Materiality Scrape
A materiality scrape is an acquisition-agreement provision that instructs the parties to disregard specified materiality qualifiers in representations and warranties for one or more purposes, commonly determining whether a breach occurred, calculating losses, or both.
The scrape changes how a representation is tested
Representations often contain qualifiers intended to prevent immaterial facts from creating breach. The indemnification article can later tell the parties to ignore those qualifiers.
That can broaden the set of technical breaches while leaving the basket to screen out economically minor claims.
Single and double scrapes are different
A scrape that disregards materiality only when calculating losses is narrower than one that also disregards materiality when determining whether a breach occurred.
Market participants sometimes call the broader version a double materiality scrape. The label is less important than the operative sentence in the agreement.
Exceptions are common
Agreements may preserve materiality for specific representations, defined terms or contract schedules. For example, a definition of Material Contract can be carved out because removing materiality would change which contracts belong on a disclosure schedule.
The scrape should therefore be read together with every listed exception.
The economic effect depends on the basket
Suppose ten small inaccuracies each cause $50,000 of covered loss. A scrape may allow all ten to qualify as breaches. A $750,000 basket could still prevent recovery.
The scrape changes the breach analysis; it does not automatically eliminate contractual thresholds.
RWI underwriting can use a different lens
An insurer can underwrite the representations and apply its own exclusions, retention and claim interpretation under the policy. The purchase agreement’s scrape does not automatically rewrite the insurance policy.
Coverage analysis requires both documents.
Materiality scrapes can prevent double thresholds
One reason buyers seek a scrape is to avoid applying materiality twice. Without a scrape, a representation might require a problem to be “material” before a breach exists, and the indemnification article might separately require the aggregate claims to exceed a basket.
That can create two filters for the same economic issue. A scrape can remove the first filter while preserving the basket as the negotiated dollar threshold.
Sellers may resist a broad scrape because it can convert technically immaterial inaccuracies into claims that accumulate toward the basket. The final language reflects how the parties choose to divide small-error risk.
Common mistakes
Assuming every scrape is double Some provisions affect loss calculation only.
Ignoring carve-outs Certain representations or defined terms can retain their qualifiers.
Treating the scrape as removal of the basket The scrape and basket solve different problems.
Example
A seller represents that it has complied in all material respects with specified laws. The indemnification article states that materiality qualifiers are disregarded both in determining breach and calculating loss. A buyer may therefore test compliance without reapplying the word material at those stages, subject to the provision’s exceptions.
Example
A seller represents that it has complied in all material respects with specified laws. The indemnification article states that materiality qualifiers are disregarded both in determining breach and calculating loss. A buyer may therefore test compliance without reapplying the word material at those stages, subject to the provision’s exceptions.
Professional note
Materiality scrapes can interact sharply with baskets. Removing a materiality qualifier can turn smaller inaccuracies into indemnifiable claims, while the basket still provides an aggregate economic threshold.
Related terms
- Representations and Warranties
Representations and warranties are contractual statements of fact or condition made by parties to an acquisition agreement about matters such as authority, ownership, financial statements, taxes, contracts, compliance and the business being sold.
- Indemnification
Indemnification is a contractual remedy under which one party agrees to compensate another for specified losses arising from defined events, such as breaches of representations, warranties or covenants, assumed liabilities, excluded liabilities or specially identified risks.
- Indemnity Basket
An indemnity basket is an aggregate loss threshold that must be reached before specified indemnification claims become recoverable under an acquisition agreement. The agreement determines whether recovery applies only above the threshold or includes losses from the first dollar once the threshold is exceeded.
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