Indemnity Clause Example: Drafting Clear, Enforceable Terms

If you run a small business, you’ve probably seen an indemnity clause buried in a contract and thought: Is this standard, or is this risky?

Indemnities can be genuinely useful risk-management tools. They can also be one of the fastest ways to accidentally take on “someone else’s problem” (and costs) if the clause is too broad, unclear, or one-sided.

This guide walks you through what an indemnity is in plain English, when you might need one, and how to draft one that’s clear and commercially practical. We’ll also include an indemnity example you can use as a starting point, plus common pitfalls that can make an indemnity hard to enforce or more expensive than you intended.

What Is An Indemnity (And Why Do Small Businesses Use Them)?

An indemnity is a promise by one party (the indemnifier) to cover certain losses, costs, or claims suffered by the other party (the indemnified party).

In a small business context, an indemnity is usually about allocating risk. In other words, it answers questions like:

• If something goes wrong, who pays?
• If a third party makes a claim, who covers legal costs?
• If a product or service causes loss, who bears that loss?

Indemnities commonly show up in:

• Service agreements (e.g. consultants, agencies, trades, IT providers)
• Supply agreements (e.g. selling goods, manufacturing, distribution)
• Online terms (e.g. website terms, subscription services, marketplaces)
• Leases and licences (e.g. commercial tenancy arrangements)
• Business purchases (e.g. seller indemnities about liabilities, employee entitlements, IP ownership)

Indemnities sit alongside (but are different to) other risk tools like warranties, limitation of liability clauses, and insurance requirements. If you’re reviewing your contracts more broadly, it can help to also understand limitation of liability so the overall risk allocation makes sense.

Indemnity Vs Damages: What’s The Difference?

This is where many business owners get caught out. In general terms:

• Damages are a remedy for breach of contract (you usually need to show breach, loss, and causation).
• An indemnity is a contractual promise to cover certain losses, and it can apply even if there’s no breach (depending on how it’s drafted).

That’s why an indemnity can sometimes be a more straightforward path to recovery than a standard damages claim, and why you should be careful about giving one that’s wider than necessary.

When Do You Actually Need An Indemnity Clause?

Not every small business contract needs an indemnity. But in the right scenario, a well-drafted indemnity can reduce disputes and make responsibilities clearer.

You’re more likely to need an indemnity when:

• You’re exposed to third-party claims (e.g. IP infringement claims, personal injury claims, property damage).
• You’re relying on the other party’s conduct (e.g. the other party controls the workplace, product, or data).
• You want a practical pathway to recovery if costs arise (especially legal costs).
• The other party is better placed to manage the risk (because they control the relevant process, staff, equipment, or decisions).

Common Indemnity Scenarios For Small Businesses

• IT / SaaS provider: you might ask the provider to indemnify you if they infringe a third party’s intellectual property with their software.
• Marketing agency: the agency might indemnify you for claims arising from content they supply (e.g. using images without permission), while you indemnify them for content you provide.
• Supplier/manufacturer: you may ask for an indemnity for product defects, non-compliance, or safety issues.
• Landlord/tenant: a lease might require the tenant to indemnify the landlord for claims arising from the tenant’s use of the premises.

It’s also common to see indemnities tied to compliance obligations, like privacy and data handling. If you collect customer data, your broader contract and compliance setup often includes a Privacy Policy, and indemnities can be used to allocate risk if one party mishandles personal information.

An Indemnity Example You Can Adapt (With Notes)

Here’s an indemnity example written in a practical style that many small business contracts use. This is not “one size fits all” (and you should tailor it to your deal), but it’s a useful starting point.

Indemnity Example (General Third-Party Claims)

Indemnity

The Supplier indemnifies the Customer against any loss, damage, liability, cost or expense (including reasonable legal costs on a full indemnity basis, where recoverable) suffered or incurred by the Customer arising out of or in connection with any third-party claim that:

1. the Services, Deliverables, or any materials provided by the Supplier infringe the intellectual property rights of any person; or
2. the Supplier’s negligent act or omission or wilful misconduct in performing the Services causes personal injury (including death) or property damage,

except to the extent that such loss, damage, liability, cost or expense is caused or contributed to by the Customer’s breach of this Agreement, negligence, or unlawful conduct.

Why This Indemnity Example Works Better Than A “Catch-All” Clause

This example is narrower (and often more workable in practice) because it:

• Specifies the triggers (IP infringement; negligence/misconduct causing injury/property damage).
• Focuses on third-party claims (a common business risk where legal fees add up quickly).
• Includes a carve-out where the indemnified party contributed to the loss.
• Defines recoverable costs (including legal costs), which is often what businesses care about in real disputes.

If your contract also has warranties, refund rights, or customer-facing obligations, you’ll usually want the indemnity to “fit” with your consumer law position. For example, if you sell to consumers, your terms and practices need to align with the Australian Consumer Law (ACL), including how you handle warranties and remedies.

How To Draft A Clear, Enforceable Indemnity Clause (Step By Step)

A good indemnity clause is usually not the longest one in the contract. It’s the clearest.

When you draft (or negotiate) an indemnity, try working through these drafting decisions in order.

1. Identify The Risk You’re Actually Trying To Cover

Start by naming the real-world risk, not just writing “Party A indemnifies Party B against all losses”.

Ask yourself:

• Is this about third-party IP infringement?
• Is this about employee actions on site?
• Is this about damage to property?
• Is this about data breaches?
• Is this about regulatory investigations, claims, or costs (noting some penalties/fines may not be enforceable to pass on, or insurable, as a matter of law)?

