Published on January 18, 2023
Indemnification caps and baskets are tools used in contract negotiations to limit the liability of one party (the indemnitor) for losses suffered by the other party (the indemnitee). They are commonly used in situations where one party (such as a company or individual) is taking on a significant amount of risk, and wants to protect itself against potential losses.
Indemnification caps are used to limit the total amount of money that the indemnitor is required to pay to the indemnitee in the event of a loss. For example, if a company is entering into a contract with a vendor and wants to protect itself against the risk of a lawsuit, it may include an indemnification cap in the contract to limit the total amount it would have to pay the vendor in the event of a loss.
Indemnification baskets, on the other hand, are used to set a minimum threshold for losses that must be reached before the indemnitor is required to pay anything to the indemnitee. For example, if a company is entering into a contract with a vendor and wants to protect itself against the risk of a lawsuit, it may include an indemnification basket in the contract to set a minimum threshold for losses that must be reached before the company is required to pay anything to the vendor.
Both indemnification caps and baskets are useful tools for managing risk in contracts. However, they can also be complex and may require the assistance of legal counsel to properly understand and negotiate.
It is important to carefully consider the terms of an indemnification cap or basket, as they can significantly impact the risk and liability of the parties involved. For example, if the indemnification cap is set too low, the indemnitor may not be adequately protected against significant losses. On the other hand, if the indemnification basket is set too high, the indemnitee may not be adequately protected against small losses.
Overall, indemnification caps and baskets are useful tools for managing risk in contracts, but they should be carefully considered and negotiated to ensure that the interests of both parties are adequately protected with assistance of legal counsel to properly understand.
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Shawn Flynn is a Principal at Global Capital Markets, a premier middle-market investment bank with a global presence. Shawn has expertise in mergers and acquisitions, capital markets, financial restructuring, and secondaries. He speaks Mandarin and is the host of the award-winning Podcast The Silicon Valley Podcast. Connect with him on LinkedIn.
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