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===Of the Animal Spirits===
Few things are more apt to excite an lawyer’s animal spirits than sight of an [[indemnity]]. Once a proud creature of the common law, in the hands of mediocre lawyers this noble beast has fallen upon hard times. Where once it prudently allocated unwanted outcomes, now the indemnity 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. Those asked to indemnify, on the other hand, feel their throats tighten in a manner redolent of the closing stages of a Conrad novel.
===What an indemnity is===
===What an indemnity is===
Why the excitement, you might ask, for isn’t an indemnity simply a promise to pay a defined sum should pre-agreed circumstances arise?
“Why the excitement,you might ask, “for isn’t an [[indemnity]] simply a promise to pay a defined sum should pre-agreed circumstances arise?” Quite so, if used as the Lords<ref>House of Lords, that is.</ref> intended. For an indemnity is a sensible way — perhaps the only way — to allocate the third-party risks two merchants might encounter when faithfully providing one another goods and services.


Quite so, if used as the Lords<ref>House of Lords, that is.</ref> intended. For an indemnity is a sensible way — perhaps the only way — to allocate the risks of externalities two merchants might encounter when providing one another goods and services.
Now the [[common law]] already has a sophisticated means for allocating losses between the parties to a commercial bargain. It is called the law of [[contract]]. [[Contract]]s are simple things: each party has something the other wants; by contract, they memorialise the willing exchange. Should either side not keep to the bargain, the other may sue.


===What a (well-crafted) indemnity is not===
[[Contractual damages]] are limited only by the depraved imagination of your lawyer: [[loss of bargain]], [[loss of opportunity]], [[consequential loss]], [[tax]]es, [[reputational damage]], [[restitution]], [[hedge]]-breakage costs, [[emotional distress]], [[nervous shock]], (needless to say, but inevitably said) legal costs and, if that is not enough, [[aggravated damages]] to compensate for the mental distress of having ones expectation’s cruelly forsaken — in our time of [[snowflake|snowflakery]], undoubtedly a vibrant head of recovery.<ref>But not [[exemplary damages|''exemplary'' damages]], which are not available at contract, [[as any fule kno]].</ref> Nebulous as they are, such allegations at least require evidence, and the law has developed techniques — [[causation]] and [[remoteness of damage]] — to limit unnecessary excess.
=====It is ''not'' better than a [[contract]]=====
An {{tag|indemnity}} is no ''better'' than a contractual claim. It ''is'' a contractual claim. It does not have a harsher accounting impact. Its [[regulatory capital|capital]] treatment is the same. You enforce it as you would a breach of contract: by suing the [[indemnifier]] for its failure to pay the indemnified amount. Since (if well crafted) it is a claim to pay a pre-defined (or at any rate [[deterministic]]) sum, proving your claim is not hard and a well-crafted indemnity is apt for [[summary judgment]]. But careful, [[Mediocre lawyer|counsel]]: aptness for [[summary judgment]] is not a magic property of all [[indemnities]]: it depends on how well you have crafted yours.


=====It does ''not'' require a breach of contract=====
Now any economist will tell you there can be undesirable consequences of commercial activity, that neither party wants, nor can avoid, even if each keeps faithfully to the bargain. For these “externalities” we have [[indemnities]]. They allocate these risks ''away from the person on whom they would naturally fall''. One should therefore approach the request for an indemnity, with caution.  
Meanwhile, note a point of profound importance. While failing to honour an indemnity claim is a contractual breach, the circumstances giving rise to one is not. One need allege no breach and prove no loss to make a claim under a (well-crafted) indemnity. No [[causation]] is required, no value judgment needed to satisfy the [[indemnifier]] of your bona fides: all you need prove is:
*There is an [[indemnity]]
*The [[indemnified event]] has happened;
*You have calculated the [[indemnified sum]].


Recovering for a failure to honour a (well-crafted) [[indemnity]] is therefore straightforward: You must attest to the above, and the following:
Your first question should always be “''why''”: Why ''shouldn’t'' this loss fall on the fellow who would ordinarily bear it? If it would, and it ''should'', you don’t need an [[indemnity]].  
*You have demanded the [[indemnified sum]] from [[indemnifier]]; and
*The [[indemnifier]] has not paid it.


