Indemnities in Contracts | Sprintlaw Australia

If you’re running a startup or small business, contracts are meant to create certainty. But sometimes, the “certainty” is that you’ll be wearing the risk when things go wrong - and that’s where indemnities can become a big deal.

An indemnity is one of those contract clauses that can look like standard legal boilerplate, right up until there’s a claim, a dispute, a data incident, or a customer loss. Then it can play a major role in deciding who pays, how much, and when.

This guide breaks down indemnities in contracts in plain English, from a small business perspective. We’ll cover what indemnities are, why they matter, common types you’ll see in Australia, and the practical points to negotiate so your contract risk is actually manageable.

What Are Indemnities In Contracts (And Why Do They Matter)?

An indemnity is a promise that one party will cover certain losses suffered by the other party.

In practical terms, an indemnity clause is often used to shift financial risk. For example, if your customer gets sued because of something your business did (or allegedly did), the indemnity might require you to cover the customer’s losses.

Indemnity vs “Normal” Breach Of Contract Damages

This is where many business owners get caught out. If you breach a contract, the other party may have a standard right to claim damages. Those damages are usually subject to limitations under contract law (for example, what losses were reasonably foreseeable).

But an indemnity can work differently. Depending on how it’s drafted, an indemnity may:

cover wider categories of loss (including third-party claims);
be triggered even if the indemnified party also contributed to the loss (unless the clause says otherwise);
expand what can be recovered compared to a standard damages claim (for example, by expressly covering particular types of loss); and
require you to cover certain costs in a particular way (for example, legal costs as they are incurred, if the clause is drafted that way).

That’s why indemnities are often heavily negotiated in business-to-business deals, SaaS agreements, supplier arrangements, leases, and investment transactions.

When You’ll Commonly See Indemnities

Indemnities show up in lots of everyday small business contracts, including:

customer contracts and service agreements (especially higher-value projects);
supplier and distribution agreements;
software development and technology contracts;
employment and contractor arrangements (less common, but still possible in some contexts);
commercial leases and fit-out arrangements;
business or asset sales; and
shareholder or investment documentation.

If you’re signing anything substantial, it’s worth checking the indemnity section with extra care - and making sure it lines up with how you actually run your business.

How Indemnities Allocate Risk (And The Hidden “Cost” For Small Businesses)

At a business level, indemnities are about risk allocation. The tricky part is that risk doesn’t just disappear - it usually gets priced into the deal.

If your startup gives broad indemnities, you may need to absorb the “cost” in other ways, such as:

higher insurance premiums (or exclusions you didn’t expect);
increased compliance costs (because you’re now on the hook for more outcomes);
more internal processes to manage claims and disputes; and
greater cash flow pressure if a claim arises (especially if legal costs must be paid as incurred under the contract).

For small businesses, the risk is often magnified because one significant claim can be enough to disrupt operations. So when you’re reviewing indemnities in contracts, it helps to ask a simple question:

“If this worst-case scenario happened, could we actually survive the financial impact?”

Indemnities Can Override “Limitation Of Liability” Clauses

A common misunderstanding is assuming your limitation of liability clause will cap your exposure no matter what. But many contracts carve indemnities out of the liability cap.

That means you could have:

a $50,000 liability cap for general breaches; but
uncapped liability for indemnities (for example, IP infringement or third-party claims).

This is one of the biggest reasons indemnities deserve a dedicated negotiation, rather than a quick skim.

Common Types Of Indemnities In Contracts (With Startup-Friendly Examples)

There’s no single “standard” indemnity. The scope depends on what’s being sold, who has the power to control the risk, and what’s commercially acceptable in the industry.

Here are some of the most common indemnities you’ll see in Australian business contracts.

Third-Party Claims Indemnity

This is an indemnity triggered when someone outside the contract (a third party) makes a claim.

Example: You provide event services. A third party alleges property damage caused by your staff. Your customer wants you to indemnify them for any losses arising from that third-party claim.

These indemnities often cover legal costs, settlements, and damages, which can become expensive quickly.

Intellectual Property (IP) Infringement Indemnity

Common in technology, creative services, marketing, and product supply agreements.

Example: You design a logo, website, or software feature. The customer claims a competitor says it infringes their copyright or trade mark, and they want you to cover the costs.

If your business is creating or licensing IP, you’ll want strong internal IP processes and clear contractual boundaries (for example, what you are and are not responsible for, and what the client supplies).

Confidentiality / Data / Privacy Indemnity

These can apply where personal information or sensitive business data is handled.

Example: Your business stores customer contact details. If there’s a data breach caused by your systems, your client might seek an indemnity for regulatory claims, third-party complaints, and notification costs.

Many businesses don’t realise how quickly this type of indemnity can expand in scope, especially if the clause includes “any loss” connected with a privacy breach.

Also keep in mind that whether “regulatory penalties” are covered will depend on the wording and the specific circumstances, and in some cases there may be legal restrictions on indemnifying certain penalties or fines.

If you collect personal information, a clear Privacy Policy and aligned internal practices can reduce disputes about what you promised to do with data.

Negligence / Personal Injury / Property Damage Indemnity

This comes up a lot for service businesses, trades, onsite work, logistics, events, and construction-adjacent arrangements.

Example: Your team is working on a site and accidentally damages equipment. The client may want you to indemnify them for repair and replacement costs.

These indemnities are often tied to insurance expectations, so it’s important your contract aligns with what your insurer will actually cover.

Tax Indemnity

More common in business sales, contractor arrangements, and some cross-border deals.

