Account control agreement
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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.