What Is An Indemnity Clause? (2026 Updated)

If you’ve ever signed a contract and felt uneasy about a clause that sounds like “you agree to indemnify us…”, you’re not alone. Indemnity clauses are one of the most common (and most misunderstood) contract terms for Australian business owners.

An indemnity can be completely reasonable in the right context. But if it’s drafted too broadly, it can also shift significant financial risk onto you in a way that’s easy to miss when you’re focused on pricing, timelines, and getting the deal done.

In this guide, we’ll break down what an indemnity clause is, how indemnities work in Australian contracts, common types you’ll see in practice, and what to look for before you agree to one.

What Is An Indemnity Clause?

An indemnity clause is a part of a contract where one party (the “indemnifying party”) promises to cover certain losses, costs, or liabilities suffered by the other party (the “indemnified party”).

In plain English: an indemnity is a contractual promise to “pay you back” (or protect you) if a particular kind of loss happens.

Indemnities come up everywhere in business, including:

• service agreements (for example, marketing, IT, consultants, tradies and agencies)
• supplier and manufacturing contracts
• leases and licences
• events and venue hire arrangements
• online terms and conditions
• share sales and business purchases

Indemnity vs Damages: What’s the Difference?

This is where many business owners get tripped up. “Damages” are generally the amount a court orders one party to pay another for breach of contract or a legal wrong.

An indemnity, on the other hand, is something you agree in advance in the contract. If the indemnity is triggered, the indemnifying party may have to pay even if:

• there wasn’t a breach of contract (depending on drafting)
• the loss was caused by a third party
• the loss wasn’t within the usual scope of “damages” you might expect

This is why indemnities are often negotiated alongside limitation of liability clauses. One clause can give risk, and the other can take it away.

When Does An Indemnity Clause Apply?

Indemnity clauses usually apply when a defined “trigger event” happens. Common triggers include:

• a third-party claim (for example, a customer sues your client because of your work)
• an intellectual property infringement allegation
• your breach of the contract
• your breach of law
• your negligence or misconduct

The key is that the contract should clearly spell out what triggers the indemnity and what losses are covered.

Why Do Indemnity Clauses Matter For Australian Businesses?

Indemnity clauses matter because they can materially change the financial risk of a deal. Two contracts with the same price can have wildly different “real cost” depending on how indemnities are drafted.

If you’re a small business, an overly broad indemnity can expose you to liabilities that are disproportionate to the value of the job.

They Can Shift Risk Beyond What You Expect

Many people assume a contract is mostly about what you deliver and when you get paid. But indemnities are about who wears the risk if something goes wrong.

For example, you might be happy to stand behind the quality of your work. But you may not want to indemnify a client for:

• how they use your deliverables after the project ends
• losses caused by their own negligence
• every indirect loss they suffer, even if it’s not foreseeable

It’s also worth remembering that contracts only protect you properly if they’re set up with the essentials of offer, acceptance, and certainty. If you’re unsure whether you even have a contract in place, it helps to understand what makes a contract legally binding in Australia.

Indemnities Often Drive Insurance Discussions

In many industries, indemnities are tied to insurance obligations. For instance, a client might require you to hold professional indemnity insurance or public liability insurance.

That doesn’t automatically make the indemnity “safe”. Insurance policies have exclusions, excess amounts, and notification requirements. The indemnity should still be reasonable, and it should align with what your insurance can realistically cover.

Indemnities Can Affect Cash Flow

Some indemnities require you to pay amounts “on demand” or immediately once a claim is made. That can create major cash flow pressure, even before liability is proven.

This is why the process side matters just as much as the dollars: when is a claim made, who controls the defence, and when do you have to pay?

Common Types Of Indemnity Clauses (With Practical Examples)

There isn’t one single “standard” indemnity clause. Indemnities are often tailored to the risks of the relationship, and the wording can be broad or narrow.

