Indemnity Clause Example: Drafting & Using Indemnities In Australia

If you sell products, deliver services, or hire subcontractors, you’ll eventually come across the question: should my contract include an indemnity clause?

Indemnities are powerful risk‑allocation tools. Used well, they protect your business from specific losses and clarify who pays if something goes wrong. Used poorly, they can expose you to uncapped liability and disputes you didn’t expect.

In this guide, we’ll walk through a clear indemnity clause example, break down the moving parts in plain English, and show you how to tailor indemnities for everyday Australian business contracts. We’ll also cover how indemnities interact with limitation of liability, insurance and unfair contract terms, so you can reduce risk without scaring off customers or partners.

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

An indemnity clause is a promise that one party will compensate the other for certain losses, liabilities or claims. In short, it answers: if X happens, who pays?

Small businesses commonly use indemnities to manage risks that one party is better placed to control. For example:

• A subcontractor indemnifies a head contractor for losses caused by the subcontractor’s work or negligence.
• A supplier indemnifies a reseller for third‑party intellectual property claims about the supplied goods.
• A client indemnifies a consultant for losses arising from the client’s misuse of the deliverables after handover.

Why use them? Indemnities can:

• Make risk allocation explicit and predictable.
• Cover third‑party claims (e.g. a customer sues you, and you “pass through” those losses to your supplier).
• Sit alongside other contract protections like limitation of liability and insurance requirements.

However, indemnities are often negotiated hard because they can be broad, uncapped and long‑lasting. The trick is drafting them to be clear, reasonable and workable in the real world.

A Practical Indemnity Clause Example (With Variations You Can Tailor)

Here’s a straightforward indemnity clause you can use as a starting point. Do not copy‑paste blindly-use it to understand the moving pieces you’ll want to tailor.

Indemnity

1. The Supplier indemnifies the Customer against any Loss suffered or incurred by the Customer arising from:
   (a) any Claim by a third party that the Goods or Services infringe that third party’s Intellectual Property Rights; 
   (b) personal injury, death or property damage to the extent caused by the Supplier’s (or its Personnel’s) negligent acts or omissions; and
   (c) any breach of this Agreement by the Supplier.

2. The indemnity in clause 1 does not apply to the extent the Loss was caused or contributed to by:
   (a) the Customer’s misuse of the Goods or Services; 
   (b) the Customer’s failure to follow the Supplier’s reasonable instructions; or
   (c) the Customer’s negligence or breach of this Agreement.

3. The Supplier is not liable under this indemnity for any Consequential Loss, except for Loss arising from a third‑party Claim for Intellectual Property Rights infringement.

4. As a condition of the indemnity:
   (a) the Customer must promptly notify the Supplier of any Claim and provide reasonable information; 
   (b) the Supplier may conduct the defence and settlement of the Claim; and
   (c) the Customer must use reasonable efforts to mitigate its Loss.

5. The parties agree that any liability under this indemnity is subject to the limitations and caps set out in clause , except for liability for personal injury, death, tangible property damage, or fraud.

How you might tailor it:

• Mutual vs one‑way: Make it mutual if both sides present similar risks (e.g. each party indemnifies for its own breach or negligence).
• Scope: Target specific risks (IP infringement, property damage, third‑party claims) instead of “all losses arising out of or in connection with this agreement”.
• Caps and carve‑outs: Tie the indemnity to the contract’s liability cap, and carve out serious conduct (e.g. fraud or wilful misconduct) from any cap.
• Defence control: Let the indemnifying party control the defence of third‑party claims (with a duty to consult), so the costs are managed sensibly.
• Notice and mitigation: Make prompt notice and reasonable mitigation a condition of the indemnity to avoid open‑ended exposure.

Key Parts To Get Right In Your Indemnity

1) Define The Triggers Clearly

Spell out exactly what events trigger the indemnity: breach of contract, negligence, IP infringement, data breach, workplace injury, or third‑party claims. If it’s too broad, you risk indemnifying for issues outside your control.

2) Use “To The Extent Caused By” Wording

In Australia, proportionate liability regimes and contribution principles matter. Wording like “to the extent caused by” (instead of “arising out of”) helps apportion liability fairly and avoid picking up losses caused by the other party or a third party.

3) Decide On Consequential Loss

Businesses often exclude “consequential loss” to avoid liability for remote or indirect losses. Be explicit whether the indemnity covers or excludes it, and whether there are exceptions (e.g. for third‑party IP claims). For more context on what sits in or out of this bucket, see consequential loss.

