An indemnity cap is the ceiling on the total amount a seller can be made to pay under the indemnity provisions of a Canadian purchase agreement, regardless of how large the buyer’s actual losses turn out to be.
Treadstone Law states it plainly: “the cap is a ceiling: the maximum total amount recoverable, regardless of how large the actual loss turns out to be.” Nothing in Ontario law compels a seller to accept one. Answering that exact question, Treadstone Law confirms: “Nothing in Ontario law requires an indemnity cap in a business purchase and sale, so a seller is free to refuse one” — and “there is no default rule filling the gap if the agreement is silent.”
A seller who refuses any cap rarely gets to walk away from the trade-off entirely: “an uncapped indemnity leaves a seller exposed indefinitely for issues that may surface long after they no longer control the business,” and a buyer facing that refusal typically responds by seeking “a longer survival period, a lower basket threshold, or a larger holdback” instead. The cap, basket and survival period are rarely negotiated in isolation — giving ground on one usually means asking for more on another. Different categories of representation commonly carry different caps in the same agreement; a tax representation, for example, is often tied to how long the Income Tax Act lets the CRA reopen the file, since ITA s.230(4)(b) requires business records to be kept “until the expiration of six years from the end of the last taxation year to which the records and books of account relate.”
Suppose the parties to a $5,000,000 share purchase agreement negotiate three separate caps: fundamental representations (title to the shares, corporate capacity) capped at the full $5,000,000 purchase price; general operational representations capped at $1,000,000; and tax representations capped at $1,000,000 but surviving for six years, tracking the ITA’s own reassessment record-keeping window. A breach of a general representation costing $1,400,000 to remedy is capped at $1,000,000 — the seller is not liable for the remaining $400,000, however real the loss.
See also: Indemnity basket, Warranty and indemnity insurance
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