=====It is not (necessarily) of indeterminate scope=====
If it would but it shouldn’t, consider how well you can articulate the risk and likely loss? If you can describe it with minute precision, all well and good: your counterparty might be minded to accept: if you have no more than a faintly discomfiting sense that [[Chicken Licken|the sky might fall on your head]] when performing the contract, and you want to be indemnified for that, expect a stouter challenge.  
Nor is a (well-crafted) {{tag|indemnity}} broader or of less determinate scope than any other contractual claim. It might be to reimburse taxes incurred in performing the contract, or a similar unavoidable expense that would not arise but for the contract. It should have a predictable financial consequence: an indemnity is a precision tool for a narrow risk, not a weapon of mass destruction. The sky should not fall in under the weight of a well-proportioned {{tag|indemnity}}.


{{box|An indemnity is a precision tool for a narrow risk, not a weapon of mass destruction.}}
===What a (well-crafted) indemnity is not===
=====An [[indemnity]] is ''not'' “better” than a [[contract]]=====
An [[indemnity]] is no ''better'' than a contractual claim. It ''is'' a contractual claim. It does not have a harsher accounting impact. Its [[regulatory capital|capital]] treatment is the same. You enforce it as you would a [[breach of contract]]: by suing the [[indemnifier]] for its failure to pay the indemnified amount.


====Many indemnities aren’t very well-crafted at all====
Now. Since (if well-crafted) it is a claim to pay a pre-defined (or at any rate [[deterministic]]) sum, proving your claim is not hard: prove you have the contract, prove you’ve suffered the loss and—''that’s it''. A well-crafted indemnity is therefore apt for [[summary judgment]]<ref>[[summary judgment]] is a speedy civil court process where you have have a court award your claim without out all that messy and unpleasant business mucking around calling witnesses and so on.</ref>. But careful, [[Mediocre lawyer|counsel]]: aptness for [[summary judgment]] is not a [[magic]] property of all [[indemnities]]: it depends on how well you have crafted yours.
But this is where things have gone awry. Many latter-day indemnities are not articulated this way. It is common for indemnities to catch every contingency under the sun: The indemnifier is asked to cover “any and all losses, costs and damages, howsoever arising, incurred or suffered in diligent performance of the contract”. (An [[indemnified party]] showing uncommon largesse might let the [[indemnifier]] off those losses caused by its own [[negligence, fraud or wilful default]], but that’s another whole story.)


In any case, if you’re asked for something as mad as that, refuse, for it implies your counterpart has not grasped the fundamentals of a commercial bargain: shouldering the losses and costs naturally arising from the diligent performance of contractual obligations — the ordinary vicissitudes of one’s day-to-day commercial existence, that is to say — well, it’s kind of the point. That is why you’re even at the table.  
=====An [[indemnity]] does ''not'' require a [[breach of contract]]. In fact they should be ''mutually exclusive''=====
{{indemnity for breach of contract capsule}}
=====An [[indemnity]] is ''not'' (necessarily) of indeterminate scope=====
Nor is a (well-crafted) [[indemnity]] broader or of less determinate scope than any other contractual claim. A good one should have a predictable and reasonable financial consequence: It might be to reimburse taxes or similar unavoidable expenses a merchant incurs in performing the contract, that it would not, but for that contract. The [[Chicken Licken|sky should not fall in]] under the weight of a well-proportioned [[indemnity]].  


[[Indemnities]] are not meant for that.
It is a precision tool to allocate responsibility for a narrow risk, not a [[Weapons of financial mass destruction|weapon of mass destruction]].


====What are fit topics for an indemnity then?====
===You keep saying “[[well-crafted indemnity|''well-crafted'' indemnity]]”===
Yes, [[I]] do. This is where things have gone awry. Many latter-day [[indemnities]] are not well-crafted at all. Often they try to catch every contingency under the sun: “any and all losses, costs and damages, howsoever arising, incurred or suffered in diligent performance of the contract”. Magnanimous ones might let the [[indemnifying party]] off those losses caused by the [[indemnified party]]’s [[negligence, fraud or wilful default]], but that’s [[Negligence, fraud or wilful default|another story]].
 
