You have received a transaction document with a willful breach standard as an exception to the indemnity cap – now what? For transactions with interim operating covenants (e.g., conduct of business between signing and closing), seller is often required to operate the business in the ordinary course and seek purchaser consent to enter into material contracts (among other negative covenants applicable during the interim period). What happens in the event seller seeks purchaser’s consent to enter into a material contract and purchaser objects or fails to provide consent in a timely manner? If seller determines in good faith that the material contract is in the best interest of the company and therefore decides it must willfully breach the interim covenant to enter into the material contract (despite purchaser’s objection, or, as a result of purchaser’s failure to respond at the speed of business), then purchaser could (1) arguably, terminate the agreement based on seller’s material breach of the interim covenants, or (2) despite seller’s breach, close the transaction by waiving the standard condition to closing that seller has complied in all material respects with all covenants (the “Closing Condition”). That seems simple enough. However, if purchaser decides to waive the Closing Condition and close the transaction, it could then arguably bring a claim against seller for indemnification (for breach of covenant) outside of the indemnity cap (as willful breaches are excluded from the indemnity cap). To avoid this outcome, consider (a) pushing back on the inclusion of willful breach as an exclusion from the indemnity cap (seller friendly), or, if that is not possible, (b) including a provision stating that in the event purchaser expressly waives the Closing Condition, any damages arising from seller’s willful breach of the pre-closing covenant giving rise to the failure of such Closing Condition will be subject to the exclusive remedy provision and indemnity cap (middle of the road), or (c) including a provision stating that in the event purchaser expressly waives the Closing Condition, purchaser shall be precluded from making a claim for indemnification for any damages arising from seller’s willful breach of the pre-closing covenant giving rise to the failure of such Closing Condition (seller friendly). Sample language of a clause (b) provision (i.e., middle of the road) is included below (which can be revised to apply to both seller and purchaser, if circumstances dictate).
Seller shall not be required to indemnify the [Purchaser Indemnitees] with respect to any claim by Purchaser for indemnification pursuant to Section [Seller Indemnification Obligations Section Reference] in an aggregate amount greater than the Purchase Price; provided, that the limitations set forth in this Section [xx] shall not apply in the event of Fraud or Willful Breach of this Agreement by Seller (excluding any Willful Breach by Seller of any pre-Closing covenant that is expressly waived by Purchaser pursuant to Section [Condition to Closing Section Reference], but only to the extent such Willful Breach does not otherwise involve Fraud).
“Fraud” of a party means the actual common law fraud (as determined pursuant to Delaware law) in the making of any representation or warranty set forth in Article [Seller Reps Reference] or Article [Purchaser Reps Reference], as applicable, or any certificate delivered by such party pursuant to Article [Conditions to Closing Reference]. The term “Fraud” shall not include any fraud claim based on constructive fraud, equitable fraud, negligent misrepresentation or omission or any similar theory.
“Willful Breach” means a material breach that is a consequence of an act or failure to act undertaken by the breaching party with actual knowledge that such party’s act or failure to act would constitute a material breach of this Agreement.