Indemnity in an NDA

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.

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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.

Indemnities in confidentiality agreements

You may conclude, based on the above, than indemnity is not usually justified in a confidentiality agreement. This would be a sound conclusion, but it will not stop uppity counsel for disclosing parties insisting on them — fewer things in the legal world are worse understood, by lawyers, than indemnities.

It is hard enough to establish ordinary contractual damages for breach of a financial markets confidentiality agreement — there is a reason for that mealy-mouthed acknowledgment that “damages may not be an adequate remedy and the discloser may seek equitable relief” — and you may like to challenge your counterparty to give an example of the sort of loss she thinks should plausibly be covered by an indemnity. She’ll struggle.

See also

• Indemnities
• Contractual damages
• Remedies