Template:M intro contract indemnity

Few things are more apt to excite the animal spirits than an indemnity. Once a proud creature of the common law, this noble beast has fallen upon hard times. Instead of prudently allocating unwanted outcomes, these days it is seen, by those who would wield it, as a smart bomb for surgically eliminating evil whilst vouchsafing loved ones to the bosom of the Earth while those asked to indemnify, on the other hand, feel their throats tighten in a manner redolent of the closing stages of a Conrad novel.

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.

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.