Learn about the importance of clear indemnification provisions in M&A agreements. This blog discusses a recent Pennsylvania court case where a buyer’s right to defense was triggered by a product claim, not just a lawsuit.
M&A Stories
July 27, 2021
Introduction:
When a buyer acquires a business, they want protection from any issues related to the seller’s products before the deal’s closing. To address this, buyers often include provisions in the agreement requiring the seller to defend and indemnify them against such problems. A recent case in Pennsylvania sheds light on the importance of these provisions.
The Deal:
In 2016, a buyer purchased a company that manufactured ultraviolet generators for water treatment. The seller agreed to defend and indemnify the buyer against any claims or losses arising from product issues that occurred before the deal’s closing date.
The Lawsuit:
After the deal was finalized, a customer claimed that the ultraviolet generators were defective, causing damage to their products. The customer threatened to take legal action against the buyer. The buyer hired experts and sought legal counsel to respond to the claim, and then requested the seller to fulfill its obligation to defend and indemnify against the customer’s claim.
The Seller’s Argument:
The seller argued that it was only obligated to defend the buyer if a lawsuit had been filed. They believed that until then, they had no duty to act.
The Court’s Decision:
Both the trial court and the intermediate appellate court disagreed with the seller’s argument. They ruled that the seller had agreed to defend and indemnify the buyer against any claims, not just lawsuits. The court emphasized that the terms “Claim,” “Loss,” and “Legal Proceedings” had separate and distinct definitions in the agreement, making the seller’s argument invalid.
This case is referred to as Neptune-Benson, LLC v. Bio UV SAS, No. 594 WDA 2020, Superior Court of Pennsylvania, (Filed: May 13, 2021).
Key Takeaway:
This case highlights the significance of clear indemnification provisions in purchase agreements. Waiting for a lawsuit to be filed could have put the buyer at a disadvantage, whereas the buyer’s right to defense was secured by having the obligation triggered by the mere existence of a claim.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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