What Is An Indemnity Clause In Australia?

If you run a small business in Australia, you’ll see indemnity clauses pop up everywhere - in supplier contracts, SaaS subscriptions, venue hire agreements, subcontractor terms and more.

They’re powerful risk‑shifting tools. Used well, they can protect your business when things go wrong. Used poorly, they can expose you to open‑ended liability that your insurance won’t cover.

In this guide, we unpack what an indemnity clause is, how it works in Australian contracts, common traps to avoid, and how to negotiate balanced wording that actually supports your commercial goals.

What Is An Indemnity Clause (And What Does It Do)?

An indemnity clause is a promise that one party will compensate the other for certain losses, claims, or liabilities that arise in connection with a contract.

In plain English: if a specified event happens (for example, a third‑party claim, property damage, or an IP infringement allegation), the indemnifying party will make the other party whole for the losses covered by the clause.

Key features commonly include:

• Who is indemnifying whom (the “indemnifier” and the “indemnified”).
• What types of losses are covered (e.g. legal costs on a full indemnity basis, settlement amounts, fines - although fines/penalties may raise public policy issues).
• What triggers the indemnity (e.g. breach of contract, negligence, third‑party claims, IP infringement).
• Any limits, caps, time periods, or exclusions (e.g. the other party’s own negligence or wilful misconduct).

Why it matters for small businesses: indemnities can be broader than standard breach of contract damages. They often change who bears the cost of legal claims, and they can override usual rules about foreseeability and loss heads if not carefully drafted.

How Do Indemnity Clauses Work In Practice?

Indemnities are most useful for allocating risk to the party best placed to control or insure against it. For example, a subcontractor might indemnify a builder for losses caused by the subcontractor’s faulty workmanship.

Common situations include:

• Third‑party claims: A customer sues your client, alleging your services caused them loss. The client relies on your indemnity to recover their defence costs and settlement payments from you.
• IP infringement: You provide software and indemnify a customer against third‑party claims alleging the software infringes their IP.
• Property damage or personal injury: A venue requires suppliers to indemnify it for damage or injury caused while on site.

Indemnities are often read alongside a contract’s Limitation of Liability clause, so both provisions should be consistent. Otherwise, you could inadvertently agree to unlimited liability via the indemnity while believing your liability is capped elsewhere.

What Should An Indemnity Clause Cover (And Exclude)?

There’s no one‑size‑fits‑all indemnity. The right scope depends on your role, bargaining power and insurance. Still, there are practical inclusions and exclusions most small businesses should consider:

Helpful Inclusions

• Clear triggers: Tie the indemnity to specific events you can control (e.g. your breach, your negligence, your IP infringement), not vague catch‑alls like “in connection with the agreement.”
• Third‑party claims only: Where appropriate, restrict the indemnity to third‑party claims rather than all losses suffered by the other party.
• Defence control: If you’re indemnifying, require prompt notice and the right to conduct the defence or approve settlements (so costs don’t spiral).
• Proportionate liability: Losses should be reduced to the extent they are caused or contributed to by the other party.
• Time limits and caps: Align with your overall liability cap and the contract term, noting any statutory obligations that can’t be excluded.

Common Exclusions

• Other party’s negligence or wilful misconduct: You generally shouldn’t indemnify the other party for their own wrongdoing.
• Indirect or special losses: Exclude loss types that are hard to quantify or insure against, such as loss of profit or loss of opportunity, unless the deal specifically requires it.
• Uninsurable risks: If your policy won’t respond to certain fines or penalties, avoid indemnifying for them.

Many contracts also define or exclude consequential loss. Make sure the indemnity’s wording and your loss exclusions work together properly.

Indemnity Clauses And Other Key Contract Terms

An indemnity doesn’t operate in a vacuum. It should be drafted to “fit” with other liability management clauses in your agreement.

Limitation Of Liability

Most small businesses will include a liability cap (e.g. 12 months’ fees) and carve‑outs (e.g. IP infringement, personal injury caused by you, confidentiality breaches). Ensure the indemnity is expressly subject to the cap where appropriate, otherwise the indemnity can unintentionally bypass it.

