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“Indemnity” is not a word that usually pops up in everyday conversation. However, if you’ve ever reviewed a commercial contract, you’ve likely come across an indemnity clause. In 2025, with business risks evolving rapidly, indemnity clauses remain a cornerstone of commercial agreements, helping parties manage liabilities from unforeseen events.
The indemnity clause is often one of the most important provisions during contractual negotiations, especially as industries face new challenges such as cybersecurity breaches and supply chain disruptions. For more insights into contract essentials, check out our guide on What Is a Contract?.
So, let’s explore what an indemnity clause means and why lawyers devote considerable attention to getting it right.
What Is An Indemnity Clause And How Does It Work?
An indemnity clause is fundamentally about allocating risk. It serves as a guarantee to compensate for any losses caused by one party to another during the performance of the contract. In today’s fast-changing market environment, this clause is crucial to protect your business from unforeseen liabilities.
If there is any damage arising from a contract, the parties typically need clarity on two key points:
- What is the compensation for the damage?
- Who is responsible for making that compensation?
Essentially, an indemnity clause transfers risk from one party to another. It’s akin to saying, “If this event occurs, I’ll cover you for it”.
Indemnity clauses frequently become a point of intense negotiation, given that the stakes involve potential financial loss, legal disputes, and reputational harm. Ensuring that an indemnity clause aligns with your business interests can be the difference between manageable risk and a costly liability. For instance, if you need insights on safeguarding your interests, consider reviewing our article on Contract Review and Redraft.
What Is A Good Indemnity Clause?
A good indemnity clause protects your business as comprehensively as possible within the limits of the law. It should clearly define the scope of risks covered, including emerging ones in the current 2025 landscape such as cyber threats.
Commercial contracts are complex by nature, so it’s vital that your indemnity clause is drafted to integrate seamlessly with the other terms. This proactive approach helps avoid headaches and complications later on. Our resource on Business Set-Up Ideas and Plans can provide additional context on aligning your agreements with best practices.
It’s always advisable to seek the assistance of a legal professional when drafting an indemnity clause, as these provisions are often subject to varying interpretations.
How Will That Impact Me?
Even if your indemnity clause appears robust, there’s a risk that a court might interpret it ambiguously or differently from your intentions. In 2025, courts continue to scrutinise these clauses closely, and an unclear indemnity clause can be a red flag that may lead to an unfavourable ruling.
The precise wording is critical and must be tailored to the unique context of your contract, ensuring that it reflects the current risks and liabilities your business might face.
What Else Should I Be Looking Out For?
Caps
It’s also important to check for any caps that the other party may have imposed on their liability. If liability is capped at a certain amount, the indemnity may not be sufficient to cover the entire loss, leaving you exposed for amounts above the cap.
Pore over the details carefully because you don’t want to end up paying for someone else’s mistakes. For more detailed guidance on contract clauses, our page on Contract Review and Redraft is a valuable resource.
Scope
Another key aspect is the scope of the indemnity clause. You want to avoid taking on responsibility for risks beyond your control. Indemnity clauses are not merely designed to shield you from damages; they are also intended to protect you against circumstances that you could not have reasonably foreseen.
If you do end up being liable for compensation, it is critical to ensure that you only pay what is reasonably owed and are not held accountable for unforeseeable matters. For further insights on risk management in contracts, you might want to look at our insights on Industry Regulations.
Having an experienced lawyer draft your commercial contracts is the simplest way to ensure you secure a favourable deal. If you’re concerned about your indemnity clause or need assistance drafting or reviewing a contract, you can talk to our contract experts at Sprintlaw.
In 2025, businesses are increasingly aware that a well-drafted indemnity clause not only allocates risk but also fosters a transparent relationship between contracting parties. By understanding and negotiating these clauses carefully, you can safeguard your financial interests and maintain robust commercial relationships. For an in-depth discussion on these principles, our article on Legal Essentials for Small Business Start-Ups might be of interest.
When Is An Indemnity Clause Used?
An indemnity clause is commonly inserted into contracts related to:
- Supply of goods
- Terms and conditions of services
- Leases
- Sale of property
This isn’t an exhaustive list – indemnity clauses are prevalent in most commercial contracts. For more information on standard contractual practices, you might consider reviewing our Legal Requirements for Starting a Business guide.
What Can An Indemnity Clause Cover?
Because an indemnity clause focuses on one party compensating the other for a loss or harm—even if incurred by a third party—it can cover a range of areas, depending on the contract’s specifics.
Some common areas covered include:
- Negligence by a contracting party
- Injury or death related to the contract
- Damage to property
- Intellectual property rights infringement
- Legal costs and disbursements
Types of Indemnity Clauses
As noted, each indemnity clause should be tailored to fit the specific provisions of the contract it supports. Nonetheless, certain types of indemnity clauses are widely used in commercial contracts.
Proportionate Indemnities
This occurs when a contractor is only required to cover losses to the extent that their actions contributed to them. For example, if damage results partly from your actions and partly from another’s, your liability is limited to your share of the fault.
| Example Alyssa has agreed to paint Ben and Joan’s home. They have a contractual agreement that specifies time, pay, duties, and an indemnity clause. While painting, Alyssa manoeuvres a ladder and inadvertently chips a wall. Later, when Joan attempts to adjust the ladder, she inadvertently exacerbates the damage to the ladder. The proportionate indemnity clause in their contract limits Alyssa’s liability to the initial damage she caused—the chip in the wall—while excluding the additional damage resulting from Joan’s actions. |
Bare Indemnities
Bare indemnities cover losses arising from a specified event in a blanket manner. Unlike proportionate indemnities, these clauses do not limit liability strictly to your share of fault but may encompass all damages associated with the event.
| Example Mila hires Austin to drive a truck loaded with potatoes across town. During the trip, Austin has an accident at a bridge, causing minor scratches to the truck. Mila argues that based on the bare indemnity clause in their contract, Austin is liable not only for any loss of cargo but also for the full extent of the damage to the truck, regardless of the specific cause. |
Hold Harmless Vs Make Good
Indemnity clauses can generally be classified into two categories.
Hold harmless means that once a loss or damage occurs, the indemnifying party is obligated to provide compensation, essentially absolving the other party of liability for that specific loss.
Make good requires that the party responsible for causing the loss rectifies it as though the loss had not occurred at all. This term emphasises restoration and repayment, ensuring that any damage is fully remedied.
What to Take Away…
The scope and extent of an indemnity clause will always be dictated by the nature of your commercial contract and the associated risks. It’s essential to ensure that your indemnity clause is unambiguous and aligns with your business objectives.
Indemnity clauses should never be drafted or agreed upon lightly. Always obtain legal advice before signing a contract to ensure you fully understand the implications of the terms. In today’s legal climate, even small misinterpretations can lead to significant financial consequences.
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat. You may also consider exploring our Contact Us page for more details on how we can assist you.
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