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:
- If Pledgee instructs Custodian wrongly then:
- If Pledgor loses any money as a result:
- Doubtful Custodian has a contractual breach claim against Pledgee, because it was complicit in the breach. Therefore:
- 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
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