Clause library

Indemnity clause, explained

An indemnity is a promise by one party to cover certain losses the other party suffers, usually losses caused by a third-party claim.

What does an indemnity clause do?

An indemnity moves the cost of a specific risk from one party to the other. If the risk happens, the party giving the indemnity pays the other party's losses, often including legal costs. Indemnities commonly cover claims that the work infringes someone else's rights, breaches of data or confidentiality terms, and losses caused by negligence. Unlike an ordinary claim for breach, an indemnity is usually drafted to pay out pound for pound, without arguing about what the loss would have been. That is why it is often one of the most negotiated clauses in a services agreement.

Example wording

Example · our own drafting

The Supplier will indemnify the Client against all losses, costs and reasonable legal fees arising from any claim by a third party that the Deliverables infringe that third party's intellectual property rights, provided the Client notifies the Supplier promptly, gives it control of the defence, and does not admit liability without the Supplier's written consent.

In Plain English

If someone outside the deal says the work copies their material and makes a claim against the client, the supplier pays the client's losses and reasonable legal fees. In return, the client tells the supplier quickly, lets the supplier run the defence, and does not admit fault without the supplier agreeing in writing.

What do people negotiate in an indemnity clause?

  • Whether the indemnity is one-way or mutual.
  • Which risks it covers, since a broad list such as "any breach" is often resisted.
  • Whether indemnity payments sit inside or outside the liability cap.
  • Conduct of claims: who runs the defence and who can agree a settlement.
  • Whether the indemnified party is expected to take reasonable steps to reduce its loss.

Which contracts include it?

Lex includes this clause in, among others:

  • Services agreement (MSA)
  • Mutual NDA
  • Statement of work

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Frequently asked questions

What does an indemnity clause mean?

It means one party promises to cover particular losses the other suffers, usually from a claim brought by someone outside the contract. The clause lists which losses are covered and the conditions for claiming.

Is an indemnity the same as a warranty?

Not usually. A warranty is a promise that something is true, and a breach of it is commonly claimed as ordinary damages. An indemnity is a promise to pay for a defined loss, and is often drafted to pay out more directly.

Does an indemnity have a cap?

It depends on the wording. Some contracts put indemnities under the general liability cap, others leave certain indemnities uncapped. This is one of the most commonly negotiated points.

Who usually gives an indemnity in a services contract?

Often the supplier gives an indemnity for intellectual property claims about its work, and the client gives one for materials it supplies. Mutual indemnities are common in larger deals.

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