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Template:Indemnity description: Difference between revisions
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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 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. | |||
===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: | |||
*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. | |||
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 | |||
{{Box|'''Example''': | {{Box|'''Example''': | ||
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*If A neglects to make the indemnity payment, B has an action in breach of contract.}} | *If A neglects to make the indemnity payment, B has an action in breach of contract.}} | ||
===Claiming under an indemnity=== | |||
For these reasons, an [[indemnified party]] does '''not''' need to prove the [[indemnifying party]] committed a {{tag|breach of contract}}: it need only show that the undesirable "third party" contingency has befallen it, and that it has correctly ascertained amount which the [[indemnifying party]] has indemnified it as a result. | |||
===Liability under an indemnity=== | |||
Since it isn't necessarily triggered by a breach of contract, nor is the value of indemnity necessarily constrained by ordinary contract law principles for ascertaining damages. (That is not to say you don't have to prove loss, though: beware indemnities that look like [[penalty clause]]s.) | |||
Now we have already established that you want to reallocate this risk away from the party who would naturally bear it. That person will ask itself, as should you, could my agreeing to this indemnity, in the immortal words of Cardozo J in [https://en.wikipedia.org/wiki/Ultramares_Corp._v._Touche ''Ultramares Corporation v. Touche''] open the floodgates leading to "liability in an indeterminate amount for an indeterminate time to an indeterminate class"? | |||
Actually a little side bar here: The more open-ended the wording of your indemnity, the more prone the courts are to analogise its extent back to ordinary contractual principals of remoteness of damage - see ''[http://www.olswang.com/articles/2015/03/ocq-mar-2015-indemnities/ Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus)]'' Good note that from Olswang, by the way. | |||
Indemnities are generally viewed as onerous obligations. A request for one will often be met with a sharp intake of breath, particularly from the legal department.<br /> | Indemnities are generally viewed as onerous obligations. A request for one will often be met with a sharp intake of breath, particularly from the legal department.<br /> | ||
===Indemnities and Guarantees=== | |||
An [[indemnity]] is nonetheless a useful back-up to a [[guarantee]] because: | An [[indemnity]] is nonetheless a useful back-up to a [[guarantee]] because: | ||
*The [[Statute of Frauds]] does not apply to an [[indemnity]]. | *The [[Statute of Frauds]] does not apply to an [[indemnity]]. | ||
*The invalidity of an underlying obligation does not invalidate an indemnity. | *The invalidity of an underlying obligation does not invalidate an indemnity. | ||
*Variation of the terms of an underlying obligation will not discharge an [[indemnity]] whereas it might a [[guarantee]] (unless you have a good [[waiver of defences]] clause) <br /> | *Variation of the terms of an underlying obligation will not discharge an [[indemnity]] whereas it might a [[guarantee]] (unless you have a good [[waiver of defences]] clause) <br /> | ||