What an indemnity clause actually moves

In one line. An indemnity is a promise by one side to cover a named kind of loss the other side suffers, usually a claim brought by someone outside the contract.

Most of a contract describes what each side will do. An indemnity describes who pays when a particular thing goes wrong. It does not stop the thing from happening. It decides whose budget absorbs it.

That is why it reads differently from the clauses around it. It is narrow, it names triggers, and it is commonly the clause both sides send to someone else to read.

It transfers the cost of a defined event from the side that would otherwise carry it to the side giving the promise. The definition is the whole clause.

In client work the usual triggers are:

• Third-party IP claims. Someone says the delivered work infringes their copyright or trade mark. The supplier indemnifies the client.
• Breach of confidentiality or data rules. One side leaks the other's information and a third party claims.
• Injury or damage on site. Common where people work at the client's premises or use the client's equipment.
• Misuse by the client. The client changes the work or uses it outside the agreed purpose, and indemnifies the supplier for what follows.

Read the trigger words closely. "Arising from" is wider than "caused by". "Any claim" is wider than "any claim finally decided by a court". Small words move a lot of money here.

The clause also names who is covered. Many indemnities protect the client "and its affiliates, officers and employees", people who are not parties. In England and Wales, a non-party can enforce a term if the contract says so or if the term purports to benefit them, unless the contract shows the parties did not intend that, and contracts commonly exclude this right (Contracts (Rights of Third Parties) Act 1999, s.1). So whether those named people can claim directly depends on what the rest of the contract says.

A well-drafted indemnity says what it does not cover as clearly as what it does. Common carve-outs:

• Losses caused by the indemnified side's own breach or negligence.
• Claims that come from changes the indemnified side made to the work.
• Claims that arise only because the work was combined with something the supplier did not provide.
• Losses the indemnified side could have reduced but did not.

Most indemnities also set a process. The side claiming has to notify promptly, let the indemnifying side run the defence, and not settle without consent. These steps are dull, but they decide whether the promise is usable when the letter arrives.

Only if the contract says so. This is the most negotiated point in the clause.

Suppliers usually want indemnities to sit inside the overall liability cap. Clients often want some indemnities, especially IP infringement, to sit outside it, because a third-party claim can exceed the fee for the job many times over. A common middle ground is a separate, higher cap for named indemnities.

There is also a floor set by law. In England and Wales, liability for death or personal injury caused by negligence cannot be excluded or restricted by a contract term, and other negligence liability can be limited only so far as the term is reasonable (Unfair Contract Terms Act 1977, s.2). A cap that tries to go below that floor will not do what it says. The limitation of liability clause page covers how the cap itself is usually written.

In a services agreement, indemnities usually sit next to warranties and just before the limitation of liability clause. The order matters: the warranty says what the supplier promises, the indemnity says who pays for named third-party claims, and the cap says how far any of it goes.

Where a master services agreement sits above several statements of work, the indemnities live in the master agreement and apply to every job. A statement of work rarely adds one unless the job carries an unusual risk, such as using client-supplied images whose rights are unclear.

Most of the back-and-forth lands on five questions:

1. Mutual or one-way? Studios often ask for a mutual clause, so the client covers misuse and client-supplied material.
2. Which triggers? Narrow, named events, or anything "arising from" the contract.
3. Who is covered? The client alone, or affiliates and staff as well.
4. Inside or outside the cap? And if outside, is there a separate limit?
5. What process? Notice, control of the defence, and consent to settle.

The indemnity clause page has example wording and a Plain English reading of each part.