Indemnification
An indemnification clause is a promise by one party to cover the other party’s losses arising from specified events, most often claims brought by third parties.
What it does
An indemnity shifts risk. Instead of the injured party having to prove breach, causation, and loss under the normal rules of contract damages, the indemnifying party agrees up front to reimburse defined losses when a defined trigger occurs. That makes recovery faster and more certain, which is why indemnities are valuable to the party receiving them and dangerous to the party giving them.
The classic B2B indemnity covers third-party intellectual property claims: if a customer is sued because the supplier’s software infringes someone’s patent or copyright, the supplier defends the claim and pays any damages. Other common indemnities cover breach of confidentiality, breach of data protection obligations, personal injury or property damage caused by a party’s negligence, and breach of law.
The clause usually also sets the procedure: the indemnified party must notify promptly, must let the indemnifying party control the defence, and must not settle without consent.
Example wording
The Supplier shall defend the Customer against any claim brought by a third party alleging that the Customer’s use of the Services in accordance with this Agreement infringes that third party’s intellectual property rights, and shall pay any damages finally awarded or agreed in settlement, provided that the Customer: (a) notifies the Supplier promptly in writing of the claim; (b) gives the Supplier sole control of the defence and settlement; and (c) provides reasonable assistance at the Supplier’s expense.
Risks for SMBs
Broad, one-way indemnities. A clause requiring the SMB to indemnify the counterparty for “any and all losses arising from or relating to this Agreement” is close to unlimited liability, triggered by almost anything. Indemnities should be tied to specific events, not the whole relationship.
Indemnities outside the liability cap. Many contracts exclude indemnities from the liability cap. Combined with a broad indemnity, the cap then protects the SMB against nothing that matters. Check whether the cap applies to indemnity payments.
Losses defined too widely. “Losses” may include the other side’s legal fees, internal costs, and consequential losses that would otherwise be excluded. Read the definition.
Indemnities for things you do not control. Indemnifying for claims caused by the other party’s own modifications, misuse, or combinations with third-party products is a common trap for SMB suppliers. Standard exclusions cover this, but only if they are written in.
The counterparty cannot pay. An indemnity from a shell company or a thinly capitalised startup is only as good as its balance sheet or insurance. See insurance.
Jurisdiction affects meaning. The legal effect of “indemnify” differs across legal systems. In some it adds little beyond ordinary damages, in others it substantially expands recovery. Local advice matters.
Common variants and negotiation points
- Specific triggers only. Limit indemnities to third-party IP claims, breach of confidentiality or data obligations, and personal injury or property damage caused by negligence. Resist “any breach of this Agreement.”
- Mutuality. If the supplier indemnifies for IP infringement, the customer can reasonably indemnify for claims arising from its own data or its misuse of the service.
- Capped indemnities. Include indemnities within the general cap, or under a separate higher cap, rather than leaving them unlimited.
- Remedies for IP claims. Give the supplier the option to modify the product, procure a licence, or terminate and refund, instead of paying an open-ended indemnity.
- Defence control. Agree who runs the defence, who pays, and that neither side settles on the other’s behalf without consent.
Related clauses
- Liability cap: whether the cap applies to indemnities is a key question.
- Insurance: the practical backing for an indemnity.
- IP ownership: the rights an IP indemnity protects.
- Data processing: data indemnities are increasingly standard.
This page is general information about a common contract clause. It is not legal advice and does not account for your jurisdiction, industry, or the specific contract in front of you. Talk to a qualified lawyer before relying on it.
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