Example: In an asset sale, the buyer might ask for a tax indemnity covering liabilities that arise from the seller’s pre-completion tax position.

This can be reasonable, but the wording needs to be tight so you’re not taking responsibility for unknown issues outside your control.

Important: This section is general information only and isn’t tax advice. Tax outcomes can be complex, so it’s a good idea to get advice from a qualified tax adviser or accountant on your specific situation.

What To Look For When Reviewing Indemnities In Contracts

When you’re reviewing (or drafting) indemnities in contracts, it’s not just “is there an indemnity?” - it’s the exact wording that matters.

Here are the practical clause points to focus on.

1) What Events Trigger The Indemnity?

Look for the trigger language. Common triggers include:

“arising out of” (often broad);
“in connection with” (also broad);
“caused by” (usually narrower and more favourable);
“as a result of breach” (ties indemnity to an actual breach).

If you’re the one giving the indemnity, you’ll usually want the trigger to be narrower and linked to something you can control (like your negligence or breach).

2) What Losses Are Covered?

Indemnities can cover different categories of “loss,” including:

direct losses (e.g. cost to repair);
indirect or consequential losses (which can be very large);
loss of profit or revenue;
regulatory penalties (sometimes included, sometimes excluded, and sometimes restricted by law);
legal costs (and whether they’re “as incurred”);
settlements (and whether you must consent to them).

Be especially careful with undefined phrases like “any loss whatsoever.” That wording is common, but it can be commercially unrealistic for a small business to accept without a cap or exclusions.

3) Is The Indemnity Capped Or Uncapped?

If the contract has a liability cap, check whether indemnities are:

inside the cap (better for the party giving the indemnity); or
excluded from the cap (higher risk exposure).

A balanced outcome is often:

cap most indemnities; and
leave only specific, high-control risks uncapped (if any), like deliberate misconduct.

4) Are You Indemnifying The Other Party For Their Own Mistakes?

Some indemnities are drafted so broadly that you effectively cover loss even if the other party contributed to it.

If you see language that could catch “contributory negligence” by the other party, consider negotiating:

an exclusion where the loss is caused by the other party; or
apportionment (so you’re only responsible to the extent of your contribution).

5) Who Controls The Defence Of A Claim?

For third-party claims, it’s important to clarify:

who appoints lawyers;
who controls strategy and settlement;
what consultation/consent rights exist; and
what happens if the indemnified party wants to settle quickly.

Without control rights, you could be paying for a defence strategy you wouldn’t choose - or a settlement you don’t agree with.

6) Notice Requirements And Claim Process

Look for rules like:

the other party must give notice “promptly” or within a set timeframe;
you can deny liability if notice is late (depending on the wording);
you must pay within a certain number of days; and
you must provide records and cooperation.

A clear process reduces disputes and helps you manage issues early, before they become expensive.

How To Negotiate Indemnities (Without Derailing The Deal)

Negotiating indemnities can feel uncomfortable - especially when you’re the smaller party and you want to close the deal.

The good news is you don’t always need to “remove” the indemnity to make it workable. Often, you can adjust the scope so it matches real-world risk.

Start With A Simple Risk Conversation

Instead of arguing about legal wording first, try aligning on the risk principle:

Who is best placed to control the risk?
What’s the likely financial impact if something goes wrong?
Is the indemnity matching the value of the contract?

That framing makes it easier to propose reasonable changes.

Common Startup-Friendly Negotiation Positions

Depending on the deal, you might negotiate:

Limit the trigger to your breach, negligence, or misconduct (rather than anything “in connection with” the services).
Carve out client-supplied materials (e.g. if the client provides content or instructions, you don’t indemnify for issues caused by those inputs).
Exclude consequential loss, loss of profit, and loss of revenue.
Cap the indemnity (for example, to fees paid, a multiple of fees, or an insured amount).
Make indemnities mutual where appropriate (e.g. both parties give a confidentiality indemnity).
Build in claim control rights and settlement consent requirements.
Align to insurance (for example, the indemnity is limited to the extent covered by insurance, subject to policy terms).

These adjustments often land well because they’re tied to fairness and commercial reality.

Make Sure Your Core Contract Documents Back You Up

Indemnities don’t sit in isolation. They should align with your overall contract suite - especially your customer-facing terms and supplier terms.

For example, if you’re providing services to clients, a well-drafted Service Agreement can clarify scope, assumptions, exclusions, and responsibility boundaries so indemnities don’t accidentally expand beyond what you intended.

And if you collect personal information, your customer terms should work consistently with your Privacy Policy and internal processes, so you’re not promising more than you can practically deliver.

Key Takeaways

Indemnities in contracts are promises to cover certain losses, and they can shift serious financial risk onto your business if drafted broadly.
Indemnities often operate differently from standard breach of contract damages, and they can expand liability beyond what you expect depending on the wording.
Common indemnities include third-party claims, IP infringement, privacy/data incidents, negligence/property damage, and tax liabilities.
When reviewing indemnities, focus on the trigger wording, what losses are covered, whether the indemnity is capped, and who controls the defence of claims.
You don’t always need to remove an indemnity - narrowing the scope, adding exclusions, and aligning the clause to insurance can make it commercially workable.
Strong underlying contracts and policies (including customer terms and a Privacy Policy) help ensure indemnities match how your business actually operates.

If you’d like help reviewing or drafting a contract with indemnities (so you can sign with confidence), reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Indemnities In Contracts: What Australian Businesses Need To Know