You're part-way through reviewing a contract your business is about to sign, whether a supply agreement, a software subscription, a commercial lease or a contractor engagement, and you've reached a clause headed "Indemnity". It runs for a few dense lines of "arising out of or in connection with" and "hold harmless", and it is the part of the contract most likely to cost you real money. Before you sign, it pays to know what each piece of the clause does and which parts can actually be negotiated.
An indemnity clause is a contractual promise by one party, the indemnifier, to make good specified losses suffered by the other party, the indemnified party. It works alongside the rest of the contract rather than restating the ordinary law of damages: if a loss falls within the clause's scope, the indemnified party claims it directly under the clause, without having to prove breach and quantify damages in the usual way. Because it reallocates risk in ways that would not otherwise exist, both sides fight hard over its wording, and courts treat it as a special kind of promise.
The parts of an indemnity clause, piece by piece
Most indemnity clauses in Australian commercial contracts are built from the same components. Here is what each one does, the drafting choice that matters most, and where the traps sit.
The scope: what losses the clause covers
The scope is the heart of the clause. It lists the losses the indemnifier promises to cover, such as claims by third parties, damage to property, personal injury, legal costs or losses flowing from a breach. The drafting choice that matters most is the connecting words: a clause covering losses "arising out of or in connection with" an event is wider than one covering losses "caused by" it, and courts give those words their ordinary meaning. Three points to keep in mind:
- Narrow scope: covers only third-party claims against the indemnified party, such as a customer suing over a faulty product. It does not cover losses the indemnified party suffers directly.
- Broad scope: "any and all claims, losses, damages, costs and expenses" can reach almost any loss, including the other side's own legal costs of pursuing you.
- Trap: the scope is decided by the words in the contract, not what you intended when you signed. If the words are wide, expect them to be enforced widely.
The trigger: what must happen before the clause bites
The trigger defines the events that switch the indemnity on: a breach of contract, negligence, an act or omission, infringement of intellectual property, or an event such as personal injury that applies regardless of fault. The key drafting choice is whether the trigger is fault-based or no-fault. Three drafting points to know:
- Fault-based trigger: the indemnifier pays only where its own breach or negligence caused the loss. This is the version to prefer when you are the indemnifier.
- No-fault trigger: the indemnifier pays when the event occurs even if it was not at fault. This is common in product liability and IP infringement clauses, where the risk sits with the party best able to control it.
- Own negligence: if the indemnified party wants cover for losses caused partly by its own conduct, the words need to say so. Courts construe indemnities strictly, so silence tends to favour the indemnifier.
The beneficiaries: who is protected
The clause names who is protected. It may cover only the other contracting party, or it may extend to that party's officers, employees, agents and related companies. The longer the list, the more people you are effectively insuring. Three things to consider:
- Variant the other side pushes for: extending the indemnity to "related bodies corporate" or "each of its officers, employees and agents", so your promise covers entities and individuals who were never part of the deal.
- Trap: you cannot control or insure people outside your own organisation, so an unlimited beneficiary list is hard to manage.
- Drafting minimum: if you are giving the indemnity, limit the beneficiaries to the counterparty. If you are receiving it, ask for your officers and employees to be included, because claims often land on individuals as well as the company.
Caps and exclusions: the limits on the promise
Most indemnities are subject to limits. A cap sets the maximum the indemnifier will ever pay, often expressed as a multiple of the fees paid under the contract. Exclusions carve out losses the indemnity does not cover, most commonly consequential or indirect loss such as lost profits and business interruption. The key limits are:
- Cap: "the indemnifier's aggregate liability under this clause is limited to the fees paid in the twelve months before the claim" is a common formulation.
- Consequential loss exclusion: the carve-out that gets negotiated hardest. It decides whether the other side can claim lost profits on top of direct losses.
- Trap: a cap that sits above your insurance limits is a cap in name only. If a claim exhausts your policy, the balance comes out of your own cash flow.
The indemnity period: how long the promise lasts
An indemnity can expire with the contract or survive it. Survival clauses keep the indemnity alive for a defined period after termination, typically one to two years, although some indemnities, such as those covering IP infringement or product liability, run indefinitely. The trap is the clock: clauses that start the period when the loss arises, rather than when a claim is made, can shut the door on claims that surface later. If you are the indemnified party, check that the period is long enough to catch claims you cannot know about yet.
