Template:Indemnity description: Difference between revisions

“Why the excitement,” you might ask, “for isn’t an [[indemnity]] simply a promise to pay a defined sum should pre-agreed circumstances arise?” Quite so, if used as the Lords<ref>House of Lords, that is.</ref> intended. For an indemnity is a sensible way — perhaps the only way — to allocate the risks of [[externalities]] two merchants might encounter when faithfully providing one another goods and services.

Now the [[common law]] already has a sophisticated means for allocating losses between the parties to a commercial bargain. It is called the law of [[contract]]. Contracts are simple things: each party has something the other wants; by contract, they memorialise the willing exchange. Should either side not keep to the bargain, the other may sue.   

Contractual damages are limited only by the depraved imagination of your lawyer: [[loss of bargain]], [[loss of opportunity]], [[consequential loss]], [[tax]]es, [[reputational damage]], [[restitution]], [[hedge]]-breakage costs, [[emotional distress]], [[nervous shock]], (needless to say, but inevitably said) legal costs and, if that is not enough, [[exemplary damages]] to punish your contumelious disregard for your opponent’s commercial expectations. Nebulous as they are, such allegations at least require evidence, and the law has developed techniques — [[causation]] and [[remoteness of damage]] — to limit unnecessary excess.

So much for breach. Now any economist will tell you there can be undesirable consequences of commercial activity, that neither party wants, nor can avoid, even if each keeps faithfully to the bargain. For these contingencies we have indemnities. They allocate these unwanted, "third party" risks ''away from the person on whom they would naturally fall''. One should approach the request for an indemnity, therefore, with a cautious air. Your uppermost question should always be “''why''”? Why shouldn't this loss fall on the fellow who would ordinarily bear it? If it would, and it should, you don’t need an indemnity.

If you are still persuaded you do, how well you can articulate the risk and likely loss? If you can describe it with minute precision, all well and good — your counterparty might be minded to accept: if it is no more than a faintly discomfiting sense that [[Chicken Licken|the sky might fall on your head]], expect a stouter challenge.