Basket and Cap

In commercial transactions, one worry common to both buyers and sellers is the unexpected costs that may arise after closing. To avoid these types of problems the parties may elect to set forth ground rules in the Sales Purchase Agreement (“SPA”) in the form of a basket and cap (sometimes cap and basket) provision.

Under this scheme, each time an unexpected expense occurs the buyer puts it into a basket with a predetermined limit (e.g. €20,000). Here, the basket is a de minimis monetary limit, below which the buyer may not seek indemnification from the seller. Until the amount of liabilities in the basket reaches €20,000, the buyer is responsible for them. If and when the amount in the basket reaches €20,000, i.e. the basket is filled; the buyer can pass any liabilities over and above the limit to the seller.

Alternatively, a cap is an upper monetary limit on total liability to the seller for these unexpected costs. In other words, a cap is a limit on the obligation of the seller to indemnify the buyer that is set at some mutually agreeable level. The cap is typically used in sales where the buyer assumes unknown future liabilities. While the seller may be required to pay back some portion of the sale proceeds, the seller’s maximum liability is limited.