How a court reads the clause
Australian courts treat indemnity clauses as special provisions and construe them strictly, in the context of the contract as a whole. In Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424, the High Court read an indemnity down in favour of the party giving it, holding that a clause covering liability Brambles might incur to third parties did not extend to Brambles' own liability to its injured employee. Where the words are ambiguous, the ambiguity is resolved against the party relying on the indemnity. That is a double-edged sword: precise, wide drafting protects the indemnified party, while vague drafting protects the indemnifier.
Unlike the English position, Australia does not require express words before an indemnity can cover a party's own negligence. The question is one of ordinary construction in context, as the NSW Court of Appeal confirmed in BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [2007] NSWCA 173. The practical consequence is that drafting precision decides who pays, which is why the clause is worth reviewing before signature rather than after a dispute begins.
What the law will not let the clause cover
Even a carefully drafted indemnity hits statutory limits. Under the Competition and Consumer Act 2010 (Cth), the Australian Consumer Law sits in Schedule 2, and s 64 voids any term that purports to exclude, restrict or modify the consumer guarantees. An indemnity cannot be used to contract out of them. For business-to-business supplies, s 64A allows a supplier to limit liability for failure to comply with most guarantees to repairing or replacing the goods or re-supplying the services, provided the term is fair and reasonable and the goods or services are not of a kind ordinarily acquired for personal, domestic or household use. Two further limits apply:
- Unfair contract terms: since 9 November 2023, proposing or relying on an unfair term in a standard form consumer or small business contract is a contravention that carries substantial penalties under s 23 of the Australian Consumer Law, enforced by the ACCC and ASIC. A term is unfair 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. A one-sided, uncapped indemnity in a standard form agreement is exactly the kind of term regulators scrutinise. Small business means fewer than 100 employees or annual turnover under $10 million.
- Public policy: an indemnity cannot protect a party against the consequences of its own fraud or criminal conduct. Courts will not enforce a clause that offends public policy, no matter how clearly it is drafted.
Indemnity clauses worth asking for
Some indemnity clauses are not in every template but are worth raising in negotiation when the situation calls for them:
- Mutual indemnity: worth including when both parties can cause the other loss, so each indemnifies the other for losses caused by its own breach or negligence. It balances the risk and makes the clause easier to justify.
- Intellectual property infringement indemnity: worth including in software, licensing and product development deals, where the supplier's code or materials could infringe a third party's rights and the customer wants protection against being sued.
- Confidentiality breach indemnity: worth including in non-disclosure agreements where the confidential information is commercially critical, so a leak has a defined financial consequence.
- Third-party claims indemnity: worth including in reseller, distribution and franchise arrangements, where the party dealing with end customers carries the claims arising from the goods or services.
- Officers' and directors' indemnity: worth including where individuals are asked to sign for a company, so the company indemnifies them against personal liability incurred while acting on its behalf.
How an Artificer Legal lawyer would review your indemnity clause
When Artificer Legal reviews an indemnity clause, we start with the scope words, because that is where the value of the clause is set, then work through the cap, the exclusions and the survival period in that order. For a client giving an indemnity, we would push for a fault-based trigger, a cap tied to the fees paid under the contract, a carve-out for consequential loss, and beneficiaries limited to the other party. For a client receiving an indemnity, we would push the other way: wide scope, cover for officers and employees, no cap or a generous one, and an indemnity that survives termination long enough to catch late claims.
There are also technical questions a lawyer needs to assess, such as how the indemnity interacts with the proportionate liability legislation in your state and with the apportionment provisions in the Competition and Consumer Act 2010 (Cth) for misleading conduct claims, and whether your insurance actually covers the contractual liability you are taking on. Standard business policies often exclude or limit cover for liability assumed by contract unless the insurer has been told about it, so a proper review should check your policy as well as the contract.
The clause that decides who pays
Across the indemnities that pass through our office, the difference between a clause that works and one that does not is usually the cap. An indemnity without a cap converts your business into the other party's insurer: your promise is as large as their worst loss, with no upper bound. The second most common failure is the reverse, agreeing to a narrow, one-sided indemnity in the belief that it covers you, only to find, as Brambles did in Andar, that the words do not reach the loss that actually occurred. Before you sign, ask two questions: what is the most this clause can cost me, and does it cover the loss I most fear? If you cannot answer both, get the clause reviewed before you commit.
Indemnity clauses are standard in Australian commercial contracts, but standard does not mean harmless. The scope, the trigger, the beneficiaries, the cap and the survival period each decide who carries a defined piece of risk, and the Australian Consumer Law sets limits on what the clause can do even between businesses. Read the clause piece by piece, negotiate the parts that matter, and check your insurance before you sign.