Indemnity Agreements

Abstract The agreement between the issuing bank and the account party or Principal has two distinct sides: on one hand it is an agreement by the bank to render certain special services at the request of the account party against a fee including an authorization (“mandate”) by the Principal to the bank to do so. On the other hand, an inseparable act or agreement is the bank’s right to be reimbursed by the Principal: “indemnification” in the event the bank effects payment under the instrument as agreed and incurs costs or is exposed to liability when doing so. No specific agreement needs to be made in order for the right of reimbursement to arise, since the bank is acting at the request of the applicant and under his mandate. The payment effected is made for and on behalf of the Principal and not on the bank’s own account: this is evident and the very purpose of the arrangement. However, certain jurisdictions may require that the agreement be in written form in order for it to be enforceable.