Here are some of the most common indemnities Australian businesses see.

Third-Party Claim Indemnity

This indemnity is triggered if a third party makes a claim against the other party that relates to your actions or your breach.

Example: You’re an IT provider. Your client gets sued because their customer alleges a data breach caused by a vulnerability in software you implemented. The client asks you to cover their legal costs and any settlement amounts under the indemnity.

Intellectual Property (IP) Infringement Indemnity

IP indemnities are common in creative, tech, marketing, manufacturing, and product-based businesses.

Example: You design a logo or provide content. A third party claims it infringes their copyright or trade mark. Your client wants you to indemnify them for the claim.

IP indemnities are often negotiable depending on who supplies the IP. If your client provides the materials and you only use what they supply, it may be more reasonable for them to indemnify you.

Negligence Indemnity

This indemnity applies if losses arise from your negligence (or sometimes the negligence of your staff or subcontractors).

Example: A contractor accidentally damages a client’s equipment on-site. The contract requires the contractor to indemnify the client for repair costs and related losses.

Negligence indemnities can be fair, but the drafting needs attention. For example, does it apply only to the extent of your negligence, or does it apply even if the other party contributed to the loss?

Regulatory / Breach Of Law Indemnity

Some agreements include an indemnity if one party breaches a law and causes the other party loss.

Example: A marketing service provider runs a campaign that doesn’t comply with Australian Consumer Law, leading to complaints or regulatory attention. The customer seeks costs under the indemnity.

This type can be reasonable, but it should be aligned with what you can actually control.

Employee / Workplace Indemnities

Where labour hire, subcontracting, or on-site services are involved, indemnities may be included for employment-related risks.

Example: A business engages labour through a provider. The provider indemnifies the business if a worker later claims they were actually an employee of the business and seeks unpaid entitlements.

What Should An Indemnity Clause Include?

A well-drafted indemnity clause doesn’t just say “Party A indemnifies Party B.” It should define the boundaries of risk clearly, so both sides understand what’s being accepted.

Here are the key building blocks to look for (and negotiate) in 2026.

1. The Trigger Events (When The Indemnity Applies)

The contract should clearly state what has to happen for the indemnity to be triggered, for example:

• breach of contract
• breach of confidentiality
• negligence or wilful misconduct
• third-party IP infringement claim
• breach of law (ideally limited to laws relevant to the services)

If the clause uses vague wording like “arising out of or in connection with”, it can become very broad, so it’s worth checking what is actually intended in your commercial relationship.

2. What Losses Are Covered (And What’s Excluded)

Indemnities often cover “loss, damage, liability, cost, charge, expense” and “legal costs on a full indemnity basis”. That’s not necessarily wrong, but it should be deliberate.

Common negotiation points include:

• Direct vs indirect loss: does the indemnity cover consequential losses like lost profits?
• Legal costs: are legal costs recoverable only if reasonable?
• Fines and penalties: are regulatory penalties included (often heavily negotiated)?

These issues usually need to be aligned with the broader liability settings in the contract, including caps, exclusions, and any wording around set-off clauses that might let one party deduct amounts from invoices.

3. Causation And “To The Extent” Wording

One of the biggest practical protections in an indemnity clause is adding “to the extent caused by” (or “to the extent contributed to by”) the indemnifying party.

This helps ensure you’re not paying for losses caused by:

• the other party’s negligence
• the other party’s breach of the contract
• events outside your reasonable control

Without that kind of wording, you can end up with an indemnity that effectively makes you responsible for a situation even where the other party played a significant role.

4. A Liability Cap (And How It Interacts With Other Clauses)

Many business owners assume a general “liability cap” automatically limits everything in the contract. But some contracts carve indemnities out of the cap entirely.

That means you might see wording like:

• “liability is capped at $X”
• “except for liability under the indemnities”

In practice, this can make indemnities the biggest financial exposure in the contract.

