Indemnity for breach of contract

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An indemnity for breach of contract — a “BOC indemnity” in the Opco Boone adventures — is the sort of thing we really wish we could reduce to a running joke on this wiki, since it is so face-slappingly stupid — but we can’t because it belongs in the category of “face-slappingly stupid things about the legal market that just won’t go away” — which as you all know power and nourish this very wiki site.

So, with feeling:

Indemnities are never appropriate to compensate for a breach of contract. Never.

Like, never ever.

While failing to honour an indemnity claim may be a breach of contract, the circumstances giving rise to an indemnity claim in the first place are not. Indemnities address unwanted externalities that arise from faithful performance of the contract that fall on one party where equity — but not law of the contract — suggests they should fall on the other. An indemnity is simply a contractual technique to mutually reassign such an externality from one party to the other so that the law of contract does require it. That is all.

Thus: if there has been a breach of contract causing a loss, you don’t need an indemnity, because the law of contract already reassigns that externality on the breaching party automatically. This is called “damages for breach of contract”. There are important limitations on one’s liability for breach of contract — questions of causation, remoteness of damage, foreseeability and proof of loss — developed over centuries in the Darwinian crucible of the common law. They are there for the very good reason that, when things turn to vanillesoße, the parties to a contract are certain to disagree about how badly they are wounded and who is at fault. This is a function of their motivated irrationality and conflicting interests.

To claim under a well-crafted indemnity, no breach is required. There is no causation to prove, or value judgment needed about what the loss has been. Recovering for failure to honour a (well-crafted) indemnity is therefore straightforward: You must prove the indemnified liability has arisen, that you have demanded it from indemnifier; and that the indemnifier has not paid it. Hence: summary judgment.

So, friends, do not let your opponents babble about how an indemnity relieves the indemnified party the burden of all that tedious mucking around establishing causation, foreseeability and so on: it does not. If the loss you are seeking to recover is that indeterminate, it is not suitable for an indemnity. Indemnities are designed for identifiable, deterministic sums that require no judgment or evaluation to arrive at. If your indemnity claim requires that kind of thing the court will require you to prove that loss, and — if it arises from breach — the breach and its causation and foreseeability anyway.

The reason — the only reason, readers — a well-crafted indemnity is supposed to be exempt from this kind of enquiry is that it is meant to be a pre-agreed — at least uncontroversially obvious — amount, so there is no need to get into foreseeability, causation, quantum and so on. You did foresee it. You did quantify it: you wrote it into the contract.

Hence, if you are inclined to seek indemnification “for any loss of any type, kind or variety that the indemnified party shall on its own certification suffer” — and there is scarcely a corporate services provider out there who is not — you should not be seeking an indemnity. You should be putting on a tin hat and going with a year’s supply of tinned beans and a musket to sit in an air-raid shelter.

See also

• Indemnity