What Is An Indemnity In Australia? Practical Explanation And Examples

Indemnities show up in a huge range of business contracts in Australia - from customer agreements and supplier contracts, to leases, SaaS terms, and investment documents.

If you’ve ever read an agreement and thought “this indemnity section feels like it could cost me a lot of money”, you’re not wrong to pause.

At the same time, indemnities aren’t automatically “bad”. When used properly, they’re a practical risk-management tool that can protect your business from specific losses and help make sure the party best placed to control a risk is the one responsible for it.

This guide breaks down what an indemnity is, how indemnities work in Australian business contracts, common types you’ll see, and what to watch out for before you sign.

What Is An Indemnity (In Plain English)?

So, what is an indemnity?

An indemnity is a promise by one party to cover certain losses or liabilities suffered by the other party, if a defined event happens.

In other words, it’s a contractual “you pay if this goes wrong” clause.

Indemnities are usually drafted to shift risk from one party to another. The business reason is simple: if a risk is more likely to arise because of one party’s actions (or is better controlled by one party), it can be fair and efficient for that party to bear the cost.

How Is An Indemnity Different From “Normal” Liability?

Most contracts already create legal responsibilities. For example, if a supplier breaches the agreement and you suffer loss, you might be able to claim damages for breach of contract.

An indemnity goes a step further by:

• specifying particular types of loss that are covered (even if they might be difficult to claim under general damages rules);
• reducing uncertainty about who pays and what’s recoverable; and
• sometimes allowing recovery even where loss isn’t strictly caused by a breach (depending on how it’s drafted).

This is why indemnities are often heavily negotiated in commercial deals - they can significantly change your financial exposure.

Do Indemnities Only Apply If Someone Is At Fault?

Not necessarily.

Some indemnities are “fault-based” (they only apply if the indemnifier did something wrong). Others are broader and may apply even without wrongdoing - for example, an indemnity that applies to any third-party claim arising from your product, regardless of whether you were negligent.

The key is always the drafting: what triggers the indemnity, and what losses are covered.

Why Indemnities Matter For Small Businesses And Startups

When you’re running a small business or startup, cash flow and certainty matter. An indemnity can create a liability that is:

• large (it might cover legal costs, settlements, and consequential losses);
• hard to predict (triggered by third-party claims you didn’t expect); and
• not capped (many indemnities are uncapped unless you negotiate a limit).

That said, indemnities can also protect you. For example:

• If you hire a contractor to build a feature and they infringe someone’s copyright, you may want them to indemnify you for that third-party claim.
• If you’re buying a business, you may want the seller to indemnify you for undisclosed liabilities that existed before settlement.

Indemnities are most important when a contract involves:

• third parties (customers, end users, regulators);
• intellectual property and content;
• data and privacy risks;
• personal injury or property damage risks;
• payments, credit, or financing; or
• any kind of “handover” of assets or responsibility (like a sale, assignment, or outsourcing arrangement).

Common Types Of Indemnities You’ll See In Australian Contracts

Indemnities are often drafted broadly, but in practice they tend to fall into a few common patterns.

1) Third-Party Claim Indemnities

This is one of the most common types. It covers losses if a third party makes a claim against the other party.

For example:

• A customer claims your client’s product harmed them, and your client seeks to pass that liability to you.
• A third party claims a logo or design infringes their IP.

These indemnities often cover:

• legal costs (sometimes “on a full indemnity basis”);
• settlements;
• court judgments; and
• associated losses like investigation costs.

2) Intellectual Property (IP) Infringement Indemnities

IP indemnities are common in software development, marketing, eCommerce, and content-heavy businesses.

A typical example is: “Supplier indemnifies Customer against any claim that the deliverables infringe a third party’s intellectual property rights.”

If you provide software, code, branding, designs, copywriting, or training materials, IP indemnities are a big deal - because infringement claims can be expensive even if you ultimately win.

3) Negligence / Injury / Property Damage Indemnities

These indemnities cover physical-world risk (though they can also apply to professional negligence). They are common in:

• events and venue hire;
• construction and trades;
• equipment hire;
• retail premises;
• service businesses operating on customer sites.

