Why the characterisation decides everything
Where an indemnity operates as a debt claim - typically because it relates to a specified sum on a specified event - the rules on causation, remoteness, and mitigation do not apply. The indemnified party recovers pound for pound, without proving foreseeability or efforts to minimise loss. Where the indemnity covers unspecified, general losses, a court may instead treat it as a damages claim, importing all those limits.
So the same word - indemnity - can carry very different consequences depending on how the obligation is framed.
The debt principle: ABN Amro
In ABN Amro Commercial Finance Plc v McGinn [2014] EWHC 1674 (Comm), the court treated the directors' indemnities as primary obligations - debts - not secondary, guarantee-type liabilities. Flaux J put the principle directly: a party providing an indemnity cannot challenge its obligation to pay under what is a claim in debt by reference to the principles on assessing damages, which have no application to debts.
Where the indemnity is a debt, the indemnifier simply owes the money once the trigger occurs. That is the advantage practitioners assume indemnities always have - but it depends on the obligation being a debt.
When an indemnity is treated as damages
The advantage is not guaranteed. Where an indemnity covers general or unspecified losses, courts may treat it as giving rise to damages. In Durley House Ltd v Firmdale Hotels plc [2014] EWHC 2608 (Ch), the court approached the indemnity in damages terms and stressed that contracts should spell out how the indemnity operates - to whom, when, and how payment is made.
And remoteness is not automatically irrelevant. In Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus) [1998] 1 Lloyd's Rep 351, the Court of Appeal held there is no rule that an indemnity recovers losses regardless of foreseeability; whether remoteness applies depends on the drafting.
The covenant-to-pay solution: AXA
The safest way to secure debt treatment is to draft a covenant to pay rather than a general indemnity. In AXA SA v Genworth Financial International Holdings Inc [2019] EWHC 3376 (Comm), a clause by which the seller covenanted to pay, on demand, a fixed share of PPI mis-selling losses was held to be a debt obligation, not a general indemnity - and the payer could not run mitigation arguments. The court looked at the words and the commercial context: a promise to pay a defined amount on demand.
The lesson is to make the obligation read as a debt: a promise to pay a specified sum, or a defined percentage, on a defined event, on demand, expressly without any requirement to mitigate and irrespective of foreseeability.
Drafting and reviewing for debt treatment
To secure the advantages, draft the indemnity as a covenant to pay: on the indemnified party incurring the specified costs or liabilities, the indemnifier shall pay on demand a sum equal to those amounts, without any requirement to mitigate and whether or not the loss was foreseeable. State it plainly rather than relying on the word indemnity to carry the meaning.
In review, ask the basic question first: is this a debt or a damages claim? A general hold-harmless against unspecified losses is far weaker than a covenant to pay a defined sum, and the difference is exactly what the indemnified party is paying for.
Use at the desk
Practical checklist
- Decide whether the indemnity is a debt (sum on an event) or a general indemnity a court may treat as damages.
- For debt treatment, draft a covenant to pay a specified sum or defined percentage on demand (AXA v Genworth [2019] EWHC 3376 (Comm)).
- State expressly: without any requirement to mitigate and whether or not the loss was foreseeable.
- Remember damages principles do not apply to a true debt (ABN Amro v McGinn [2014] EWHC 1674 (Comm)).
- Do not assume remoteness is irrelevant to an indemnity - it depends on the drafting (The Eurus [1998] 1 Lloyd's Rep 351).
- In review, treat a general hold-harmless against unspecified losses as far weaker than a covenant to pay.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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