Indemnification clause

What is an indemnification clause?

An indemnification clause requires one party to compensate the other for specific losses, typically third-party claims, IP infringement, or regulatory fines. It shifts risk. If something goes wrong, the indemnifying party pays.

The real danger is that indemnification often sits outside the contract's liability cap. A contract might limit total liability to £100,000 but carve out indemnification obligations. That makes the indemnification uncapped, and uncapped exposure is the single largest financial risk in most commercial contracts.

Relevant legislation

Indemnification is primarily a contractual concept. There's no standalone "indemnification statute" in most common law jurisdictions. However, several laws constrain how far these clauses can go:

• UK: Unfair Contract Terms Act 1977 (UCTA). Exclusions and limitations must pass a "reasonableness" test. Liability for negligence causing death or personal injury can't be excluded.
• US: varies by state. Some states (e.g. California, New York) have anti-indemnity statutes that void certain one-sided indemnification provisions, particularly in construction contracts.
• Australia: Australian Consumer Law. Unfair contract terms in standard form contracts can be voided.

The specifics vary by jurisdiction, but the principle is the same: courts will scrutinise indemnification clauses that are one-sided or disproportionate.

What to look for

Check the scope first. "Any and all claims arising out of or relating to" is a blank cheque. Compare that to "third-party claims arising directly from Supplier's breach of its confidentiality obligations." The narrower version ties indemnification to a specific, controllable risk.

Check whether it's mutual. One-sided indemnification, where only the supplier indemnifies, is common in customer-drafted contracts and almost always worth pushing back on. Both parties should cover losses caused by their own acts.

Check whether the indemnification sits inside or outside the liability cap. Read the limitation of liability clause carefully. If indemnification is carved out, your client's exposure is unlimited regardless of what the cap says.

Look at defence rights. Who controls the defence of indemnified claims? If the indemnified party can settle without consent, the indemnifying party might end up paying for a deal they'd never have agreed to.

Common pitfalls

Uncapped indemnification is the big one. It's often buried in the limitations section rather than stated in the indemnification clause itself. You have to read both clauses together to see the full picture.

Overly broad trigger language is nearly as bad. "Arising out of or relating to" has been interpreted very broadly by courts in multiple jurisdictions. If you represent the indemnifying party, push for language tied to specific, identifiable risks.

Watch for clauses that require indemnification even where the loss was partly caused by the other party's negligence. These "reverse indemnities" are enforceable in many jurisdictions if clearly drafted, but they're commercially aggressive and courts will scrutinise the wording closely. Some US states void them outright in certain contexts.

Example clause

"The Supplier shall indemnify and hold harmless the Customer from third-party claims, losses, and reasonable legal costs arising directly from: (a) breach of the Supplier's confidentiality obligations under clause 9; (b) negligent acts or omissions in performing the services; or (c) infringement of third-party IP rights by the deliverables. This indemnity is subject to the liability cap in clause 12.1."

Frequently asked questions

Is an indemnification clause enforceable?

Yes, if clearly drafted. Most jurisdictions apply some form of reasonableness or fairness test to these clauses. An indemnification with broad scope and no cap is more likely to be challenged. But most well-drafted indemnities hold up.

What's the difference between indemnification and limitation of liability?

A limitation of liability caps total exposure. An indemnification creates an obligation to cover specific losses. If the indemnification sits within the cap, the cap constrains the payout. If it's carved out, the indemnification operates with no ceiling. Always read both clauses together.

Should indemnification be mutual?

Usually, yes. Each side should cover losses caused by their own breach or negligence. One-sided indemnification creates lopsided risk that's rarely justified. If the other side insists on it, that's a signal the contract needs more negotiation.

How Clara helps

Clara identifies indemnification clauses and flags whether they're mutual or one-sided, whether they sit inside or outside the liability cap, and whether the trigger language is unusually broad.