4) Cap The Exposure (And Carve Out The Serious Stuff)

It’s common to tie indemnity exposure to a liability cap (e.g. 12 months’ fees), with carve‑outs for serious conduct like fraud, wilful misconduct, personal injury or property damage. Make sure the contract’s limitation of liability clause and the indemnity clause are aligned and not contradicting each other.

5) Include Defence, Settlement And Cooperation Rules

Without a process, disputes can balloon. Set out who controls the defence, the duty to keep the other side informed, and when consent is needed to settle. Also include prompt notice and a duty to mitigate reasonably.

6) Address Insurance

Indemnities work best alongside appropriate insurance. If you’re giving an indemnity (e.g. for personal injury/property damage), ensure you hold public and products liability cover at suitable limits and that it responds to contractual indemnities where possible. Conversely, if you’re receiving an indemnity, require the other side to maintain specified insurance for the term (and perhaps for a tail period).

7) Consider The Unfair Contract Terms (UCT) Regime

If you use standard form contracts with small businesses or consumers, Australia’s UCT rules under the Australian Consumer Law can void terms that are unfair-this can include overly broad indemnities. Keeping indemnities clear, proportionate and reasonably necessary for your legitimate interests will help. If you’re not sure whether your template passes muster, a targeted UCT review and redraft can be invaluable.

How Indemnities Interact With Other Contract Terms

Indemnities don’t sit in a vacuum. They interact with several core clauses-get those relationships right to avoid unpleasant surprises.

Limitation Of Liability

Your indemnity and cap should work together. If the indemnity says it is “subject to the cap”, that usually means the cap applies; if the indemnity says “notwithstanding any other clause”, it may sit outside the cap. Be explicit. Many businesses cap ordinary losses but leave carve‑outs for personal injury, property damage, fraud and IP infringement. Align this with the overall limitation of liability framework.

Consequential Loss Exclusions

Decide whether your consequential loss exclusion applies to indemnified losses. You might exclude consequential loss generally but allow it for third‑party IP claims (where damages and legal costs can be significant). If you exclude too much, the indemnity may not be worth much in practice-strike a fair balance with the other party and document it clearly, referencing your approach to consequential loss.

Set‑Off And Payment Mechanics

If an indemnity amount is owed, can the recipient deduct it from amounts they owe you? If you’d like to allow or restrict that, say so in your set‑off clause. This is especially relevant in supply and services contracts where invoices cycle regularly.

Waivers, Releases And Deeds

Sometimes you’ll resolve a dispute or end a relationship and want the indemnity to keep protecting you. A tailored release (often in a deed) can “cleanly” settle matters and preserve agreed indemnities or carve‑outs. In that scenario, a dedicated Deed of Waiver, Release and Indemnity keeps things tight and enforceable.

Execution Requirements

Even the best‑drafted indemnity is only useful if the agreement is validly signed. If you’re dealing with companies, consider having documents executed in line with the Corporations Act regime for certainty-more on this in our guide to signing under section 127.

Australian Consumer Law

Indemnities can’t be used to sidestep the Australian Consumer Law (ACL), including consumer guarantees and the prohibition on misleading or deceptive conduct. Keep your indemnity consistent with your obligations under section 18 of the ACL and ensure your overall liability framework doesn’t purport to exclude mandatory guarantees.

Where Should You Use Indemnities In Your Business?

Indemnities appear in many day‑to‑day agreements. The key is to match the risk to the party best placed to manage it.

Supplier And Terms Of Trade

When you sell goods or services, your customer‑facing terms will often include targeted indemnities-for example, the customer indemnifies you for losses caused by their unlawful use of your products, or for claims arising from content they provide. Your supplier‑facing terms will commonly include the supplier’s indemnity for IP infringement or defective goods. If you’re formalising these, consider rolling them into clear, balanced Terms of Trade.

Professional Services And Statements Of Work

Consultants usually indemnify clients for personal injury/property damage they cause, and for breaches of confidentiality or data security. Clients may indemnify consultants for third‑party claims that arise from how the client uses the deliverables after handover. These risk allocations should be consistent across your Master Services Agreement and SOWs, and reviewed via a practical contract review before you sign big engagements.

Technology, SaaS And IP

Software vendors often indemnify customers for IP infringement claims related to the software itself. Customers might indemnify vendors for data the customer supplies (e.g. user‑generated content that infringes others’ rights). When you draft or negotiate these, align them with your support obligations, version control and update processes so they remain realistic over time.

