A materiality scrape is often a heavily negotiated clause in a purchase agreement, and it is easy to miss if you do not know to look for it. In plain terms, a materiality scrape tells the reader to ignore the words “material,” “materiality,” and “material adverse effect” in the seller’s representations and warranties for certain purposes. You read the representations as if those qualifiers were not there. Whether you want that depends entirely on which side of the deal you are on.
The problem a scrape is meant to fix
Representations in a purchase agreement are often hedged with materiality. A seller represents that the company is in compliance “in all material respects” with its contracts, or that nothing has occurred that would have a “material adverse effect.” Those qualifiers do useful work while the deal is being negotiated. The difficulty comes later, at the indemnification stage. Without a scrape, a buyer bringing a claim has to clear the materiality bar twice: once to prove the representation was breached at all, and again on top of the indemnification basket, which already screens out small claims. Buyers call this the double materiality problem, and they argue it lets the same immaterial matter defeat a claim two different ways.
Single scrape versus double scrape
Scrapes come in two main sizes. A damages-only scrape, often called a single scrape, leaves the materiality qualifiers in place for deciding whether a representation was breached, but ignores them when calculating the losses once a breach is established. A double scrape ignores materiality for both questions: whether there was a breach, and how much it costs. The double scrape is the more buyer-friendly version, and the damages-only scrape is the more common compromise.
Why buyers want them
Buyers favor scrapes for several connected reasons:
- They remove the double counting. The basket, and any de minimis threshold, already filter out trivial claims, so letting materiality qualifiers filter them a second time feels to a buyer like being screened twice for the same thing.
- They make the representations work as a clean pricing tool. If a representation turns out to be wrong, the buyer recovers the full dollar cost, subject only to the basket and the cap, instead of litigating whether the error was “material.”
- They capture breaches that add up. Several individually small problems can be large in the aggregate, and a scrape keeps each one from being knocked out on its own.
- They cut down fights over the word “material,” which has no fixed dollar meaning and invites dispute.
Why sellers push back
Sellers resist scrapes for the mirror image reasons:
- They expand exposure. A seller can end up paying for problems that, by the plain words of the representation, were never material.
- They hollow out qualifiers the seller just negotiated. The time spent adding “in all material respects” to the representations is wasted if a single clause scrapes them all away.
- They invite more claims. When immaterial breaches count, buyers have a reason to pursue smaller matters, which means more disputes after closing.
- They push more dollars toward the cap, raising the odds the seller actually writes a check.
Where deals usually land
Most negotiated deals do not accept or reject the scrape outright. They settle on a middle ground:
- Damages only. The buyer must still show a real breach, but once it does, materiality drops out of the loss calculation. This is the most common resolution.
- Carve-outs for defined terms. A scrape should never delete the word “material” where it is built into a defined term, such as “Material Adverse Effect” or “Material Contracts,” or where “material” sets a list threshold. Scraping those would make the contract read nonsensically, so the clause is drafted to leave them alone.
- A trade for a bigger basket. A seller who concedes the scrape often asks for a higher basket or de minimis in return, so the expanded exposure is offset.
- Representation and warranty insurance. In insured deals a materiality scrape is common and insurers generally expect one, which can take some heat out of the negotiation because the recovery comes from the policy rather than the seller’s pocket.
What to check in your agreement
- Find the scrape. It usually sits in the indemnification article or inside the definition of “Losses,” in one dense sentence. Read it before you sign the letter of intent, not after.
- Know which version you have. A damages-only scrape and a double scrape allocate very different risk.
- Confirm the carve-outs. Make sure the scrape excludes “Material Adverse Effect” and any defined terms or thresholds that use the word “material.”
- Line it up with the basket, the de minimis, and the cap. The scrape only makes sense when you read it together with those numbers.
- Decide whether it touches the closing condition. A scrape is usually written for indemnification; the condition that lets a buyer walk before closing normally keeps a materiality or material adverse effect standard. Confirm which one your draft uses.
Whether a materiality scrape helps or hurts you is not a question with a universal answer. It is a risk allocation choice that should be priced and negotiated alongside the basket, the cap, and the survival period, not treated as boilerplate. If you are buying or selling a business, read that one sentence closely, because it can decide who pays when a representation turns out to be wrong.
If you have questions about a purchase agreement or the sale of a business, or any other service, you can reach Martin at martinkreshon.com, northcitylaw.com, or call (206) 929-0609. You can also find reviews for Martin on Google and Avvo.