Exclusion Of Certain Losses

Exclusions of indirect or special damages are common. Confirm whether these exclusions apply to indemnified losses as well, or whether indemnified losses are carved out. Inconsistent drafting here is a frequent - and expensive - trap.

Set‑Off And Payment Mechanics

If a client can net off amounts they say you owe under an indemnity against your invoices, that impacts cash flow. Clarify if a set‑off clause applies to indemnity claims and, if so, under what conditions (for example, only after liability is finally determined).

Waivers And Releases

Sometimes parties combine indemnities with legal waivers or releases. These are different concepts: a release/waiver aims to prevent claims being brought at all, while an indemnity allocates the cost of claims that do arise. Both need careful, plain‑English drafting to be enforceable.

Insurance, Indemnities And Your Real Risk

Your indemnity is only as helpful as the insurance sitting behind it - yours and the other party’s. Before agreeing to broad indemnities, check:

• Coverage: Does your public liability, professional indemnity or cyber insurance actually respond to the indemnified risks?
• Contractual liability: Many policies exclude “assumed liability” under contract beyond what the law would impose anyway. If your contract expands your liability, your policy might not cover it.
• Caps and sub‑limits: Ensure the indemnity cap aligns with your policy limits and any relevant sub‑limits.
• Counterparty’s cover: If you rely on their indemnity, consider requiring evidence of insurance and notice of any material changes.

Where a third party (like a parent company or investor) wants extra comfort, they may seek a Deed of Guarantee and Indemnity. This is separate to a contract indemnity and should be reviewed carefully.

Common Indemnity Clause Pitfalls (And How To Avoid Them)

We regularly see Australian small businesses take on unnecessary risk because of indemnity wording. Watch out for these red flags.

1) “In Connection With” Catch‑Alls

Wording like “arising out of or in connection with” can be very broad. If you’re indemnifying, narrow it to clear, controllable triggers (your breach, negligence, or specified obligations). If you’re receiving the indemnity, be precise about what you actually need.

2) No Proportionate Liability

Without an express reduction for the other party’s fault, you could be liable for 100% of their losses even if they contributed. Include a proportionate liability clause and consider whether the Civil Liability Acts apply to your scenario.

3) Indemnities That Bypass Caps

Unless it’s a genuine high‑risk carve‑out (for example, IP infringement), it’s usually fair that indemnified amounts count toward the overall cap. Make that explicit if you are the indemnifier.

4) Paying All Costs On Demand

Some clauses require you to pay “on demand” before liability is established. Seek rights to defend claims, approve settlements and only pay proven, reasonable costs.

5) Uninsured Liability

Don’t agree to indemnify for losses that your insurance won’t cover, like certain penalties or open‑ended consequential losses, unless that risk is priced and approved internally.

6) No Alignment With Other Clauses

Check that indemnities work with your confidentiality, IP, limitation of liability and dispute resolution provisions. Inconsistencies lead to disputes about what the parties intended.

How To Negotiate A Fair Indemnity Clause

Negotiation doesn’t have to be combative. Aim for clarity and fairness that reflects commercial reality and who controls the risk.

• Start with your risk map: Identify the top legal risks in the deal (e.g. data breaches, physical injury, IP disputes) and who is best placed to manage or insure them.
• Tie indemnities to control: If you control the risk, a tailored indemnity can be reasonable; if the other party controls it, push for their indemnity or a shared responsibility approach.
• Balance with caps and exclusions: Propose a sensible cap and carve‑outs (for example, uncapped only for IP infringement caused by you or personal injury due to your negligence).
• Clarify process: Add notice obligations, defence control, and cooperation to prevent cost blowouts.
• Keep it mutual where appropriate: Mutual indemnities for each party’s breach or negligence are often seen as fair.

If the other side provides a template with very broad indemnities, don’t panic. Explain your insurance and risk constraints, and suggest targeted wording that protects both parties without creating uninsurable exposures.

Where Should You Use Indemnities In Your Business Contracts?

Indemnities are commonly used in your front‑line contracts and policies. Think about your standard terms with customers, suppliers and partners, and build sensible risk allocation into them.

