A basket that swallowed every claim the buyer had

The situation

A fund acquired 100% of a mid-sized specialty manufacturer for roughly $6 million. The purchase agreement's indemnity section, negotiated over several rounds, settled on what looked at the time like a standard, buyer-friendly structure: an indemnity basket of $75,000 and an indemnity cap of 15% of purchase price on breaches of the general representations, with carve-outs for fraud and the fundamental reps.

Nobody on the buy side flagged, at signing, exactly what kind of basket $75,000 was.

The problem

A basket can be drafted two structurally different ways, and the difference decides almost everything about what a buyer actually recovers. Treadstonelaw's guidance describes the mechanism precisely: “if the loss, alone or combined with other qualifying claims, doesn't clear the negotiated threshold, it generally doesn't count toward a claim at all” — that is the true-deductible reading, and it is the one this agreement's basket clause used. A tipping basket, by contrast, pays back to dollar one once the threshold is crossed. The agreement here did neither halfway: it was drafted as a straight deductible, and the buy-side team had negotiated the cap hard while treating the basket as boilerplate.

In the first year of ownership, three separate, unrelated issues surfaced: a physical inventory count that turned out to be materially overstated at closing (a documented $31,000 shortfall against the closing balance sheet), an unpaid supplier invoice the seller had represented as settled ($19,500), and a customer contract priced below the cost schedule the seller had disclosed ($17,500 in margin loss over the contract's remaining term). None of the three, on its own, was large. Combined, they totalled roughly $68,000 — real, documented, and individually undisputed by the seller's counsel.

The rule that decided it

$68,000 sits below a $75,000 deductible basket. Under the agreement as drafted, that meant none of it was recoverable — not a partial recovery of the amount above some lower threshold, but zero, because the basket as written excluded the entire first $75,000 of loss from counting toward a claim at all. As the same guidance frames the strategic stakes: “A basket and cap that look reasonable individually can produce very different real-world outcomes depending on how they interact,” and “a low basket paired with a generous cap favours buyers… a high basket paired with a tight cap favours sellers on both ends of the same claim.” A $75,000 true-deductible basket, on a $6 million deal, had been negotiated as though it were immaterial. It was not: it was large enough to absorb the entire first year's claim history in one sitting.

A tipping basket would have produced a completely different outcome on the same $68,000 of loss. Treadstonelaw's guidance on the two structures is precise about the contrast: under a tipping basket, once losses exceed the threshold, “the buyer can recover the full amount of all qualifying losses, from dollar one,” whereas under a true deductible “The buyer can only recover the amount by which losses exceed the threshold, not the threshold amount itself” — and because $68,000 never exceeded the $75,000 threshold at all, a tipping structure would not have saved this claim either. The fund's real drafting error was not choosing the wrong basket type in isolation; it was setting the threshold itself well above the realistic size of an ordinary first-year claim, whichever basket mechanic sat behind it.

The fix

The fund had no contractual recourse on this deal — the basket did exactly what it was drafted to do, and the seller's counsel was under no obligation to waive it. What changed was the fund's own playbook. Every subsequent letter of intent now specifies, in the term sheet itself and not left to definitive-agreement drafting, whether the basket is a true deductible or a tipping basket, and the deal team models the basket-and-cap interaction against realistic first-year claim scenarios before signing — treadstonelaw's own recommended test: “would this basket and cap combination actually produce a meaningful recovery — or would it be eaten up by the threshold on one end and the ceiling on the other?”

On the fund's next acquisition, the same modelling exercise caught an equivalent gap before signing, and the basket was renegotiated to a $40,000 tipping structure — a change the seller accepted without much friction, because nobody had thought to ask for it on the first deal.

Takeaways

• • A true-deductible basket excludes the entire threshold amount from every claim, not just the portion below it — a real, documented loss under the threshold recovers nothing. No statute changes that; the basket is worth exactly what the parties wrote.
• • Whether a basket is a tipping basket or a true deductible is a single drafting choice with an outsized effect on recovery. Negotiate it as deliberately as the cap, not as boilerplate.
• • Model the basket against realistic first-year claim scenarios before signing, not after the first claim arrives and the structure turns out to defeat it.
• • A basket and a cap interact. Evaluate them together, not as two independent numbers each negotiated in isolation.

Sources

• • Treadstone Law — indemnity baskets and caps explained — source of the quoted mechanic (“If the loss, alone or combined with other qualifying claims, doesn't clear the negotiated threshold, it generally doesn't count toward a claim at all”), of the basket-and-cap interaction passage, and of the recovery test quoted at the end.
• • Treadstone Law — baskets and deductibles in a business-sale indemnity — source of the tipping-basket and true-deductible definitions quoted above.
• • Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 — No statute governs an indemnity basket. A basket is a contractual allocation of risk, and the only law that reaches it is the law of interpretation: contract interpretation calls for a practical, common-sense approach not dominated by technical rules of construction, with the overriding concern being to determine the intent of the parties and the scope of their understanding. A court asked to rescue this buyer would have had to rewrite the parties’ own number, which is not what interpretation does.