Warranties and indemnities in your contract, a clause-by-clause guide

You have been sent a draft contract to review, or you are marking up terms to send a client, and two clauses keep appearing: the warranties clause and the indemnities clause. They rarely get read closely at signing time, but they decide who wears the cost when a delivery is late, a product is defective, or a third party makes a claim against your business.

Together these clauses allocate risk between the parties. A warranty is a contractual promise that a statement is true or that a standard will be met. An indemnity is a promise to cover defined losses if a specified event happens. They do not operate in isolation: they work alongside the liability cap, the exclusions, the insurance obligations and, for customer-facing businesses, the consumer guarantees under the Australian Consumer Law (the ACL), which they cannot override. This guide walks through each clause, the drafting choices that matter, and the traps that cause problems later.

The warranty clause: promises about facts and standards

A warranty is a promise about the state of things, now or in the future. Common examples are a supplier warranting that it has the right to sell the goods, that they meet specifications, or that its services will be provided with due care and skill. If the warranty turns out to be false, the usual remedy is damages. To recover, you generally need to prove the warranty was breached, that you suffered loss, and that the breach caused the loss and was not too remote. That proof burden is the first practical difference from an indemnity.

Typical warranty subjects in small business contracts include:

• Authority and capacity: the party is properly set up and has power to sign and perform the agreement
• Compliance: the party will comply with relevant laws and regulations
• Quality and performance: goods meet agreed specifications and services meet professional standards
• Intellectual property: the deliverables do not infringe anyone else's rights
• Data and privacy: personal information will be handled appropriately and kept secure

The drafting choice that matters most is whether the warranty promises facts and process, or a commercial outcome. Outcome warranties are where small businesses get caught. A marketing provider should rarely warrant increased revenue, a software developer should rarely warrant bug-free software, and a consultant should rarely warrant that a regulator will approve an application. Those outcomes depend on factors outside your control. Warranty language is safer when it commits to process and standards, such as performing with reasonable care and skill, meeting agreed milestones, and delivering in accordance with specifications. If the other side pushes for a results-based warranty, treat it as a pricing issue: you are being asked to insure a result, and the premium should reflect that.

The indemnity clause: a promise to cover defined losses

An indemnity is a promise to cover particular losses or liabilities if a specified event happens. It is the "you break it, you pay for it" clause, but only for the scenarios it describes, and only to the extent the clause is enforceable and properly drafted.

The significant difference from a warranty is how much the protected party must prove. With a damages claim for breach of warranty, the claimant must establish breach, loss and causation. A well-drafted indemnity is a primary obligation: depending on its wording, liability can arise on the happening of the event itself, without the same proof of breach and loss. That is why indemnity clauses are so heavily negotiated. They can shift substantial financial exposure from one party to the other, sometimes far beyond the value of the contract.

Indemnities in small business contracts commonly cover:

• Third-party IP claims: the supplier covers claims that the deliverables infringe someone else's intellectual property
• Property damage and personal injury: caused by a party's acts or negligence
• Breach of law: losses arising from a party failing to comply with legislation, noting that some liabilities cannot be indemnified because of statutory limits or public policy
• Employee and contractor claims: including claims that a contractor is in fact an employee
• Data breaches and privacy: losses tied to unauthorised access, misuse or disclosure of data

The drafting choices that matter most are the trigger event, the definition of "loss", and whether liability is limited to loss caused by the indemnifying party's fault. Many standard form contracts contain indemnities that are very broad, not limited by fault, not capped, and triggered by something as minor as "any breach". An indemnity for "any and all loss, damage, cost and expense" can swallow the rest of the risk framework if it is not constrained.

A practical example shows how the wording can misallocate risk. A web developer agrees to indemnify the client against IP infringement claims "relating to the website", but the client supplied the images and copy. If those images are unlicensed, the developer has indemnified a risk it did not control. The better approach aligns the indemnity with responsibility: the developer indemnifies for its own code and assets, and the client warrants it has the rights to the materials it supplies, or indemnifies the developer for them. Warranties and indemnities work best when they sit with the party best placed to control the risk.

The liability cap and exclusion clauses: where the protection ends

The liability cap sets the maximum amount either party can recover under the contract, and the exclusion clause lists the types of loss that cannot be recovered at all, commonly consequential loss, loss of profit and business interruption.

The drafting choice that matters most is whether the indemnities sit inside or outside the cap. If the contract has a cap but the indemnity is carved out of it, the protected party effectively has unlimited exposure for that category of risk. On paper the contract looks protected. In practice the indemnity has created a loophole that bypasses both the cap and the exclusions. When reviewing a contract, check the connection between the indemnity clause and the cap clause before you check anything else. If an indemnity must be broad, negotiate a clear definition of what loss includes and excludes, a requirement that loss be "to the extent caused by" the indemnifying party, a duty to mitigate, and a cap that applies to the indemnity as well.

The insurance clause: matching promises to coverable risk

Contracts often require one or both parties to hold insurance, such as public liability, professional indemnity or cyber insurance, and to provide evidence of it on request. The drafting choice that matters is tying the indemnity to the insurance: an indemnity that is limited to the amount recoverable under a specified policy is commercially workable, because the risk has been priced and spread. An indemnity that extends beyond what can be insured is effectively a bet the business cannot cover. If you are asked to indemnify against a risk you cannot insure or price, that is a negotiation point, not a clause to accept quietly.