• Your Customer Contract or Terms of Trade can include targeted indemnities for third‑party IP claims or damage caused by the customer’s misuse of your products.
• Your Privacy Policy won’t contain indemnities, but your data processing terms with vendors should address privacy risk allocation in a similar spirit.
• If you hire staff, your Employment Contract typically won’t ask employees to indemnify you, but you’ll manage risk through policies, supervision and training to avoid claims like vicarious liability.
• When sharing confidential information, use an NDA with clear remedies for breach - you might not need an indemnity if other protections are strong.
• For certain activities (events, facilities, risky services), consider a tailored release or a Deed of Waiver, Release & Indemnity that’s appropriate for your industry and customers.

As always, keep the wording consistent across your documents so the indemnity doesn’t clash with your liability cap, exclusions or dispute resolution framework.

Are Indemnity Clauses Enforceable Under Australian Law?

Generally, yes. Courts in Australia will enforce clearly drafted indemnities, especially those allocating third‑party claim costs. But there are limits:

• Unfair Contract Terms: If you contract with consumers or small businesses on standard form terms, the Australian Consumer Law’s unfair contract terms regime could apply. Overly one‑sided indemnities can be struck down.
• Public Policy: Indemnities for certain fines and penalties may be unenforceable as a matter of public policy.
• Statutory Duties: You can’t contract out of some statutory obligations (for example, certain workplace safety duties).
• Interpretation: Ambiguities are usually interpreted against the party who drafted the clause, so clarity is critical.

If a dispute arises, the wording of the indemnity (and the rest of the contract) will be central to any breach of contract analysis and defence strategy.

Real‑World Examples You Can Adapt

To make the concepts tangible, here are simplified examples to illustrate different approaches. These are not templates - treat them as a starting point for discussion with a lawyer.

Example 1: Supplier Indemnity For Third‑Party IP Claims

“The Supplier indemnifies the Customer from and against all third‑party claims, losses, damages and reasonable legal costs arising directly from any allegation that the Products infringe a third party’s Intellectual Property Rights, except to the extent caused by the Customer’s misuse or modification of the Products.”

Why it works: targeted trigger (IP claims), third‑party only, proportionate carve‑out for the customer’s fault.

Example 2: Mutual Indemnity For Negligence

“Each party indemnifies the other against losses arising from personal injury or property damage caused by its negligence in connection with this Agreement.”

Why it works: mutual and focused on controllable risk.

Example 3: Narrowed Indemnity With Defence Control

“The indemnity in clause X is subject to the Indemnified giving prompt written notice of any claim, and the Indemnifier controlling the defence and settlement (acting reasonably), provided the Indemnified may participate at its cost.”

Why it works: balances cost control with cooperation.

Quick Checklist: Before You Sign An Indemnity

• What specific risks are being indemnified? Can you control them?
• Is the indemnity limited to third‑party claims and reasonable, proven costs?
• Does it work with your liability cap and exclusions (including any carve‑outs)?
• Do you have insurance cover for the indemnified risks (including contractual liability)?
• Is there a fair process for notice, defence control, and settlements?
• Are there proportionate liability and mutuality where appropriate?
• Have you considered whether a waiver or release is needed, and whether it’s enforceable under Australian law on waivers?

Key Takeaways

• An indemnity clause is a promise to cover specific losses - it’s a powerful risk‑allocation tool that needs careful, plain‑English drafting.
• Keep indemnities targeted to risks you control, align them with your cap and exclusions, and avoid paying for the other party’s negligence or uninsurable losses like broad consequential loss.
• Draft indemnities to fit with your broader liability framework, including your Limitation of Liability, loss exclusions and any consequential loss wording.
• Check your insurance for coverage of contractual liability and ensure notice/defence procedures prevent cost blowouts.
• Build sensible indemnities into your day‑to‑day contracts - from your Customer Contract to supplier terms - and keep wording consistent across documents.
• When stakes are high, negotiate mutual, proportionate indemnities and document a fair claims process to protect both sides.

If you’d like tailored help drafting or reviewing indemnity clauses for your contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.