You’ll often see indemnities tied to personal injury, death, and property damage - especially where one party controls the premises or activities.

4) Compliance / Law Breach Indemnities

These require one party to cover losses if they breach laws or regulatory requirements, such as privacy, marketing, consumer law, or industry regulation.

For instance, if you run email marketing campaigns for clients, you may be asked to indemnify them if you breach spam laws or privacy laws and they face an investigation or penalty. Whether particular penalties or regulatory amounts can be recovered under an indemnity can be complex and depends on the wording and circumstances.

5) Tax Indemnities

These are common in business sales, share sales, and some contractor arrangements.

A tax indemnity might require the seller to pay the buyer for any pre-completion tax liabilities. Or it might require a contractor to cover PAYG withholding liabilities if they are later found to be an employee (this area is complex and needs careful drafting).

Important: Tax outcomes are highly fact-specific, and this section is general information only (not tax advice). You should speak to a qualified tax adviser or accountant about your specific circumstances.

6) Security / Finance Indemnities

In lending and finance arrangements, indemnities are often paired with security interests or personal guarantees.

For example, directors may be asked to sign a deed of guarantee and indemnity, or a business might give a lender broader protection under a security arrangement such as a general security agreement.

If you’re dealing with secured finance, it’s also worth understanding how security interests can be registered and discovered - for example through the Personal Property Securities Register (PPSR).

What Should You Check Before You Agree To An Indemnity?

Before you accept an indemnity (or insist on one), it helps to run through a practical checklist. These are the clauses that often decide whether an indemnity is manageable or risky.

1) What Triggers The Indemnity?

Look closely at the trigger event. For example:

• Is it triggered by breach of contract?
• Is it triggered by negligence?
• Is it triggered by any act or omission (very broad)?
• Is it triggered by a third-party claim “arising out of” your goods/services (also broad)?

Small wording changes can make a big difference. “Caused by” is generally narrower than “arising from” or “in connection with”.

2) What Losses Are Covered?

Indemnities often cover “all loss, damage, cost and expense”. That can include:

• direct loss (like repair costs);
• indirect loss (like lost profits);
• legal costs (often a major driver);
• settlements; and
• regulatory penalties and fines (sometimes included in drafting, but enforceability and recoverability can be uncertain and depends on the context and wording).

This is where indemnities interact with other risk clauses such as limitation of liability clauses. Your contract might cap “liability” generally, but the indemnity might be carved out of the cap (meaning it can still be unlimited).

3) Is The Indemnity Capped?

Ask: is there a dollar limit?

Common approaches include:

• capping the indemnity at the contract fees paid (or payable);
• capping it at a fixed amount (e.g. $50,000);
• capping it at the level of insurance coverage; or
• having different caps for different risks (for example, a higher cap for IP infringement, and a lower cap for other claims).

If you’re a startup or service provider, an uncapped indemnity can create “bet the business” risk - even if the contract value is small.

4) Are You In Control Of The Risk?

A practical question we often ask is: are you the party who can actually prevent this issue?

If you’re indemnifying a client for “any claim relating to their use of the product”, but they control how the product is used and marketed, you may be taking on risk you can’t manage.

Where possible, indemnities should align with control. For example:

• You indemnify for your breach of IP rights in your deliverables.
• The client indemnifies you if they provide infringing materials or instructions.
• Each party indemnifies the other for their own negligence.

5) What’s The Process For Handling Claims?

A well-drafted indemnity should cover how claims are dealt with, including:

• prompt notice requirements;
• who controls the defence and settlement;
• cooperation obligations; and
• what happens if a party wants to settle and the other doesn’t.

If the other party can settle a claim without your consent and then invoice you, that’s a red flag - especially for third-party claim indemnities.

6) Does Insurance Actually Cover It?

Some business owners assume an indemnity is “fine” because they have insurance. That can be risky.

Insurance policies have exclusions, limits, and conditions. An indemnity might cover losses your policy doesn’t, or it may require you to pay amounts beyond your policy limit.

