Most Australian business owners meet an indemnity clause the way they meet most legal risk: in a draft they did not write. It might be a supplier agreement, a software or SaaS terms page, a contractor engagement or a lease. The clause usually arrives quietly, buried near the warranties, and it often reads something like "the Customer indemnifies the Supplier against all losses in connection with this agreement". The instinct to skip past it is strong. This article explains what that clause is doing, why the exact words matter far more than they appear to, and what a balanced version looks like.
An indemnity is a contractual promise to compensate another party for specified losses, costs or claims. Operationally it sits alongside your other risk tools: warranties, limitation of liability clauses, exclusions for consequential loss, insurance and waivers. Unlike a warranty, which is a promise about the state of things that gives rise to a damages claim if breached, an indemnity is a promise to pay, triggered directly by the specified loss. The person holding the indemnity does not need to run the same gauntlet of proving breach, causation and remoteness that a damages claim requires. An indemnity can also be given in a deed, which needs no consideration and, in most Australian jurisdictions, carries a longer limitation period than an ordinary contract.
The anatomy of an indemnity clause
The promise itself
The core promise usually appears in two forms: a promise to "indemnify", meaning to pay or reimburse the other party for the loss, and a promise to "hold harmless", meaning to protect them from liability altogether. Many clauses do both. What matters is that the promise is primary, not secondary. A guarantor answers for someone else's debt after that person defaults. An indemnifier's obligation to pay arises from the indemnity itself, independently of who else might be liable. Australian courts draw this line firmly, most famously in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245, and it is why a combined "guarantee and indemnity" clause is so common in director and shareholder guarantees: the guarantee catches the primary debtor's default, and the indemnity catches everything else.
The trigger: what has to happen
This is the drafting choice that decides most disputes. The trigger is the event or loss that activates the indemnity, and the words used to describe it determine how far the clause reaches. The two formulations you will see most often are:
- "Caused by": The indemnity covers loss "to the extent caused by" the indemnifier's acts or omissions. This is proportionate wording. It ties the obligation to the risk the indemnifier actually controls.
- "In connection with": The indemnity covers "any loss in connection with" the agreement or the services. This is a catch-all. Courts give these words a wide operation, and "in connection with" can sweep in losses the indemnifier had no hand in causing.
If you are the indemnifier, the trigger is where you should spend your negotiating energy. A broad trigger converts a targeted risk allocation into an open-ended promise to pay.
Who is protected
Indemnities rarely protect only the contracting entity. The clause usually extends the benefit to the other party's related bodies corporate, directors, officers, employees and agents. Every added beneficiary is an added set of claims you may have to answer. Check the definition clause to see exactly who is covered, and consider whether that matches the risk you are willing to take on. If the other side wants to protect a group of related companies, that may be reasonable, but it should be stated and understood rather than assumed.
What losses are covered
The categories of recoverable loss are where indemnities quietly expand. Typical lists include:
- Damages: Court-awarded damages and judgments against the protected party.
- Settlements: Sums paid to settle third-party claims, sometimes subject to the indemnifier's consent.
- Legal costs: Sometimes "on a full indemnity basis", which is a more generous measure than the standard party-and-party costs a court would ordinarily order, and sometimes internal costs and management time on top.
- Fines and penalties: A point of caution. Public policy prevents an indemnity from covering liability for criminal fines or penalties in many circumstances, and some regulatory penalties cannot be passed on or insured against. If a clause asks you to cover another party's fines, treat it as a red flag and take advice before agreeing.
The counterweight is a reasonableness limit: recoverable costs should be confined to "reasonable costs actually incurred", with the protected party required to mitigate its loss.
The carve-outs
A well-drafted indemnity does not make the indemnifier an insurer of the other party's own conduct. The standard carve-out excludes liability to the extent the loss is caused by the indemnified party's negligence, wilful misconduct or breach of the agreement. Without it, you can be on the hook for losses the other party caused itself. If the other side resists the carve-out, ask why they need protection from their own conduct. A carve-out that says "except to the extent caused by the indemnified party's negligence" is the single most valuable line a small business can add.
Procedure: who controls the claim
Indemnities are enforced through claims, and claims need process. A clause that lets the protected party defend and settle a claim freely, then send you the bill, is a clause that hands the other side a blank cheque. Balanced clauses include:
- Notice: Prompt written notice of any claim that might trigger the indemnity.
- Control: The indemnifier's right to assume conduct of the defence, with the protected party's reasonable cooperation.
- Consent: No admission of liability and no settlement without the indemnifier's consent, not to be unreasonably withheld.
These provisions rarely change the commercial deal. They change who holds the pen when a claim actually lands, and that is where the real money is decided.
Caps, exclusions and insurance
An indemnity does not operate in isolation. Its interaction with the rest of the contract determines your true exposure:
- Limitation of liability: Many contracts cap total liability at a dollar amount or at fees paid. Whether the cap reaches the indemnity depends entirely on drafting. Some contracts expressly exclude indemnities from the cap, which means indemnity claims are uncapped. If that is insisted upon, it should be limited to narrow, controllable risks such as third-party intellectual property infringement, and aligned with your insurance.
- Consequential loss: Many agreements exclude indirect or special losses. An indemnity can carve around that exclusion, restoring recovery of losses you assumed were excluded. Read the two clauses together.
