What Is an Indemnity Clause?
An indemnity clause requires one party to compensate the other for specific losses, liabilities, or costs. Unlike a simple damages claim — where a court assesses what loss you actually suffered — an indemnity is a direct contractual obligation to pay, regardless of fault and often without the need for litigation.
Indemnities are common in commercial contracts, service agreements, and software licences. They are also one of the most financially dangerous clauses in any agreement, because they can operate as uncapped, strict liability obligations.
Indemnity vs Limitation of Liability
These two clause types are closely linked and often in tension. A limitation of liability clause caps what one party can recover — an indemnity can override that cap entirely. In many standard commercial contracts, indemnity obligations are expressly carved out of the liability cap, meaning the financial exposure under an indemnity is theoretically unlimited.
Types of Indemnity in UK Contracts
- Third-party indemnities: You agree to compensate the other party for claims brought against them by third parties — for example, if your product causes injury to someone
- IP indemnities: Common in software and technology contracts — you warrant your deliverable does not infringe third-party intellectual property rights
- Tax indemnities: Used in M&A transactions to allocate pre-completion tax liabilities
- General indemnities: Broad clauses compensating for any loss arising from breach — often the most dangerous
What Makes an Indemnity High Risk?
- No financial cap on the indemnity obligation
- One-sided — only one party is required to indemnify, with no reciprocal protection
- Broad trigger language such as "arising out of or in connection with" rather than specific circumstances
- No carve-out for the other party's own negligence or breach
- No requirement for the indemnified party to mitigate their loss
- No notification requirement before costs are incurred
How to Negotiate an Indemnity Clause
The most important negotiation points are the financial cap and the trigger conditions. Push to link the indemnity cap to the total contract value or a fixed sum. Narrow the trigger to specific, defined circumstances rather than a broad catch-all. Where possible, seek a mutual indemnity — if you are indemnifying them, they should indemnify you on equivalent terms. Always insist on a notification obligation so you have the opportunity to manage or dispute a claim before costs escalate.