Indemnity: Difference between revisions

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An indemnity is an undertaking by one party (an "'''[[indemnifying party]]'''") to compensate another (an "'''[[indemnified party]]'''") for losses the [[indemnified party]] suffers ''beyond'' those arising as a direct consequence of the [[indemnifying party]]'s failure to perform its obligations under the contract containing the indemnity.
{{essay|contract|indemnity|}}
 
Indemnities are therefore generally viewed as onerous obligations. A request for one will often be met with a sharp intake of breath.
 
===Usage===
They are often used:
*to protect agents and custodians in a transaction who are dealing with assets but do not have principal risk or reward in the transaction, but none the less could be opened to significant liability as a consequence of their role;
*as a means of protecting an [[indemnified party]] against [[consequential loss]] that it could not otherwise recover against the [[indemnifying party]]. 
 
===Scope of losses===
*'''Direct losses as a result of Breach''': Needless to say, an indemnity is '''not''' required from a party to recover direct losses suffered as a result of breach of contract by that party: the innocent party has an ordinary action available for breach of contract.
*'''Other losses suffered by the Indemnified Party: Indemnities may cover "consequential losses" incurred by a party arising out of a breach of contract by the indemnifying party, or they may be quite unrelated to any action of the indemnifying party. However, the latter case opens the indemnifying party up to significant and indeterminate liability and it would be well advised to resist giving such an indemnity.
 
===Common Restrictions===
Generally indemnities are limited to things that are actually in control of the [[indemnifying party]] (and things it is obliged to do under the contract). In the agency context it is reasonable for a principal to indemnify an agent for losses it suffers as a result of non-negligently performing its obligations under the contract upon the instructions of the principal.

Latest revision as of 09:35, 2 September 2024

The basic principles of contract
Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent

Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation
Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee
Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent
Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability
Not contracts: Restitutionquasi-contractquasi-agency

Index: Click to expand:
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Few things are more apt to excite the animal spirits than an indemnity. Once a proud creature of the common law, this noble beast has fallen upon hard times. Instead of prudently allocating unwanted outcomes, these days it is seen, by those who would wield it, as a smart bomb for surgically eliminating evil whilst vouchsafing loved ones to the bosom of the Earth while those asked to indemnify, on the other hand, feel their throats tighten in a manner redolent of the closing stages of a Conrad novel.

Under an indemnity, one party (the “indemnifier”) agrees to pay the other the “indemnified”) an agreed amount should a specified event occur during the contract.[1]

The “events” covered by an indemnity are usually unexpected costs and expenses the indemnified party incurs while performing obligations under the contract, the benefits of which accrue exclusively to the indemnifying party: things like tax charges levied on a custodian relating to assets it holds for its clients. Without an indemnity, the party incurring these costs would just have to wear them. This would be a windfall for the benefiting party.

An indemnity thus creates a payment obligation under the contract where one would not otherwise exist. If the indemnified event occurs and the indemnifier doesn’t pay, the indemnifiee has an action in breach of contract.

And that’s about it. An indemnity gives you a right to sue where, without it, you would not have one.

Indemnity for breach of contract? No, sir.

In any case, indemnities should not, ever, cover losses arising from breach of contract. Like, ever. Anyone who tells you anything different — and in this old salt’s long and grim experience, many people who should know far better will — should be directed to the coat check. Here is why: if the other guy has breached the contract, Q.E.D. you have a right of action under the contract. You don’t need an indemnity. This is self-evidently true. An indemnity claim for a defined amount of money. It requires no proof of breach, causation, or quantification. All of these things are vital to the allocation of losses following breach of contract.

There is, we think, a common misconception amongst eaglery that an indemnity can vouchsafe a claim for breach: that it can, somehow, make recovery under a contract quicker, more certain or more straightforward.

It cannot.

At the limit, a well-crafted indemnity would stipulate a fixed sum payable on breach of contract, regardless of loss, and this the courts would regard as an unenforceable penalty.

See also

References

  1. When you put it like that it sounds rather like a derivative, doesn’t it?