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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 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.  
===What an indemnity is===
“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 third-party risks two merchants might encounter when faithfully providing one another goods and services.


{{box|An indemnity is nothing more than a contractual promise to pay a defined sum should a pre-agreed circumstance arise.}}
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]]. {{t|Contract}}s 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. 


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.  
[[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, [[aggravated damages]] to compensate for the mental distress of having ones expectation’s cruelly forsaken — in our time of [[snowflake|snowflakery]], undoubtedly a vibrant head of recovery.<ref>But not [[exemplary damages|''exemplary'' damages]], which are not available at contract, [[as any fule kno]].</ref> 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.


Much ignorance.
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 “externalities” we have [[indemnities]]. They allocate these risks ''away from the person on whom they would naturally fall''. One should therefore approach the request for an indemnity, with caution.  


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.
Your first 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 {{t|indemnity}}.  


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.
If it would but it shouldn’t, consider 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 you have no more than a faintly discomfiting sense that [[Chicken Licken|the sky might fall on your head]] when performing the contract, and you want to be indemnified for that, expect a stouter challenge.  


===Why all the anxiety?===
===What a (well-crafted) indemnity is not===
Indemnities are different from contractual promises:
=====An {{tag|indemnity}} is ''not'' “better” than a {{t|contract}}=====
* 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''.  
An {{tag|indemnity}} is no ''better'' than a contractual claim. It ''is'' a contractual claim. It does not have a harsher accounting impact. Its [[regulatory capital|capital]] treatment is the same. You enforce it as you would a [[breach of contract]]: by suing the [[indemnifier]] for its failure to pay the indemnified amount.


The questions in your mind should always be:
Now. Since (if well-crafted) it is a claim to pay a pre-defined (or at any rate [[deterministic]]) sum, proving your claim is not hard: prove you have the contract, prove you’ve suffered the loss and—''that’s it''. A well-crafted indemnity is therefore apt for [[summary judgment]]<ref>[[summary judgment]] is a speedy civil court process where you have have a court award your claim without out all that messy and unpleasant business mucking around calling witnesses and so on.</ref>. But careful, [[Mediocre lawyer|counsel]]: aptness for [[summary judgment]] is not a [[magic]] property of all [[indemnities]]: it depends on how well you have crafted yours.
*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. (and for that matter, the court to grant it to you in any case).


{{Box|'''Example''':
=====An {{tag|indemnity}} does ''not'' require a [[breach of contract]]. In fact they should be ''mutually exclusive''=====
{{indemnity for breach of contract capsule}}
=====An {{tag|indemnity}} is ''not'' (necessarily) of indeterminate scope=====
Nor is a (well-crafted) {{tag|indemnity}} broader or of less determinate scope than any other contractual claim. A good one should have a predictable and reasonable financial consequence: It might be to reimburse taxes or similar unavoidable expenses a merchant incurs in performing the contract, that it would not, but for that contract. The [[Chicken Licken|sky should not fall in]] under the weight of a well-proportioned {{tag|indemnity}}.


A enters a derivative contract with B. To hedge itself B, buys security X. B's investment in X is subject to an unexpected tax charge. A has indemnified B against all tax liabilities arising on its hedging activities.
It is a precision tool to allocate responsibility for a narrow risk, not a [[Weapons of financial mass destruction|weapon of mass destruction]].
*A did not breach the contract
*B does not need to (and indeed cannot) claim breach of contract,
*B can call on the indemnity to require A to make a payment equal to the tax charge under the indemnity.
*If A neglects to make the indemnity payment, B has an action in breach of contract.}}


===Claiming under an indemnity===
===You keep saying “[[well-crafted indemnity|''well-crafted'' 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.
Yes, [[I]] do. This is where things have gone awry. Many latter-day [[indemnities]] are not well-crafted at all. Often they try to catch every contingency under the sun: “any and all losses, costs and damages, howsoever arising, incurred or suffered in diligent performance of the contract”. Magnanimous ones might let the [[indemnifying party]] off those losses caused by the [[indemnified party]]’s [[negligence, fraud or wilful default]], but that’s [[Negligence, fraud or wilful default|another story]].


===Liability under an indemnity===
In any case, such a wide indemnity suggests your counterparty has not grasped the fundamentals of the commercial bargain: [[Indemnities]] are not meant for the ordinary costs of one’s performance of a contract. That is called ''[[consideration]]''. It is why the other fellow is making a bargain with you in the first place. You’re meant to just pay that, and be grateful.
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.)  
 
===What ''are'' fit topics for an indemnity then?===
Indemnities capture unexpected and unwanted possibilities brought about by performance of the contract which ''ought'' not to arise, whose provenance is beyond the [[indemnified party]]’s control, but which ''do''.
 
There are two flavours of these:
*'''Retrospective tax events''': Events that arise from the perfidy of higher powers: changes in law, retrospective taxes, and unbudgeted cost blowouts which are levied on the [[indemnified party]] as a direct result of performing the contract, which it could not reasonably have anticipated or avoided, and which the commercial equity of the situation supports allocating other than where they would naturally fall. In this correspondent’s opinion, that is limited really to retrospectively imposed taxes. Allocation of other un-budgeted costs can be resolved by re-negotiation or termination.
*'''Losses caused by the [[indemnifier]]’s misbehaviour to a third party''': Events that arise though the mendacity — though not actual [[breach of contract]] — of the [[indemnifier]]. These arise where the [[indemnifier]] has given a [[third party]] an interest that, unbeknownst to [[indemnified party]], its honest performance of the [[contract]] somehow abrogates. These a reasonable [[indemnifier]] should not resist, seeing as they are within its gift to prevent.
 
===Liability under an {{tag|indemnity}}===
Since it isn't necessarily triggered by a {{tag|breach of contract}}, nor is the value of [[indemnity]] constrained by ordinary contract law principles for 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"?
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.
Actually a little side bar here: The more open-ended the wording of your indemnity, the more prone the courts are to restrict its extent along the lines of 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. There, the Court of Appeal held that an obligation to pay "any time, costs, delays or loss" ''caused by a party's breach'' only covered losses flowing directly from the breach or that were in the contemplation of the parties when they made the contract.''
 
===The difference between an [[indemnity]] and a [[reimbursement]] obligation===
You will sometimes see indemnities mentioned in the same breath as obligations to “reimburse” extraordinary costs an agent incurs in carrying out services for its client. You might think, based on the discussion above, that the two ideas bear some similarities — albeit that reimbursement obligations seem benign, and indemnities toxic. You would be right about that. They are ''so'' similar that some commentators, including this one, would call them ''identical''.  


{{box|''The Court of Appeal, interpreting the contract as a whole, held that the obligation to pay "any time, costs, delays or loss" caused by a party's breach only covered losses flowing directly from the breach or that were in the contemplation of the parties when they made the contract.''}}
Indeed, calling an indemnity a reimbursement obligation points up the difference between a good one and a bad one quite nicely: compare:
*“You must reimburse me for any taxes I am charged on securities I hold in custody for you” — to which a sensible reaction, is “ok boss; seems fair enough”; with.
*“You must reimburse me for any costs, expenses, foregone profits, lost business opportunities I suffer — on my say so — as a result of carrying out my services for you” — to which a sensible reaction is, “sorry but what planet are you on because it doesn’t resemble any I’ve come across in this arm of the galaxy.”


===Indemnities and Guarantees===
===Indemnities and Guarantees===
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