be reduced by (a) the amount of Buyer's insurance covering any particular Loss and (b) the amount of any tax benefit accruing to Buyer as a result of any such Loss.
- Seller's obligation to make indemnity payments is subject to the condition that Buyer delivers to Seller written notice of a possible Loss no later than 5 days after becoming aware thereof.
Draft Email:
Draft a brief (one page) email to Able's legal team highlighting your principal concerns (between 6 and 10, in order of their significance) to Able with the proposed indemnification provision.
Dynamic Business Law
ISBN: 9781260733976
6th Edition
Authors: Nancy Kubasek, M. Neil Browne, Daniel Herron, Lucien Dhooge, Linda Barkacs