Indemnification Clauses: What Startups and Small Businesses Should Know

When you’re running a startup or small business, you’ll probably sign (or draft) more contracts than you ever expected - with customers, suppliers, landlords, contractors, platforms, and sometimes investors.

And in almost every one of those contracts, you’ll see a section that can quietly shift a lot of risk onto you: an indemnification clause.

Indemnities can be reasonable and standard in many industries. But they can also be written so broadly that your business ends up “wearing” liabilities you didn’t price into the deal (or can’t control).

Below, we’ll break down what an indemnification clause is, why it matters, what to watch out for, and how to negotiate it in a way that protects your business while still getting deals done.

What Is An Indemnification Clause (And Why Does It Matter)?

An indemnification clause (often just called an “indemnity”) is a contract clause where one party agrees to compensate the other party for certain losses or claims.

In plain English: if something goes wrong and the other party suffers a loss (or gets sued), the indemnity may require you to pay for that loss, including legal costs (to the extent the clause covers them).

Indemnity vs Liability: What’s The Difference?

People often mix up “liability” and “indemnity”, but they’re not the same.

• Liability is your legal responsibility for harm or loss (whether under the contract, negligence, statute, etc.).
• Indemnity is a contractual promise to cover the other party’s losses (and depending on how it’s drafted, it can operate even where liability is disputed or not finally determined).

This is why indemnification clauses can be so powerful: they can allocate risk in ways that go beyond “normal” legal liability.

Where You’ll Commonly See Indemnification Clauses

Indemnification clauses are common in:

• supplier and manufacturing agreements
• software and SaaS contracts
• service agreements (consulting, agencies, trades)
• leases and licences (especially where you’re using someone else’s premises or equipment)
• online terms (marketplaces, platforms, integrations)
• shareholder and founder documents (in some cases)

If you’re scaling fast, signing lots of customers, or onboarding suppliers, indemnities can have a real impact on your risk profile and cash flow.

How Indemnification Clauses Work In Practice (With Examples)

Indemnities can be drafted in different ways depending on the commercial deal and the bargaining power between the parties. The key is understanding what triggers the indemnity and what costs you’re promising to cover.

Example 1: Your Business Indemnifies A Customer

Let’s say you provide marketing services and the customer’s contract says you must indemnify them for “any loss arising out of the services”.

If the customer gets sued because an advertisement is allegedly misleading, they may claim their legal costs and settlement are “losses arising out of the services” - and send the bill to you.

That’s a big risk if you don’t control all inputs (for example, if the customer approved the copy, or gave you product claims that were inaccurate). This is where indemnity wording becomes critical.

Example 2: You Receive An Indemnity From A Supplier

Indemnities aren’t always “bad”. If you’re buying products from a supplier, it can be reasonable to ask them to indemnify you for:

• third party claims that the products infringe intellectual property
• claims arising from defective manufacturing
• recall costs (where the supplier is at fault)

For many businesses, this is an important risk management tool - especially where you’re the face of the brand, but you don’t control manufacturing.

Example 3: Mutual Indemnities

In a balanced commercial arrangement, you might see mutual indemnities, where each party indemnifies the other for losses caused by:

• their breach of the contract
• their negligence or misconduct
• their breach of law

Mutual indemnities can feel “fair”, but the details still matter. A mutual indemnity can still be risky if one side’s exposure is naturally larger (for example, a small supplier indemnifying a large enterprise for broad categories of loss).

What To Watch Out For In An Indemnification Clause

Indemnities are often written broadly and tucked into boilerplate. As a startup or small business, it’s worth slowing down and checking a few key points before you sign.

1. Overly Broad Trigger Events

Watch for indemnities triggered by wording like:

• “arising out of”
• “in connection with”
• “relating to”

These phrases can be interpreted widely and may capture losses only loosely connected to your work.

Where possible, it’s usually safer to tie the indemnity to clearer triggers, such as “to the extent caused by” your breach, negligence, or specific unlawful acts.

2. Indemnities For The Other Party’s Own Negligence

Be careful if an indemnity effectively makes you responsible even where the other party contributed to the problem.

For example, if a customer gives you incorrect information, ignores your advice, or misuses your product, you generally don’t want to indemnify them for losses they caused (or helped cause).

3. “Consequential Loss” And Indirect Damages

Some indemnities capture losses like loss of profit, loss of revenue, loss of goodwill, or business interruption.

However, what counts as “consequential loss” can vary depending on the contract wording and how the courts interpret it in context. Either way, these types of losses can escalate quickly and may be difficult to quantify or control. If the indemnification clause includes broad categories of loss, consider whether the contract also has clear limitations of liability (and whether the indemnity is carved out from those limits).

This is especially important for businesses offering services on tight margins or fixed fees.

4. Unlimited Liability (No Cap)

Many small businesses assume the “liability cap” in the contract will protect them. But a common issue is that the contract says:

• liability is capped (for example, at fees paid), but
• indemnities are excluded from that cap

That can leave you with effectively unlimited exposure.

If you’re providing ongoing services (or a subscription), consider whether it’s commercially reasonable for your indemnity exposure to be uncapped - and if not, negotiate for a cap.

5. One-Way Indemnities In Unequal Deals

In many industries, the larger party will offer a template contract where you indemnify them, but they don’t indemnify you (even for things they control).

That doesn’t always mean you can’t sign - sometimes it’s the cost of doing business - but you should at least understand:

• what risks you’re taking on
• whether your pricing reflects that risk
• whether you can narrow the scope or add carve-outs

6. Legal Costs And “On Demand” Payment

Some indemnification clauses require you to pay losses “on demand”, including legal costs as they are incurred.

