Don’t let a contract drafting oversight trigger $20M in M&A litigation. This post analyzes a Delaware Supreme Court case showing how failing to decouple indemnity notice deadlines for R&W breaches and specific long-tail covenants nearly barred a seller’s legitimate claim. Learn the pre-closing contractual fix lower middle market buyers, sellers, and advisors need to implement to manage this non-obvious risk and prevent costly post-closing disputes.
M&A Stories
October 14, 2025
M&A purchase agreements are engineered to allocate risk, with indemnification clauses being the central mechanism. For lower middle market deals, these clauses are often the most heavily negotiated part of the contract. While advisers are rightly focused on the survival period for representations and warranties, a recent case originating in Delaware’s Court of Chancery demonstrates how a seemingly standard notice deadline can create years of costly, unnecessary litigation over a non-R&W specific covenant.
The core of the issue lies in a lack of precision when mixing different types of indemnification claims under one procedural deadline.
The $20 Million Drafting Oversight
The underlying transaction involved the sale of a contracting business that was mid-project on a major bridge development. Crucially, the seller had executed a personal guarantee—an indemnity agreement—to the bonding company securing the target’s payment and completion bonds.
As part of the sale, the buyer agreed to a specific covenant: it would indemnify the seller for any future payments the seller was forced to make under that bond indemnity. This was a specific, anticipated liability, separate from the general representations and warranties (R&Ws) about the business.
After the deal closed, and well past the agreement’s Termination Date and the general R&W survival period, the buyer caused the target to withdraw from the project. This trigger forced the seller to pay the insurer approximately $20 million, prompting the seller to seek reimbursement from the buyer under the specific covenant in the acquisition agreement. The buyer refused, claiming the notice was late.
The buyer relied on the agreement’s notice clause, which required the seller to notify the buyer of a claim within a reasonable time, “but in any event before the later of the Termination Date or the survival period provided in Section 9.5 with respect to [the] particular representation or warranty to which the matter applies.”
Since the loss occurred after the deadlines, the buyer argued the claim was barred.
The Seller’s Success and the Drafter’s Failure
Both the trial and appellate courts sided with the seller, allowing the claim to proceed. The courts reasoned that the final deadline language was explicitly tied to a “representation or warranty.” Since the claim arose not from a breach of an R&W, but from a specific non-R&W covenant (the bond indemnity), the deadlines for R&W claims simply did not apply. The only relevant requirement was that the seller provide notice within a “reasonable time” of the loss, which it had done.
While the seller ultimately prevailed, the lack of clarity in the drafting required several years of expensive litigation to affirm the correct interpretation. For lower middle market parties and their advisers, this case, North American Leasing v. NASDI Holdings, is a stark warning. The drafting mistake was not in identifying the bond risk, but in failing to decouple the procedural deadlines for two entirely different kinds of liability.
The Pre-Closing Risk Management Fix
This costly legal battle could have been minimized, if not entirely avoided, with a pre-closing contractual provision that clearly separated the indemnification categories. The key for both seller and buyer advisers is to ensure that the notice provision for specific, long-tail covenants (such as tax indemnities, environmental retained liabilities, or specific bond indemnities) are explicitly carved out from the shorter survival period tied to general R&Ws.
A precise contractual remedy would have been to revise the notice section to treat the claims separately:
Notice of Claims. Claims for indemnification based on a breach of a representation or warranty must be delivered prior to the expiration of the applicable survival period. However, claims for indemnification based on any covenant (other than a representation or warranty), or any specific indemnity for a retained liability, shall not be subject to the Termination Date or any survival period otherwise applicable to representations and warranties, and the Claim Notice for such matters shall be timely so long as it is delivered within a reasonable time after the Indemnified Party becomes aware of the existence of the potential claim.
This clear, two-part structure—which distinguishes the claims and their corresponding procedural requirements—is a crucial, non-obvious legal risk management tool. It ensures that critical, anticipated liabilities, like the $20 million bond loss in this case, remain enforceable without having to resort to the courts to affirm the parties’ original intent. For both buyers and sellers, avoiding years of post-closing litigation over flawed contract mechanics is one of the most valuable services an adviser can provide.
See: North American Leasing v. NASDI Holdings, No. 192, 2020, Supreme Court of Delaware (April 11, 2022).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law in lower middle market private target deals.
By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5
and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM
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