In any case, such a wide indemnity suggests your counterparty has not grasped the fundamentals of the commercial bargain: [[Indemnities]] are not meant for the ordinary costs of one’s performance of a contract. That is called ''[[consideration]]''. It is why the other fellow is making a bargain with you in the first place. You’re meant to just pay that, and be grateful.
 
===What ''are'' fit topics for an indemnity then?===
Indemnities capture unexpected and unwanted possibilities brought about by performance of the contract which ''ought'' not to arise, whose provenance is beyond the [[indemnified party]]’s control, but which ''do''.  
Indemnities capture unexpected and unwanted possibilities brought about by performance of the contract which ''ought'' not to arise, whose provenance is beyond the [[indemnified party]]’s control, but which ''do''.  


There are two flavours of these:
There are two flavours of these:
*'''Retrospective tax events''': Events that arise from the perfidy of higher powers: changes in law, retrospective taxes, and unbudgeted cost blowouts which are levied on the [[indemnified party]] as a direct result of performing the contract, which it could not reasonably have anticipated or avoided, and which the commercial equity of the situation supports allocating other than where they would naturally fall. In this correspondent’s opinion, that is limited really to retrospectively imposed taxes. Allocation of other un-budgeted costs can be resolved by re-negotiation or termination.
*'''Retrospective tax events''': Events that arise from the perfidy of higher powers: changes in law, retrospective taxes, and unbudgeted cost blowouts which are levied on the [[indemnified party]] as a direct result of performing the contract, which it could not reasonably have anticipated or avoided, and which the commercial equity of the situation supports allocating other than where they would naturally fall. In this correspondent’s opinion, that is limited really to retrospectively imposed taxes. Allocation of other un-budgeted costs can be resolved by re-negotiation or termination.
*'''Losses caused by the [[indemnifier]]’s malfeasance to a third party''': Events that arise though the mendacity — though not actual breach of contract — of the [[indemnifier]]. These arise where the [[indemnifier]] has given a third party an interest that, unbeknownst to [[indemnified party]], its honest performance of the contract somehow abrogates. These a reasonable [[indemnifier]] should not resist, seeing as they are within its gift to prevent, even though it has not directly breached the contract.
*'''Losses caused by the [[indemnifier]]’s misbehaviour to a third party''': Events that arise though the mendacity — though not actual [[breach of contract]] — of the [[indemnifier]]. These arise where the [[indemnifier]] has given a [[third party]] an interest that, unbeknownst to [[indemnified party]], its honest performance of the [[contract]] somehow abrogates. These a reasonable [[indemnifier]] should not resist, seeing as they are within its gift to prevent.


====How is an indemnity different from a breach of contract?====
===Liability under an [[indemnity]]===
Contracts are simple things: each party has something the other wants; by contract, they memorialise their willing exchange. And, should you fail to keep up your end of a bargain, your counterpart must have a means of redress. This is a claim for [[breach of contract]]. However plain your promise, the theoretical extent of the loss you cause should you fail to keep to it is limited only by the depraved imagination of the opposing lawyer: loss of bargain, hedge break costs, lost opportunity, [[consequential loss]], taxes, reputational damage, [[restitution]], emotional distress, nervous shock, (needless to say, but inevitably said) legal costs and even [[exemplary damages]] to punish you for your high-handed and contumelious disregard for another merchant’s reasonable commercial expectations.
Since it isn't necessarily triggered by a [[breach of contract]], nor is the value of [[indemnity]] constrained by ordinary contract law principles for damages. (That is not to say you don't have to prove loss, though: beware indemnities that look like [[penalty clause]]s.)


These things have a nebulous air to them. They will require evidence: claim and counterclaim, examination and cross, and the law has developed techniques — principally [[causation]] and [[remoteness of damage]] — to limit unnecessary excess. But in general note this: the parties to a contract expect to carry out their respective parts of the bargain: it would be a perfidious contractor who did not. No-one enters a contract planning to sue on it. The difficulties in proving your claim are thus counterbalanced against the general expectation that, a merchant's word being its bond, it will be a glum day when you have to do so.
Now we have already established that you want to reallocate this risk away from the party who would naturally bear it. That person will ask itself, as should you, could my agreeing to this indemnity, in the immortal words of Cardozo J in [https://en.wikipedia.org/wiki/Ultramares_Corp._v._Touche ''Ultramares Corporation v. Touche'']  open the floodgates leading to "liability in an indeterminate amount for an indeterminate time to an indeterminate class"?