As part of a broader risk strategy, it’s common to negotiate indemnities in tandem with limitation of liability clauses so the contract risk matches the commercial deal.

5. Claims Handling: Notice, Control, And Settlement

If an indemnity is tied to third-party claims, the contract should spell out the “claims process”, including:

• Notice requirements: when must the indemnified party notify you of the claim?
• Conduct of defence: do you get to control the defence and appoint lawyers?
• Settlement: can they settle without your consent (and then invoice you)?

This is one of those areas where small wording changes can make a big difference to outcomes and costs.

6. Relationship With Other Risk Clauses

Indemnities rarely sit alone. They interact with clauses like:

• limitation of liability
• exclusions for certain categories of loss
• warranties and disclaimers
• termination clauses
• dispute resolution

If you’re agreeing to an indemnity, it’s worth making sure the contract as a whole is consistent, rather than having one clause that undercuts everything else.

How Do You Negotiate An Indemnity Clause?

Negotiating indemnities can feel awkward, especially if the other party presents their terms as “non-negotiable.” In reality, many indemnity clauses are negotiable, particularly where the risk allocation isn’t aligned with the project scope.

Here are practical approaches that often help.

Start With The Commercial Reality

Before you mark up the clause, ask yourself:

• What am I being paid for this work?
• What risks can I actually control?
• If the worst-case scenario happened, could my business survive the exposure?
• Does my insurance match what I’m being asked to cover?

If the indemnity is out of proportion to the job value, that’s usually your strongest negotiation point.

Propose Targeted Changes (Instead Of Removing The Whole Clause)

Many counterparties won’t agree to removing an indemnity altogether, but they may agree to narrowing it. Common “middle ground” changes include:

• adding “to the extent caused by” your breach or negligence
• excluding losses caused by the other party
• excluding indirect or consequential loss (where appropriate)
• adding a liability cap that applies to the indemnity
• limiting the indemnity to third-party claims only (not first-party losses)

Check The Whole Contract For Consistency

Indemnity clauses often get negotiated in isolation, but your real risk is determined by the contract as a whole.

For example, if the agreement includes broad rights to vary scope or deliverables, you’ll want to ensure changes are properly documented. That’s where understanding how to legally vary a contract can become a practical part of risk management, not just a technicality.

Be Careful With “Waivers” And “Releases” In The Same Contract

Sometimes indemnities appear alongside waivers, releases, or disclaimers (particularly for events, services involving physical activity, or higher-risk industries).

These clauses can interact in ways that aren’t obvious. For example, a customer waiver might reduce certain claims, but a broad indemnity could still leave you exposed in other ways.

If a contract includes a waiver framework, it’s worth checking whether the intended protections are actually enforceable and fit for purpose, including whether the waiver language and the indemnity language align.

Know When To Get It Reviewed

If an indemnity clause covers high-dollar risk (or risks outside your control), it’s usually worth getting a legal review before you sign.

That’s particularly true where the contract is “standard form” (for example, a big client’s template) and includes broad liability terms. A quick contract review can often identify whether the indemnity is reasonable for your situation and propose amendments that still keep the deal moving.

Key Takeaways

• An indemnity clause is a promise to cover certain losses or liabilities, and it can shift risk well beyond what you might assume from the price of the job.
• Indemnities often apply to third-party claims, IP infringement allegations, negligence, breaches of law, and other defined trigger events.
• The most important parts of an indemnity are the trigger events, the types of loss covered, “to the extent caused by” wording, and whether a liability cap applies.
• Indemnity clauses should be read alongside limitation of liability, exclusions of loss, claims handling processes, and set-off rights, because the contract works as a package.
• Many indemnities are negotiable, and small wording changes can make a major difference to your exposure.
• If an indemnity is broad, uncapped, or out of proportion to the value of the deal, it’s a sign you should consider legal advice before signing.

If you’d like a consultation on an indemnity clause (or any other contract terms) for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.