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In an attorney's miserable existence, few things are more apt to excite the animal spirits than the request of an indemnity. Yet an indemnity is nothing more than a contractual promise to pay a defined sum should a pre-agreed circumstance - not being a breach of contract - arise. If used | In an attorney's miserable existence, few things are more apt to excite the animal spirits than the request of an indemnity. Yet an indemnity is nothing more than a contractual promise to pay a defined sum should a pre-agreed circumstance - not being a breach of contract - arise. If used as the law lords intended, it can be a sensible way to allocate third-party risks that parties take on in agreeing to provide services to each other. | ||
{{box| | {{box|An indemnity is nothing more than a contractual promise to pay a defined sum should a pre-agreed circumstance arise.}} | ||
But the indemnity has suffered a bit of continental drift | But the indemnity has suffered a bit of continental drift at the hands of inexpert lawyers. An indemnity is now seen, by those who believe they're entitled to one, as a kind of smart bomb that will assassinate all evil, whilst vouchsafing loved ones to the bosom of the Earth. To those asked to provide one, on the other hand, an indemnity has the hue of the closing stages of a Joseph Conrad novel. There is much misapprehension. Much Horror. Much Fear. Much Loathing. | ||
Much ignorance. | |||
Of itself, an {{tag|indemnity}} isn't ''better'' than a contractual claim. It ''is'' a contractual claim. You enforce it by taking legal action for breach of contract: namely, the indemnitor's failure to pay the indemnity amount. Since (if you've crafted it correctly) it is a claim to pay a pre-agreed sum, you don't need to prove your loss: all you need to prove is that the indemnified circumstances have happened. There is no loss to prove; no causation; no breach by the indemnitor (other than its failure to pay. A well-crafted indemnity is therefore apt for summary judgment. | |||
An indemnity ''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, though, thanks to the continental drift, some indemnities are crafted to catch everything under the sun. They shouldn't be. Indemnities are precision tools for narrow risks. They are not weapons of mass destruction. The sky should not fall in under the weight of a well-proportioned indemnity. | |||
===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''. | Indemnities are different from contractual promises: | ||
* 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: | The questions in your mind should always be: | ||