But, as economists will tell you, there can be undesirable consequences of commercial activity: outcomes that neither party wants, nor can avoid, even if each keeps faithfully to its side of the bargain. For these contingencies we have indemnities. Indemnities compensate for losses that do not arise from ''breach'' of contract, ''but from faithful performance of it''. They address a contingency that ''neither'' party wants: An unexpected financial loss; legal action by a third party against one or other party to the contract as a result of its performance. Indemnities allocate these unwanted, "third party" risks ''away from the person on whom they would naturally fall''.
Actually a little side bar here: The more open-ended the wording of your indemnity, the more prone the courts are to restrict its extent along the lines of ordinary contractual principals of remoteness of damage - see ''[http://www.olswang.com/articles/2015/03/ocq-mar-2015-indemnities/ Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus)]'' Good note that from Olswang, by the way. There, the Court of Appeal held that an obligation to pay "any time, costs, delays or loss" ''caused by a party's breach'' only covered losses flowing directly from the breach or that were in the contemplation of the parties when they made the contract.''


{{box|The example ''par excellence'':
===The difference between an [[indemnity]] and a [[reimbursement]] obligation===
You will sometimes see indemnities mentioned in the same breath as obligations to “reimburse” extraordinary costs an agent incurs in carrying out services for its client. You might think, based on the discussion above, that the two ideas bear some similarities — albeit that reimbursement obligations seem benign, and indemnities toxic. You would be right about that. They are ''so'' similar that some commentators, including this one, would call them ''identical''.


''Unexpected taxes imposed on a custodian in the course of holding securities for its client.''
Indeed, calling an indemnity a reimbursement obligation points up the difference between a good one and a bad one quite nicely: compare:
 
*“You must reimburse me for any taxes I am charged on securities I hold in custody for you” — to which a sensible reaction, is “ok boss; seems fair enough”; with.
The tax is no-one's fault. It could not be avoided. Because of the nature of the contract, it falls on the service provider, not the beneficiary of the service. It is easily quantifiable.}}
*“You must reimburse me for any costs, expenses, foregone profits, lost business opportunities I suffer — on my say so — as a result of carrying out my services for you” — to which a sensible reaction is, “sorry but what planet are you on because it doesn’t resemble any I’ve come across in this arm of the galaxy.
 
====You keep saying "if properly crafted"====
Yes, I do.
 
===Why all the anxiety?===
The questions in your mind should always be:
*Why shouldn't this loss fall on the party who would, under settled legal principles, ordinary bear it? If it should, and it would, you don’t need an indemnity.
*How open-ended is the loss likely to be? The more open ended the loss, the harder a job you will have persuading the other guy to wear it. (and for that matter, the court to grant it to you in any case).
 
{{Box|'''Example''':
 
A enters a derivative contract with B. To hedge itself B, buys security X. B's investment in X is subject to an unexpected tax charge. A has indemnified B against all tax liabilities arising on its hedging activities.
*A did not breach the contract
*B does not need to (and indeed cannot) claim breach of contract,
*B can call on the indemnity to require A to make a payment equal to the tax charge under the indemnity.
*If A neglects to make the indemnity payment, B has an action in breach of contract.}}
 
===Claiming under an indemnity===
For these reasons, an [[indemnified party]] does '''not''' need to prove the [[indemnifying party]] committed a {{tag|breach of contract}}: it need only show that the undesirable  "third party" contingency has befallen it, and that it has correctly ascertained amount which the [[indemnifying party]] has indemnified it as a result.
 
===Liability under an indemnity===
Since it isn't necessarily triggered by a breach of contract, nor is the value of indemnity necessarily constrained by ordinary contract law principles for ascertaining damages. (That is not to say you don't have to prove loss, though: beware indemnities that look like [[penalty clause]]s.)
 
Now we have already established that you want to reallocate this risk away from the party who would naturally bear it. That person will ask itself, as should you, could my agreeing to this indemnity, in the immortal words of Cardozo J in [https://en.wikipedia.org/wiki/Ultramares_Corp._v._Touche ''Ultramares Corporation v. Touche'']  open the floodgates leading to "liability in an indeterminate amount for an indeterminate time to an indeterminate class"?
 