Construction And Subcontracting

Head contractors usually expect subcontractors to indemnify them for site safety incidents to the extent caused by the subcontractor, and for damage to property or third‑party claims related to the subcontractor’s work. You’ll also see insurance requirements and pass‑through indemnities up and down the contracting chain. Consider whether you need a General Security Agreement or other security to backstop indemnity obligations in higher‑risk projects.

Settlement And Exit Scenarios

When relationships end, a release that preserves necessary protections (confidentiality, IP ownership, accrued rights) and clarifies which indemnities survive can save headaches later. A deed format, like a Deed of Waiver, Release and Indemnity, is commonly used for certainty.

Frequently Negotiated Points (And Practical Tips)

Mutuality

Where risks are symmetrical, consider making indemnities mutual. This often speeds up negotiations because each party stands behind its own conduct the same way.

“Hold Harmless” And “Defend” Language

US‑style clauses sometimes include “defend, indemnify and hold harmless”. In Australia, you can achieve the same outcome by explicitly stating who will conduct the defence and who will pay, then setting a reasonable process for notice, cooperation and settlement consent.

Duration And Survival

It’s normal for indemnities to survive termination. If you want them to end after a time, say so (e.g. survive for 24 months post‑termination). Be careful that statutory liability periods or insurance notification windows are not inadvertently cut off.

Evidence And Costs

Consider whether indemnified costs include legal fees on a solicitor‑client basis or only court‑awarded costs. Also decide whether the indemnified party must obtain multiple quotes, consult on counsel selection, or get consent for settlements above a threshold.

Insurance Alignment

Check your policy terms. Some insurers restrict cover for contractual indemnities beyond your civil liability. If you intend to give broad indemnities, talk to your broker about wording and coverage alignment.

Template Governance

Once you’ve agreed your risk position, reflect it consistently in your templates: master terms, SOWs, order forms and any sector‑specific contracts. If you’re refreshing your suite, a pragmatic contract drafting project can harmonise indemnity wording across documents so you’re not negotiating from scratch each time.

Another Indemnity Clause Example (Narrow And Mutual)

Mutual Indemnity (Negligence and IP Only)

Each party (Indemnifying Party) indemnifies the other party and its Personnel against Loss suffered or incurred by them arising from:
(a) personal injury, death or tangible property damage to the extent caused by the Indemnifying Party’s negligent acts or omissions; and
(b) any Claim by a third party that the Deliverables supplied by the Indemnifying Party infringe that third party’s Intellectual Property Rights.

The indemnities in this clause are subject to:
(i) the indemnified party providing prompt written notice of the Claim, reasonable information and cooperation;
(ii) the Indemnifying Party having sole control of the defence and settlement (not to be unreasonably withheld or delayed); and
(iii) the exclusions and caps in clause , except for liability for personal injury, death, or fraud.

Neither party is liable for Consequential Loss under this clause, except to the extent payable to a third party under (b) above.

Why this version? It’s narrow (negligence and IP only), mutual (each party stands behind its own conduct), and it links back to the liability cap while carving out serious conduct. This style suits balanced partnerships and recurring services arrangements where both sides contribute materially to outcomes.

Common Pitfalls To Avoid

• Over‑broad scope: “All losses in connection with the agreement” can pick up risks you don’t control. Be specific.
• No process: Without notice, defence and settlement rules, disputes over who runs a claim (and pays for it) can escalate fast.
• Cap mismatch: If your indemnity isn’t clearly “subject to” the cap (with any agreed carve‑outs), you might accidentally create uncapped liability.
• UCT exposure: In standard‑form contracts with small businesses, a sweeping, one‑sided indemnity can be at risk. Balance the wording and consider a UCT review.
• Insurance gaps: Ensure the risks you accept under your indemnities are covered by your insurance program (or consciously retained).
• Inconsistent templates: If your proposal, SOW and main terms use different indemnity language, the “battle of forms” can create ambiguity. Harmonise your documents via your Terms of Trade and master agreements.

Key Takeaways

• Indemnities allocate who pays for specific risks-keep them targeted, balanced and tied to events you can control.
• Use clear triggers, “to the extent caused by” wording, and a fair process for notice, defence, cooperation and settlement.
• Align your indemnity with your broader risk framework: liability caps, consequential loss treatment, insurance and the Australian Consumer Law.
• Make sure the clause fits the context: supplier terms, professional services, tech/SaaS and construction contracts each have common risk patterns.
• Avoid unfair, over‑broad or uncapped indemnities in standard‑form contracts-Australia’s UCT regime can void them, so consider a UCT review if you’re unsure.
• Templates work best when harmonised-build your risk position into your Terms of Trade, master agreements and SOWs, and get key deals checked with a practical contract review.

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