Account control agreement

Why would you indemnify the Custodian for actions it takes under an account control agreement?

The logic runs something like this:

• Custodian is in the middle. It has no skin in the game.
• If there’s an enforcement event and Pledgee wants to take control of the collateral:
  • Things will be moving super-fast
  • Pledgee will want Custodian to act quickly and to not stand on ceremony.
• If Pledgee instructs Custodian wrongly then:
  • Pledgee is in the wrong (Q.E.D.)
  • Pledgee benefits, because Custodian does what it wants and Pledgee gets the collateral
  • Pledgor loses, because Custodian does what Pledgee wants and Pledgee gets the collateral
  • Custodian is arguably complicit in Pledgee's wrongdoing, but
    • Pledgee started it;
    • Custodian has no skin in the game;
    • Custodian may well have no knowledge one way or another;
    • Things will be moving super-fast.
• If Pledgor loses any money as a result:
  • The Pledgor has an open-and-shut action against Custodian (Q.E.D.)
  • The Pledgor has no action against Pledgee.
• Doubtful Custodian has a contractual breach claim against Pledgee, because it was complicit in the breach. Therefore:
  • Custodian can only recover against Pledgee by way of indemnity – since Pledgee hasn't breached.
  • Practically if Pledgee doesn’t give the indemnity, expect two consequences:
    • Custodian will refuse point blank to follow Pledgee's instructions to take control, or
    • Custodian will insist on an indemnity from Pledgee anyway before taking any action.
• Pledgee can control the liability under the indemnity easily:
  • Don’t take control of the collateral when it is not entitled to
  • The liability is in any case determinate – it is the contractual damages that the Pledgor can claim from Custodian as a result.
    • Assuming Pledgee doesn’t go bust, Pledgee can return the collateral and maybe suffer some buy in costs but that’s realistically it.
    • Pledgee would have exactly the same liability if it held the collateral itself as Custodian and didn’t return it when Pledgor was entitled to it.

see also

• Custodian
• Indemnity

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