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three months after the closing because I forgot to include some two-bit claim in the
schedule."

All right, both sides have now staked out their position. The seller’s counsel has
done his job in raising and arguing the point; the purchaser’s lawyer has performed
yeoman service in resisting the change. How is the issue to be won, lost or compromised?

There are no comprehensive guidelines for dealing with the seller’s desire for
materiality caveats in representations. It usually comes down to a question of identifying
and attempting to satisfy, by one means or another, the real objectives of the parties (or
rather their attorneys, since it is the lawyers who usually play this materiality game),
without giving up what are considered vital protections.

To get at this question more analytically, let’s oversimplify the motives of the
purchaser’s attorney in resisting materiality caveats by dividing them into one or more of
three categories: P-1, he wants to unearth information; P-2, he wants to lay the basis for
his client to walk away if things are not as represented; and P-3, he wants to set his client
up for indemnification if there are any unpleasant surprises after the closing. The seller’s
attorney, on the other hand, usually has one or more of these reciprocal concerns: S-1,
he might want to conceal unpleasant information21 or simply avoid certain tedious tasks
involving what he considers to be essentially trivia; S-2, he is not willing to furnish
purchaser with an out over a minor misrepresentation, in the event that purchaser turns
lukewarm on the deal and needs an excuse to call it off; and S-3, he is trying to guard
against purchaser going after his client for indemnification down the road.

Now let’s examine the subject of the prior dialogue in light of these
considerations. Assume in the first case that purchaser’s attorney is interested in
complete information [P-1] while seller’s attorney is worried about small claims [S-3].
Well, the usual compromise here is to require seller to list all litigation, not just material
lawsuits — but to provide in the indemnification section of the agreement for a "basket"
or "cushion"; i.e., a provision to the effect that the purchaser is only entitled to be
indemnified if the aggregate of the items seller has failed to disclose or otherwise
misrepresented reaches a certain prescribed level.

21 My experience is that this is not true of most seller’s lawyers who, if not always moved as one
might hope by ethical considerations, take the practical view that it is better to disclose now — since the
adverse fact is likely to come out later to his client’s financial discomfort.

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