- Insurance: Check with your broker whether your policies respond to the specific indemnified risk. Public liability policies commonly respond to liability for personal injury and property damage, but an indemnity for another party's negligence, for fines or for contractual liability outside the policy terms may fall outside cover entirely.
There is also a statutory overlay. Under s 64 of the Australian Consumer Law (ACL), which is Schedule 2 to the Competition and Consumer Act 2010 (Cth), a term of a contract is void to the extent it purports to exclude, restrict or modify the consumer guarantees that apply to a supply of goods or services. An indemnity cannot be used to strip a consumer of those rights.
The unfair contract terms regime adds a further constraint. Under s 23 of the ACL, a term of a standard form consumer contract or small business contract is void if it is unfair. A term is unfair, under s 24, if it causes a significant imbalance in the parties' rights, is not reasonably necessary to protect the legitimate interests of the party advantaged by it, and would cause detriment if relied on, with the court bound to consider transparency and the contract as a whole. A one-sided indemnity in a take-it-or-leave-it standard form contract is a classic candidate. The regime now carries real teeth: since the 2023 amendments, the definition of small business contract covers a party that employs fewer than 100 people or has turnover under $10 million, and under s 224 the maximum penalty for a body corporate is the greater of $100 million, three times the benefit obtained, or 30% of adjusted turnover. An indemnity that is unfair is not merely unenforceable against you; proposing or relying on it can attract a penalty.
How Australian courts read the clause
Australian courts approach indemnity clauses differently from other contract terms, and that difference should shape how you draft and negotiate. In Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424, the High Court confirmed that the principles applicable to guarantees apply to indemnities: the clause is construed strictly, in the context of the contract as a whole, and where there is genuine ambiguity it is construed in favour of the party providing the indemnity. The New South Wales Court of Appeal applied that approach in BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [2007] NSWCA 173, holding that an indemnity in the widest terms covered the loss even where the protected party was itself liable to its own employee, because the words were unambiguous.
This is worth pausing on, because it is the opposite of the instinct most people bring to contract review. Under the general approach to exclusion clauses from Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, an exclusion clause is given its natural and ordinary meaning, read in the whole contract, with ambiguity resolved against the party relying on it. Indemnities are treated more strictly: ambiguity is resolved in favour of the indemnifier. The practical consequence is that if you are the indemnifier and the other side drafted the clause, ambiguity is your friend. If you are the one seeking the protection, you want the words so clear that there is nothing to argue about. Either way, the trigger wording, the carve-outs and the loss categories are where the case will be won or lost, and the decided cases turn on the precise words used, not on what the parties say they meant.
Optional clauses worth asking for
Depending on the deal, these variants are worth raising:
- Mutual indemnities: If both sides supply materials or services, each can indemnify the other for third-party claims arising from its own deliverables, which is fairer than a one-way clause and often easier to agree.
- Indemnity sub-limits: A dollar cap specific to the indemnity, separate from the general liability cap, lets you bound the open-ended risk without disturbing the rest of the risk profile.
- Survival clauses: An express statement that the indemnity survives termination of the contract, so it still operates after the relationship ends and the real claims tend to arise.
- Guarantee and indemnity: A combined clause when a director or parent company is asked to stand behind a company's obligations, so the signatory is liable on a primary basis.
- Deed-form release and indemnity: A standalone deed, rather than a clause in a larger contract, when the risk allocation needs to stand on its own, such as a settlement, an event participation or a one-off activity. A deed needs no consideration, which matters where the promise is one-sided.
When an Artificer Legal lawyer should review your indemnities
Indemnities are the clause type where a lawyer's review pays for itself, because the exposure is usually unlimited and the words are usually the other side's. An Artificer Legal practitioner reviewing a contract for you would work through the clause in a set order: first the trigger, to narrow "in connection with" wording to "to the extent caused by"; then the carve-outs, to ensure you are not indemnifying the other party's own negligence; then the loss categories, to cap recoverable costs at reasonable costs actually incurred and challenge costs on a full indemnity basis; then the procedure, to secure the right to control the defence and veto settlements; and finally the alignment with the limitation of liability clause, the consequential loss exclusion and your insurance. Where the clause sits in a standard form contract with a consumer or small business counterparty, we would also assess whether the clause risks being void as an unfair term under the ACL, with the penalty exposure that now carries. If you are the party seeking protection, we would draft the trigger and the loss categories precisely, so that nothing is left to the strict-construction rules that favour the indemnifier.
Why the words "caused by" decide most indemnity disputes
If you remember one thing from this article, make it the trigger. An indemnity that covers loss "in connection with" the agreement is an open cheque. An indemnity that covers loss "to the extent caused by" your acts or omissions is a targeted allocation of risk you can price, insure and defend. Every other part of the clause, the carve-outs, the costs, the procedure, the caps, is a refinement of that single choice. When a dispute later turns on what the parties meant, Australian courts will construe the clause strictly against ambiguity, and in favour of the indemnifier. The party who controls the trigger wording therefore controls the outcome.
Indemnities are a legitimate and useful risk tool in Australian business contracts when they are targeted at risks the indemnifier controls. Keep the trigger narrow, carve out the other party's fault, cap the recoverable losses, agree sensible claim procedure, and align the whole clause with your liability cap and your insurance. Remember that consumer guarantees cannot be excluded, and that a one-sided indemnity in a standard form contract can be void as an unfair term with substantial penalties attached. If a clause looks too broad to be a fair deal, it probably is, and a focused review before signing is far cheaper than the claim it would otherwise have funded.