Actually a little side bar here: The more open-ended the wording of your indemnity, the more prone the courts are to analogise its extent back to ordinary contractual principals of remoteness of damage - see ''[http://www.olswang.com/articles/2015/03/ocq-mar-2015-indemnities/ Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus)]'' Good note that from Olswang, by the way.
 
{{box|''The Court of Appeal, interpreting the contract as a whole, held that the obligation to pay "any time, costs, delays or loss" caused by a party's breach only covered losses flowing directly from the breach or that were in the contemplation of the parties when they made the contract.''}}


===Indemnities and Guarantees===
===Indemnities and Guarantees===
Line 85: Line 56:
*The invalidity of an underlying obligation does not invalidate an indemnity.
*The invalidity of an underlying obligation does not invalidate an indemnity.
*Variation of the terms of an underlying obligation will not discharge an [[indemnity]]  whereas it might a [[guarantee]] (unless you have a good [[waiver of defences]] clause) <br />
*Variation of the terms of an underlying obligation will not discharge an [[indemnity]]  whereas it might a [[guarantee]] (unless you have a good [[waiver of defences]] clause) <br />
{{ref}}

Latest revision as of 13:30, 14 August 2024

What an indemnity is

“Why the excitement,” you might ask, “for isn’t an indemnity simply a promise to pay a defined sum should pre-agreed circumstances arise?” Quite so, if used as the Lords[1] intended. For an indemnity is a sensible way — perhaps the only way — to allocate the third-party risks two merchants might encounter when faithfully providing one another goods and services.

Now the common law already has a sophisticated means for allocating losses between the parties to a commercial bargain. It is called the law of contract. Contracts are simple things: each party has something the other wants; by contract, they memorialise the willing exchange. Should either side not keep to the bargain, the other may sue.

Contractual damages are limited only by the depraved imagination of your lawyer: loss of bargain, loss of opportunity, consequential loss, taxes, reputational damage, restitution, hedge-breakage costs, emotional distress, nervous shock, (needless to say, but inevitably said) legal costs and, if that is not enough, aggravated damages to compensate for the mental distress of having ones expectation’s cruelly forsaken — in our time of snowflakery, undoubtedly a vibrant head of recovery.[2] Nebulous as they are, such allegations at least require evidence, and the law has developed techniques — causation and remoteness of damage — to limit unnecessary excess.

Now any economist will tell you there can be undesirable consequences of commercial activity, that neither party wants, nor can avoid, even if each keeps faithfully to the bargain. For these “externalities” we have indemnities. They allocate these risks away from the person on whom they would naturally fall. One should therefore approach the request for an indemnity, with caution.

Your first question should always be “why”: Why shouldn’t this loss fall on the fellow who would ordinarily bear it? If it would, and it should, you don’t need an indemnity.

If it would but it shouldn’t, consider how well you can articulate the risk and likely loss? If you can describe it with minute precision, all well and good: your counterparty might be minded to accept: if you have no more than a faintly discomfiting sense that the sky might fall on your head when performing the contract, and you want to be indemnified for that, expect a stouter challenge.

What a (well-crafted) indemnity is not

An indemnity is not “better” than a contract

An indemnity is no better than a contractual claim. It is a contractual claim. It does not have a harsher accounting impact. Its capital treatment is the same. You enforce it as you would a breach of contract: by suing the indemnifier for its failure to pay the indemnified amount.

Now. Since (if well-crafted) it is a claim to pay a pre-defined (or at any rate deterministic) sum, proving your claim is not hard: prove you have the contract, prove you’ve suffered the loss and—that’s it. A well-crafted indemnity is therefore apt for summary judgment[3]. But careful, counsel: aptness for summary judgment is not a magic property of all indemnities: it depends on how well you have crafted yours.

An indemnity does not require a breach of contract. In fact they should be mutually exclusive

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.[4]

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.

An indemnity is not (necessarily) of indeterminate scope

Nor is a (well-crafted) indemnity broader or of less determinate scope than any other contractual claim. A good one should have a predictable and reasonable financial consequence: It might be to reimburse taxes or similar unavoidable expenses a merchant incurs in performing the contract, that it would not, but for that contract. The sky should not fall in under the weight of a well-proportioned indemnity.

