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Indemnities are nothing more than a contractual promises to pay an ascertainable amount of money should a defined circumstance arise, but boy do people get bent out of shape about them. There is much misapprehension. Much Fear. Much Loathing. Much ignorance. | |||
An indemnity isn't better than a contractual right of suit. It isn't quicker. It doesn't have different accounting or capital consequences. It isn't, of itself, more severe. Nor is it inherently more broad or of less determinate scope. The sky won't fall in if you give an indemnity. It won't fall in if you don't get one from your counterparty either. | An {{tag|indemnity}} ''isn't'' better than a contractual right of suit. It ''isn't'' quicker. It ''doesn't'' have different accounting or capital consequences. It ''isn't'', of itself, more severe. Nor is it inherently more broad or of less determinate scope. The sky won't fall in if you give an indemnity. It won't fall in if you don't get one from your counterparty either. | ||
At its extremity you can only enforce an indemnity by taking legal action for breach of contract: namely the failure to pay under an indemnity claim. | At its extremity you can only enforce an indemnity by taking legal action for breach of contract: namely the failure to pay under an indemnity claim. | ||
===Why all the anxiety?=== | ===Why all the anxiety?=== | ||
Unlike most contractual promises, an indemnity addresses a contingency that ''neither'' party wants: An unexpected financial loss; an adverse change in tax treatment; the commencement of legal action by a third party against one or other party to the contract as a result of its performance. It allocates these unwanted, potentially unquantifiable, "third party" risks ''away from the person on whom they would naturally fall''. The questions in your mind should always be: | Unlike most contractual promises, an indemnity addresses a contingency that ''neither'' party wants: An unexpected financial loss; an adverse change in tax treatment; the commencement of legal action by a third party against one or other party to the contract as a result of its performance. It allocates these unwanted, potentially unquantifiable, "third party" risks ''away from the person on whom they would naturally fall''. | ||
The questions in your mind should always be: | |||
*Why shouldn't this loss fall on the party who would, under settled legal principles, ordinary bear it? If it should, and it would, you don't need an indemnity. | *Why shouldn't this loss fall on the party who would, under settled legal principles, ordinary bear it? If it should, and it would, you don't need an indemnity. | ||
*How open-ended is the loss likely to be? The more open ended the loss, the harder a job you will have persuading the other guy to wear it. | *How open-ended is the loss likely to be? The more open ended the loss, the harder a job you will have persuading the other guy to wear it. | ||