An indemnity clause shifts the cost of certain losses — usually third-party claims — from one party to the other. It's one of the clauses most likely to be skimmed, and one of the most expensive to get wrong, because indemnities can sit outside a contract's general liability cap entirely.
Indemnity vs. general liability
A general liability clause covers losses between the two contracting parties. An indemnity clause specifically covers losses caused by a third party — for example, a customer suing your business because of a defect in a product your vendor supplied. The indemnifying party agrees to cover those third-party costs: damages, legal fees, and settlement amounts.
A worked example
Say a software vendor's product infringes a third party's patent, and that third party sues your company for using it. An IP indemnity clause in your vendor contract would require the vendor to cover your legal costs and any damages awarded — because the underlying problem (the infringement) was the vendor's doing, not yours.
What to check
- Scope — what specifically triggers the indemnity? IP infringement, data breaches, personal injury, and breach of confidentiality are common triggers. Vague or overly broad wording ("any and all claims arising from...") can create indemnity obligations no one intended.
- Whether it's mutual — one-sided indemnities (you indemnify them, but not vice versa) are common in vendor-drafted contracts and worth pushing back on.
- Whether it's capped — indemnities are sometimes deliberately excluded from the contract's general liability cap, meaning exposure under an indemnity clause can be technically unlimited even when the rest of the contract is capped.
- Procedure — does the indemnifying party get to control the defence of the claim? Is prompt notice required? Missing procedural terms can undermine the indemnity when you actually need it.
Why this varies by governing law
How courts interpret indemnity language — how broadly, and whether an indemnity for a party's "own negligence" is enforceable — differs by jurisdiction. An indemnity clause that's standard and enforceable under one governing law may need to be worded differently to have the same effect under another — see our indemnity enforceability breakdown for the jurisdiction-by-jurisdiction detail.
Where this shows up
Indemnity is flagged in nearly every review we do — see the checklists on our MSA review, vendor agreement review, and contract drafting pages.
For the quick reference version, see the indemnity entry in our legal glossary.
