Indemnity rebuttal

See also

• Indemnity
• Negligence, fraud or wilful default

This is what we can agree to:

such liabilities as the Principal may reasonably incur in carrying out its obligations and exercising its rights under the agreement (beyond its ordinary costs of doing so), which it could not reasonably have avoided and that do not arise from its own negligence, wilful default or fraud, and any reasonable costs of mitigating or defending them.

Indemnity for all costs and expenses

You have asked us to indemnify you for all your costs, expenses and losses incurred in your performance of the contract. This is too wide. This includes your costs of doing business: your rental, your labour costs, even, conceivably, your employees’ drycleaning. These are not for us to bear.

• In preparing your fees for these services you are estimating what you consider to be the ordinary costs of your doing this business, adding on a sufficient margin, and quoting a fixed price. That is your end of the bargain.
• By inserting this indemnity, you are effectively asking to be let out of your bargain if it transpires you have underestimated your own costs. This is not acceptable: it incentivises you to lowball on your fees, safe in the knowledge that you can effectively re-price once you’ve won the contract should it transpire you got the pricing wrong. *It also means the true cost to us of this contract is obscured at exactly the point in time we need to know it: when we are committing to contractual terms. There is an argument that such a wide indemnity undermines your consideration and the enforceability of the contract altogether.
• Indemnities are meant to capture specific, unexpected, out-of-the-ordinary, costs which arise during the course of the relationship which:

1. You suffer as a result of performing the contract, and I do not;
2. You would not have incurred at all had you not been performing services for us under this specific contract,
3. You could not have anticipated or factored into your calculations when quoting your fees
4. You derive no benefit from, such that the benefit which accrues solely to us: for example, unexpected taxes on security holdings.

Only costs of this nature are suitable for an indemnity. So yes, we do insist on calling these “extraordinary expenses”, or “costs not arising in the ordinary course of business”

Indemnity for breach of contract

• The appropriate remedy for a breach of contract is an action in contract for damages resulting from that breach.

• such an action would be bounded by requirements to prove breach, loss, causation, and foreseeability/proximity of damage.
• Foreseeability and causation in particular play an important role in limiting indeterminate liabilities.

• An Indemnity is contractual agreement to pay a sum of money in pre-defined circumstances. It does not require breach of a contract. Thus, considerations of breach, loss, quantum, causation, and proximity do not apply. An indemnity may give rise to indeterminate and potentially unlimited liabilities. Hence indemnities should be tightly constrained.
• There is no good reason to suppose that the ordinary law of contract is inadequate to properly compensate you for our failure to perform our contract.
• On the other hand, there are good grounds to fear that an indemnity for breaches of contract may significantly aggravate our risk in entering the contract.