It is a precision tool to allocate responsibility for a narrow risk, not a weapon of mass destruction.

You keep saying “well-crafted indemnity

Yes, I do. This is where things have gone awry. Many latter-day indemnities are not well-crafted at all. Often they try to catch every contingency under the sun: “any and all losses, costs and damages, howsoever arising, incurred or suffered in diligent performance of the contract”. Magnanimous ones might let the indemnifying party off those losses caused by the indemnified party’s negligence, fraud or wilful default, but that’s another story.

In any case, such a wide indemnity suggests your counterparty has not grasped the fundamentals of the commercial bargain: Indemnities are not meant for the ordinary costs of one’s performance of a contract. That is called consideration. It is why the other fellow is making a bargain with you in the first place. You’re meant to just pay that, and be grateful.

What are fit topics for an indemnity then?

Indemnities capture unexpected and unwanted possibilities brought about by performance of the contract which ought not to arise, whose provenance is beyond the indemnified party’s control, but which do.

There are two flavours of these:

  • Retrospective tax events: Events that arise from the perfidy of higher powers: changes in law, retrospective taxes, and unbudgeted cost blowouts which are levied on the indemnified party as a direct result of performing the contract, which it could not reasonably have anticipated or avoided, and which the commercial equity of the situation supports allocating other than where they would naturally fall. In this correspondent’s opinion, that is limited really to retrospectively imposed taxes. Allocation of other un-budgeted costs can be resolved by re-negotiation or termination.
  • Losses caused by the indemnifier’s misbehaviour to a third party: Events that arise though the mendacity — though not actual breach of contract — of the indemnifier. These arise where the indemnifier has given a third party an interest that, unbeknownst to indemnified party, its honest performance of the contract somehow abrogates. These a reasonable indemnifier should not resist, seeing as they are within its gift to prevent.

Liability under an indemnity

Since it isn't necessarily triggered by a breach of contract, nor is the value of indemnity constrained by ordinary contract law principles for damages. (That is not to say you don't have to prove loss, though: beware indemnities that look like penalty clauses.)

Now we have already established that you want to reallocate this risk away from the party who would naturally bear it. That person will ask itself, as should you, could my agreeing to this indemnity, in the immortal words of Cardozo J in Ultramares Corporation v. Touche open the floodgates leading to "liability in an indeterminate amount for an indeterminate time to an indeterminate class"?

Actually a little side bar here: The more open-ended the wording of your indemnity, the more prone the courts are to restrict its extent along the lines of ordinary contractual principals of remoteness of damage - see Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus) Good note that from Olswang, by the way. There, the Court of Appeal held that an obligation to pay "any time, costs, delays or loss" caused by a party's breach only covered losses flowing directly from the breach or that were in the contemplation of the parties when they made the contract.

The difference between an indemnity and a reimbursement obligation

You will sometimes see indemnities mentioned in the same breath as obligations to “reimburse” extraordinary costs an agent incurs in carrying out services for its client. You might think, based on the discussion above, that the two ideas bear some similarities — albeit that reimbursement obligations seem benign, and indemnities toxic. You would be right about that. They are so similar that some commentators, including this one, would call them identical.

Indeed, calling an indemnity a reimbursement obligation points up the difference between a good one and a bad one quite nicely: compare:

  • “You must reimburse me for any taxes I am charged on securities I hold in custody for you” — to which a sensible reaction, is “ok boss; seems fair enough”; with.
  • “You must reimburse me for any costs, expenses, foregone profits, lost business opportunities I suffer — on my say so — as a result of carrying out my services for you” — to which a sensible reaction is, “sorry but what planet are you on because it doesn’t resemble any I’ve come across in this arm of the galaxy.”

Indemnities and Guarantees

An indemnity is nonetheless a useful back-up to a guarantee because:

  1. House of Lords, that is.
  2. But not exemplary damages, which are not available at contract, as any fule kno.
  3. summary judgment is a speedy civil court process where you have have a court award your claim without out all that messy and unpleasant business mucking around calling witnesses and so on.
  4. Note, also, that summary judgment is available for certain contractual breaches: Specifically, failures to pay a specified sum, where the obligation to pay can be proved by contract, and the failure to pay can be proven by affidavit. No real question of witness credibility arises.