Carve-out: Overview, definition and example
What is a carve-out?
A carve-out refers to an exception or exclusion in a larger agreement or provision. It sets aside certain rights, responsibilities, or assets so they are not governed by the main terms of the agreement. Carve-outs are often used in contracts, business sales, or mergers to protect specific interests or assets from the broader deal.
Why is a carve-out important?
Carve-outs are important because they allow parties to exclude specific items or responsibilities from the main agreement, tailoring the contract to meet their unique needs. This helps ensure that critical assets or obligations are handled differently, reducing risks and potential conflicts. For example, a seller in a business deal might carve out intellectual property they want to retain, even while selling other assets.
Understanding carve-out through an example
Imagine a company sells one of its divisions to a buyer. The sale agreement includes a carve-out for the seller’s patents related to that division, meaning the buyer will not gain ownership of those patents as part of the deal. This allows the seller to keep and potentially monetize the patents separately, while the buyer takes over the rest of the division.
In another scenario, a contract for software services might have a carve-out clause that excludes liability for third-party software embedded in the product. This means the service provider is not responsible for issues arising from those third-party components, even though they are part of the overall service.
An example of a carve-out clause
Here’s how a carve-out clause might appear in a contract:
“The obligations of the Seller under this Agreement shall not apply to any assets specifically identified in Exhibit A, which are excluded from the scope of this transaction.”
Conclusion
A carve-out creates clarity in agreements by excluding specific assets, rights, or responsibilities from the general terms. It’s a critical tool for customizing contracts and ensuring that key interests are protected while allowing the rest of the agreement to move forward smoothly.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.