The survival clause: how long the promises last

The survival clause states which provisions continue to operate after the contract ends, and for how long. Warranties typically survive termination for a defined period, often twelve to twenty-four months, so that defects or inaccuracies can still be pursued. Indemnities often survive longer, and some are drafted to survive indefinitely. Related drafting points are the notification requirements, which usually oblige the protected party to tell the other side about a claim within a set time, and the time limits for bringing claims.

The trap is a contract with no survival clause at all. Once the agreement terminates, the warranties and indemnities may die with it, and a problem that surfaces after the relationship ends has no hook to hang a claim on. When reviewing a contract, check what happens to the risk clauses on termination before you sign.

The consumer guarantee clauses: what your warranty cannot override

If you supply goods or services to consumers, the ACL gives customers guarantees that contract terms cannot take away. The ACL is Schedule 2 of the Competition and Consumer Act 2010 (Cth), and s 64 provides that any term purporting to exclude, restrict or modify the application of the consumer guarantees is void. You cannot contract out of them, no matter what your terms say.

Whether the guarantees apply at all turns on the definition of consumer in s 3. A person acquires goods as a consumer if the price does not exceed $100,000, if the goods are of a kind ordinarily acquired for personal, domestic or household use, or if the goods are a vehicle or trailer acquired mainly for transporting goods on public roads. The definition does not apply where goods are acquired for re-supply, or for transformation in a process of production or manufacture.

The guarantees themselves set the standard your warranty wording must be consistent with. Goods must be of acceptable quality under s 54: fit for all the purposes for which goods of that kind are commonly supplied, acceptable in appearance and finish, free from defects, safe and durable, as a reasonable consumer fully acquainted with the state and condition of the goods would regard as acceptable, having regard to the nature and price of the goods and any statements made about them. Services must be rendered with due care and skill under s 60, and fit for any purpose you made known, under s 61.

There is no fixed "two-year warranty" in Australian law. The standard is what a reasonable consumer would regard as acceptable given the nature of the goods, what they cost, and what you said about them. A cheap disposable item and an expensive durable one are judged differently. Statements in advertising, on invoices or in terms and conditions that misrepresent the existence or effect of a warranty, guarantee or remedy can breach s 29(1)(m) of the ACL, which prohibits false or misleading representations about the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy, and carries the risk of pecuniary penalties.

The remedies for failing a guarantee also matter. Where the failure is a major failure under s 260, such as goods a reasonable consumer would not have acquired had they known the full extent of the problem, or goods that are unsafe, the consumer can generally choose a refund or a replacement. For lesser failures, the supplier usually gets the chance to repair. There is one genuine drafting carve-out: under s 64A, for goods or services other than those ordinarily acquired for personal, domestic or household use, liability for a failed guarantee can be limited to repair or replacement of the goods, or re-supply of the services, except for the title, description and sample guarantees in ss 51 to 53.

Optional clauses worth adding

Depending on your business, a few more clauses can make the risk framework hold together:

• Flow-down clause: requires your subcontractors to give you the same warranties and indemnities you give your client, so you are not left holding their risk
• IP claim conduct clause: gives the indemnifying party notice of a claim, control of the defence, and the right to approve any settlement, so the party paying for the claim can manage it
• Client materials clause: a warranty and indemnity from the client covering content they supply, such as images, copy and branding
• Indemnity guardrails: causation wording, a cap, and defined exclusions built into any "indemnity for breach" clause, so it does not operate as a blank cheque
• Data breach clause: for businesses handling personal information, defines who bears the cost of notification, investigation and response

When a lawyer should review these clauses

A lawyer's value here is reading the risk clauses as a set rather than one at a time. An Artificer Legal practitioner reviewing a contract would check the indemnity against the cap, the exclusions against the indemnity's definition of loss, the survival period against the practical risk of the goods or services, and the warranty wording against the ACL if the other party is a consumer. We would push back on uncapped "any and all loss" indemnities, insist on causation wording where responsibility is shared, and ask who controls each risk and who can insure it. The usual order of negotiation is the cap first, then the exclusions, then the scope of the indemnities, then the insurance obligations, because each one changes the commercial value of the others. A review before signing is far cheaper than finding out where the gaps are after a dispute begins.

The indemnity-cap connection: where risk frameworks come unstuck

If there is one drafting choice that most often decides whether a contract's risk framework works, it is how the indemnity clause and the liability cap interact. A capped contract with a carve-out for the indemnity has no real cap for that category of risk, and an "any loss" indemnity with no causation requirement turns every minor breach into a full compensation event. Reading those two clauses together, and aligning them with who actually controls and can insure the risk, tells you whether the agreement protects the business or quietly exposes it. Keep the warranty promises about facts and process rather than outcomes, keep the indemnity inside the cap with causation and loss definitions, check survival and insurance, and keep consumer guarantees in mind for anything sold to customers. That combination is what turns standard wording into a contract that matches how your business actually operates.