Indemnity clauses in Brazilian share deals: binding between the parties, not against the tax authorities

In the purchase and sale of shares or quotas in a Brazilian company, the indemnity clause does well what it was designed to do: allocate between buyer and seller the cost of pre-closing liabilities. What it does not do, and cannot do, is prevent a creditor from collecting from the buyer. The distinction usually surfaces months after closing, when the claim arrives.

What the law guarantees the parties

In a commercial contract, the freedom to design an indemnity regime is broad. Article 421, sole paragraph, of the Brazilian Civil Code provides for minimal intervention and for the exceptional nature of judicial revision of contracts. Article 421-A presumes that civil and commercial contracts are entered into on an equal footing and requires, in item II, that the allocation of risk agreed by the parties be respected and observed.

Brazilian law imposes no general statutory restriction on indemnity caps, baskets or survival periods for representations and warranties in a commercial contract between sophisticated parties. These mechanisms are effective because the parties agreed them, and the law directs that their allocation be respected.

What the clause does not reach

Three provisions govern the relationship with third parties, and none of them depends on what the contract says:

• Article 1,146 of the Civil Code. The acquirer of a going concern is liable for debts incurred before the transfer, provided they were duly recorded in the accounts, and the original debtor remains jointly liable for one year.
• Article 133 of the National Tax Code. A party that acquires a business or going concern and continues the activity is liable for taxes due up to the date of the transaction: in full, if the seller ceases the activity; on a secondary basis, if the seller continues or resumes activity within six months.
• Article 448-A of the Labour Code. Where succession is established, employment obligations, including those incurred while the employees worked for the predecessor, are the responsibility of the successor.

The indemnity clause operates between the parties. It gives the buyer a right of recourse against the seller, and nothing beyond that. The tax authorities, the employee and the creditor collect from whoever the statute designates, and the contractual discussion comes afterwards, once the money has been paid.

The issue is security, not drafting

If the buyer pays first and recovers later, the outcome is decided not by the quality of the clause but by whether there are accessible assets when the claim arrives. Escrow accounts, holdbacks on the purchase price, personal or bank guarantees and representations and warranties insurance are what turn a right of recourse into money. An individual seller who was paid in full at closing and left no security is, in practice, an uncovered risk.

The limits of a cap

The freedom to cap liability meets its limit in the objective good faith requirement of article 422 and in the prohibition on clauses that hollow out the essential obligation of the contract. As to defects known to the seller, article 443 is explicit: a seller who knew of the defect must return what it received, with damages. A cap that survived the seller's wilful concealment of a liability it knew about would be difficult to sustain.

Outside the M&A context, but useful as a reference, the Superior Court of Justice upheld a limitation of liability clause in a commercial contract in Special Appeal No. 1,989,291-SP, decided by the Third Panel on November 7, 2023, the agreed cap prevailing because wilful misconduct had not been established.

Frequently asked questions

Does the indemnity clause stop the tax authorities from collecting from the buyer?

No. It operates between buyer and seller. Who the tax authorities may collect from is determined by article 133 of the National Tax Code, and that is not displaced by contract.

Does buying quotas rather than the business solve the problem?

It changes the form, not the risk. The company remains liable for the liabilities it already had, and the buyer now owns the company.

What reduces the risk most in practice?

Security. A holdback, an escrow account or representations and warranties insurance, sized against the liabilities identified in due diligence.

Still unsettled

There is little published case law on the enforcement of indemnity clauses in Brazilian share purchase agreements, and the reason is structural: these contracts usually provide for arbitration, and arbitral proceedings are confidential. In practice, the reliability of the arrangement comes from the drafting and the security, not from precedent that can be consulted before signing.