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Identifying and hedging the risk of the unknown is one of the biggest risks in business documentation. If unknown liabilities arise – or known liabilities are greater than anticipated –parties want recourse to address the economic loss. "Caps" and "baskets" are used to address this problem.
"Caps" are the the total amount for which one party may be liable to the other party post-closing. "Baskets" are the amount of loss one party must incur, if any, before seeking recourse to the other party. The variations and interplay between caps and baskets can be highly complex.
This program provides a practical guide to the uses, types, and drafting traps of caps and baskets in business transactions.
- Types of "baskets" – "tipping baskets" v. "true deductibles" v. hybrids
- Negotiating "caps" – aggregates limits, specific carve-outs for fraud and other bad acts
- Intricate relationship between baskets and caps
- Drafting to reduce risk of dispute and enhance collectability of claims
- Use of escrow to ensure payment of indemnification claims