It’s worth checking:

• whether your policy covers contractual indemnities at all;
• whether the category of claim is covered (e.g. IP infringement, data breach, professional negligence); and
• the policy limit and excess.

How Indemnities Fit With Other Contract Clauses (And Why The Whole Contract Matters)

Indemnities don’t sit in isolation. They interact with multiple other clauses, and this is where small businesses can get caught out - the indemnity might look “standard” until you see how it works with the rest of the agreement.

Indemnities And Limitation Of Liability

Most commercial contracts include a limitation of liability clause that tries to control risk overall.

However, it’s common for the contract to say something like: “The limitation of liability does not apply to indemnities.”

That means you could have a liability cap for most issues, but an uncapped indemnity for the biggest risks.

Getting the balance right is often about ensuring the indemnity is:

• narrowly triggered;
• reasonably capped; and
• aligned with control and insurance.

Indemnities And Warranties

Warranties are promises about facts (e.g. “we have the right to provide these deliverables”). If a warranty is false, it can trigger a breach.

Sometimes warranties are backed by indemnities - meaning if the warranty is untrue, you don’t just face a breach claim; you also have to indemnify for resulting loss.

Indemnities And Termination

Many agreements provide that indemnities survive termination - meaning they can keep operating even after the contract ends.

This is common and not necessarily unreasonable, but it matters for your long-term risk. If you’re signing a short-term contract but the indemnity exposure could last years, you should know that up front.

Indemnities And Waivers

Some businesses use waivers (especially where there’s physical activity, events, or higher risk services) to reduce disputes and allocate responsibility.

But waivers and indemnities do different jobs - and you generally don’t want to rely on a waiver alone without proper drafting that matches your risk profile. If you need customers to accept risk terms, a tailored Waiver can help set expectations clearly.

Indemnities And “What Makes This Contract Enforceable?”

Even the best indemnity clause won’t help if your contract is poorly formed or unclear. If you’re ever unsure whether you’ve actually got an enforceable agreement in place (especially if you’re contracting over email, quotes, or online checkouts), it’s worth understanding what makes a contract legally binding in Australia.

When Should You Offer An Indemnity, And When Should You Push Back?

There’s no one-size-fits-all rule, but there are some practical patterns we see across Australian small businesses and startups.

When It Can Make Sense To Offer An Indemnity

• You control the risk: for example, you’re supplying original IP and can confidently stand behind it.
• It’s commercially standard: some industries expect certain indemnities as a baseline (but “standard” still needs review).
• You’ve priced it in: if the contract value reflects the risk you’re accepting.
• You have insurance alignment: the indemnity is drafted to align with what your insurance will actually cover.

When You Should Consider Negotiating Or Resisting

• The indemnity is uncapped and the contract value is low.
• The indemnity covers things outside your control (for example, the other party’s instructions, customer behaviour, or their marketing claims).
• The indemnity covers “all losses” with no exclusions for indirect or consequential loss.
• The other party controls the defence and settlement, but you pay the bill.
• The indemnity duplicates other obligations in a way that makes your exposure unclear or double-counted.

If you’re negotiating with a larger organisation, it can feel like there’s no room to move. But even then, you can often negotiate the practical levers - narrowing the trigger, adding a cap, excluding indirect loss, or requiring mutual indemnities.

Key Takeaways

• What is an indemnity? It’s a contractual promise to cover another party’s losses if a defined event happens, often used to shift risk in commercial agreements.
• Indemnities can be helpful risk tools, but they can also create major financial exposure for small businesses if they’re broad, uncapped, or outside your control.
• Common indemnities cover third-party claims, IP infringement, negligence/injury, compliance breaches, tax issues, and finance/security risks.
• Before you agree to an indemnity, check the trigger, the types of loss covered, whether it’s capped, who controls claims, and how it interacts with limitation of liability clauses.
• Indemnities should be aligned with control and insurance wherever possible - if you can’t control the risk, it’s usually a sign the indemnity needs negotiation.
• Because indemnities work alongside the rest of the contract, a quick legal review can prevent expensive surprises later.

If you’d like help reviewing or negotiating an indemnity clause (or drafting an agreement that protects your business), reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.