This can create serious cash flow pressure if a dispute arises, even if the claim later turns out to be weak.

It’s often better to specify that legal costs must be “reasonably incurred”, and to include a process around how claims are handled (including your right to defend the claim - more on that below).

How To Negotiate An Indemnification Clause (Without Killing The Deal)

Negotiating indemnities doesn’t need to be confrontational. In many cases, it’s just about making the clause match the commercial reality: you should take responsibility for what you control, not everything that could possibly go wrong.

1. Limit The Indemnity To Things You Can Control

A common approach is to limit the indemnity to losses caused by:

• your breach of the agreement
• your negligence or wilful misconduct
• your breach of law
• third party IP infringement (if you’re supplying content or software)

If the other party wants you to indemnify them for broader issues, ask whether those issues are truly within your control - and if not, consider narrowing the clause.

2. Add “To The Extent Caused By” Language

One of the most helpful negotiation tweaks is adding “to the extent caused by” language. This can prevent you being liable for losses partly caused by the other party.

It can also be paired with a requirement for the other party to mitigate their losses (meaning they have to take reasonable steps to reduce the impact, rather than letting losses spiral).

3. Include Carve-Outs For Customer Instructions Or Approved Materials

If you’re a service provider, you may want carve-outs where losses arise from:

• materials provided by the customer
• customer directions or specifications
• customer-approved deliverables (particularly if they insisted on a particular approach)
• customer misuse of your work product

This is especially relevant for marketing, design, IT, and professional services.

4. Control Of Defence (Who Runs The Claim?)

If you’re indemnifying the other party for third party claims, it’s common to negotiate for you to:

• be notified promptly of the claim
• have the right to control (or participate in) the defence, depending on the clause
• approve any settlement (so you’re not forced to pay for a settlement you disagree with)

Without appropriate controls, you might end up paying for a legal strategy that doesn’t align with your interests.

5. Align The Indemnity With Your Insurance

Indemnities and insurance should work together, not against each other.

Before agreeing to a broad indemnity, it’s worth checking whether your insurance actually covers that risk. Some policies exclude (or limit cover for) contractual indemnities that go beyond your normal legal liability.

If an indemnity isn’t insurable and you can’t cap it, you may be accepting an “unfunded” risk that could seriously impact your business if something goes wrong.

6. Make Sure The Whole Contract Supports The Risk Allocation

An indemnity clause doesn’t exist in isolation. It interacts with:

• limitation of liability clauses
• exclusions for certain types of loss
• termination rights
• customer obligations (like providing correct information)

This is why it’s often worth having the agreement reviewed as a whole - not just the indemnification clause in isolation.

If you’re putting together customer-facing terms, having tailored Customer Contract terms can help ensure the indemnity position matches the way you actually deliver your services.

Indemnification Clauses For Startups: Common Scenarios And “Hidden” Risk Areas

Startups tend to move fast, onboard users quickly, and use multiple third-party tools. That can create indemnity risks that aren’t always obvious when you’re focused on growth.

SaaS And Tech: IP Indemnities And Data Issues

If you’re developing software, you may be asked to indemnify for intellectual property infringement (for example, claims that your software copies someone else’s code or product). Sometimes this is fair - but it should be limited to what you provide, and subject to sensible exclusions.

If your product processes personal information, the contract may also include indemnities relating to data breaches or privacy compliance. That’s a strong reminder to have proper privacy documentation and internal processes in place, including a fit-for-purpose Privacy Policy.

Service Businesses: Marketing Claims And Regulatory Compliance

If you run an agency, consultancy, or professional services business, an indemnity can make you responsible for issues that sit more with the client - like product claims, regulatory compliance, or customer complaints.

Because the misleading or deceptive conduct rules under the Australian Consumer Law (ACL) can apply broadly to advertising and promotions, it’s important your contracts clearly reflect who is responsible for the accuracy of claims and approvals.

Hiring And Contractors: Indemnities Can Cut Both Ways

If you’re hiring contractors, you might want indemnities from them for things like:

• their negligence
• their breach of confidentiality
• claims that they infringed someone else’s IP in work they deliver to you

At the same time, be cautious when signing contractor or employment-related documents where you indemnify the other party broadly.

Having properly drafted Employment Contract documents (and contractor agreements) helps clarify responsibilities and reduce “accidental” risk transfers in day-to-day operations.

Founders And Investors: Indemnities In Corporate Documents

As your startup grows, you may see indemnities in company governance documents - sometimes around director and officer protections, or obligations between founders.

It’s important that key documents like your Company Constitution and any Shareholders Agreement align with your risk appetite and the realities of your business.

These are not “set and forget” documents. If your business model shifts, you bring on new shareholders, or you start operating in new markets, it’s often worth revisiting whether the indemnity settings still make sense.

Key Takeaways

• An indemnification clause shifts risk by requiring one party to cover the other party’s losses and claims, sometimes beyond ordinary legal liability (depending on the drafting).
• Indemnities commonly appear in customer, supplier, SaaS, service, and leasing contracts - and can have serious cash flow impacts if triggered.
• Key red flags include overly broad triggers (“in connection with”), uncapped indemnities, indemnities for the other party’s negligence, and indemnities that sit outside the liability cap.
• You can often negotiate an indemnification clause to be more balanced by limiting it to what you control, adding “to the extent caused by” language, and setting a clear process for handling claims.
• Indemnities should be consistent with the rest of the contract (especially limitation of liability clauses) and, where possible, aligned with your insurance coverage.

This article is general information only and isn’t legal advice. If you’d like help reviewing or negotiating an indemnification clause in your contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.