Being specific helps you avoid indemnities that are so broad they become commercial deal-breakers (or so vague they become hard to enforce).

2. Decide Who Should Give The Indemnity

Indemnities should usually sit with the party who:

• controls the risk, or
• is best placed to prevent the risk, or
• profits from taking that risk on.

In many agreements, indemnities go both ways, but for different things (for example, each party indemnifies the other for their own negligence, and for materials they supply).

3. Define The “Trigger” Clearly

Ambiguity is the enemy of enforceability. Your indemnity should say what activates it, such as:

• “arising from a breach of this Agreement”
• “arising from negligence or wilful misconduct”
• “arising from a third-party claim that…”
• “arising from use of the Deliverables” (but be careful - this can be very broad)

If you’re on the receiving end of an indemnity, watch for triggers like “arising out of or in connection with” without further limits. That wording can be extremely wide.

4. Specify What Losses Are Covered (And What Aren’t)

Many indemnity disputes are not about whether there was a claim - they’re about what costs can be recovered.

Consider whether you want to include:

• legal costs (and whether it’s “party-party” or “full indemnity” basis, noting what’s actually recoverable can depend on the clause and the circumstances)
• settlement amounts
• internal management time (often contested)
• loss of profit or indirect losses (often heavily negotiated)

This is also where your indemnity needs to work alongside your limitation of liability clause and any exclusions of consequential loss. If your contract is missing those parts, you might end up with an indemnity that effectively overrides the risk limits you thought you had negotiated.

5. Include The Right Carve-Outs And Proportionality

Carve-outs are not “nice to have”. They’re often what makes an indemnity commercially acceptable.

Common carve-outs include:

• loss caused by the indemnified party’s breach or negligence
• loss arising from the indemnified party’s misuse of deliverables
• loss caused by following the indemnified party’s instructions (depending on the deal)

Another practical drafting approach is proportionality, such as “to the extent caused by” the indemnifier. This helps avoid unfair outcomes where one party is paying for something they didn’t actually cause.

6. Add A Claims Process (So You Don’t Lose Control Of A Dispute)

If the indemnity relates to third-party claims, you’ll often want a simple claims process so:

• you get notified quickly,
• the right party controls the defence or settlement (or at least has a say), and
• nobody admits liability too early.

Even a short process can prevent a lot of arguments later.

Common Indemnity Clause Mistakes That Can Hurt Small Businesses

Indemnities are a classic “looks standard, but can be expensive” clause.

Here are common mistakes we see small businesses run into, especially when using templates or copying clauses from other contracts.

Using “All Losses” Language Without Limits

If your indemnity says “all losses arising out of or in connection with” the agreement, that can unintentionally include:

• losses you didn’t cause,
• losses outside your control, and
• losses that are wildly disproportionate to the contract value.

For example, if you’re a contractor doing a small scope of work, a broad indemnity could make you responsible for losses across the client’s entire project, even if your work was a minor part.

No Link Between Indemnity And Insurance

Many businesses assume an indemnity is “covered by insurance”. Sometimes it is. Often, it’s not (or not fully).

If you’re giving an indemnity, you should check whether your insurance is likely to respond to that type of claim, and whether the indemnity wording creates exposures beyond what your policy covers.

Indemnifying For Things You Don’t Control

A practical rule: if you can’t control the risk, it’s risky to indemnify for it.

This can happen if you’re indemnifying a client for:

• their instructions to you,
• their systems or data,
• their compliance failures, or
• their staff’s conduct on site.

Where possible, indemnify only for your own acts/omissions, or for clearly defined deliverables you supply.

Indemnities That Clash With Your Other Contract Terms

Contracts are ecosystems. If your indemnity is broad but your limitation of liability is narrow (or missing), you can create internal contradictions.

The result is uncertainty, and uncertainty is where disputes live.

It’s one reason why, when you put together a Service Agreement or customer-facing Business Terms, it helps to make sure the indemnity, warranties, exclusions, and liability caps are drafted to work together.

Where Indemnities Fit In Your Overall Contract Setup

Indemnities rarely sit alone. They’re typically one part of a wider “risk allocation package” that includes:

• Clear scope of work (what you’re doing, what you’re not doing, and assumptions)
• Warranties (promises about quality, compliance, and standards)
• Limitations of liability (caps, exclusions, time limits)
• Payment terms (including when payment is due and consequences of late payment)
• Dispute resolution (how problems get handled before court)

If you’re hiring staff (or engaging contractors) who will be delivering services and interacting with customers, your contracts and policies should also be aligned. For example, having an appropriate Employment Contract can help set expectations and reduce internal disputes that spill into client problems.

And if you run an online business, indemnities often sit in your terms alongside privacy and user rules. In many cases, you’ll also want your website terms and platform rules to be consistent with any Website Terms and Conditions you publish.

Key Takeaways

• An indemnity is a contractual promise to cover certain losses, and it can allocate risk more strongly than standard damages claims.
• A useful indemnity clause is specific about what triggers it (for example, third-party claims like IP infringement, or negligence causing injury/property damage).
• The best indemnity example clauses are narrow enough to be commercially fair, but clear enough to be enforceable when something goes wrong.
• Always align indemnities with the rest of the contract (scope, warranties, limitation of liability, exclusions), so you don’t create contradictions or hidden exposure.
• Carve-outs (like “except to the extent caused by the other party”) and a basic claims process can prevent expensive disputes later.

This article is general information only and does not constitute legal advice. For advice tailored to your business and your contract, speak to a lawyer.

If you’d like help drafting or negotiating an indemnity clause for your small business contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.