Template:Currency indemnity capsule

A currency indemnity is a part of the boilerplate that is so deeply entrenched, — that passeth so much understanding — that generations of legal eagles have just abided by it, never asking what it is or why it is there. It just is. You will find them in ISDAs, loans, bonds, repacks — in fact sprayed wordily over any kind of financial instrument; a kind of comfy textual furniture to make it all seem serious and important.

In a nutshell: roll with it

So if you are in a hurry, stop there: it is fine; leave it; carry on. This is what most people do.

Do not expect much by way of negotiation on a currency indemnity (among others, for the same reason, that no-one else knows what it is for either).

If you remain curious despite this warning off

For those with the time and deep natural curiosity, or who are vexed about the “i” word, this is what it is all about.

Say I borrow from you in in euros. Being an OG in the international capital markets, my business will truck in incomings in all kinds of flakey currencies, but I still covenant, of course, to repay you in euros. That is my resting, fundamental contractual obligation.

Now, being an OG, I will of course have a sophisticated treasury function to watch lovingly over my assets, liabilities and obligations and cash position, and they will diligently execute such hedges and perform such currency conversions as I need to pay the principal and interest I owe you and any other of my creditors. It is their job to make sure I have sufficient euros to do it.

That much should not really be a surprise: I borrow in euros, I repay in euros. End of.

All this goes out the window if I go titten hoch, though. At this point my treasury team would find it hard to execute the necessary hedges and conversions, even if they weren’t wandering around, dazed, outside the building, woozily clutching Iron Mountain boxes full of gonks, deal toys, tombstones, pilfered stationery and personal effects. But they will be. This is the whole of the law.

Now the receivers and administrators will be in, busily calling in, converting and collecting my remaining assets, cash balances and figuring out how to best sort out creditors, of which you are one. These might not all be in euros, me being a capital markets OG and everything. So there is a disaster scenario in which a failed, or failing, debtor — me — has no euros and instead offers up cash in non-contractual currencies, by way of full or partial satisfaction of what I owe.

No, that isn’t what the contract preferred, but it is a fact of life, so the contract allows it. That is what the currency indemnity does. It gudgingly, grants that this sort of thing can happen and puts some parameters around what goes down in such a case.

Components of a normal currency indemnity

This will boil down to the following:

Limited discharge: A non-contractual currency will only discharge the debt to the value in the contractual currency that the creditor achieves by converting it into the contractual currency in the market on reasonable terms.

No prejudice re the shortfall: If there is a shortfall, the debtor remains immediately liable for the balance: that is, the partial payment in the non-contractual currency doesn’t somehow hamstring the creditor’s legal rights to go after the rest

Reimburse excess: If there is an excess — happy days, right? — the creditor should promptly return it. Ie the non-currency payment is only am unconditional payment to the extent of the debt. This is quite a complicated ontological concept which it is best not to think about, so call this an absolute payment with a contingent reimbursement right.

Court judgments: If you are imprudent to litigate with a capital markets OG in its own jurisdiction, and you are awarded damages in a non-contractual currency (the JC is no litigator but is given to understand local courts can do this sort of thing, whether the victor likes it or not), then the same issue arises, and it is treated the same way.

Separate indemnities: Just to bring home the point, if accepting the non-contractual currency does somehow operate to undermine or waive the primary obligation to pay in full in the contractual currency, then the obligations created by the currency indemnity clause stand as separate indemnity payments. (This, by the way, is “indemnity” in its narrow sense, as “a unilateral obligation to pay a defined sum of money not by way of recompense or damages for some other failure, but just because you have agreed to pay it” and not in its “Help! Help! We are all going to die under a Cardozan excess of indeterminate liability” sense.) This is probably most important in the context of judgment debts, where the debtor might (rightly) complain that it had no choice but to pay in the local currency, and therefore try to argue that that local currency judgment, if paid in full, should discharge the debt ad to hell with the vagaries of the foreign exchange markets. The currency indemnity should put, er, paid to that argument by constructing an entirely independent obligation to pay the balance.

No requirement to actually convert: You may see a rider, as in the ISDA, that one should not have to actually convert the currency you received at a loss to prove a loss: it is okay to keep your money in the tendered currency and not crystallise the position.