The Beginner's Guide to Indemnity Clauses: The Risks and Benefits

Indemnity clauses are crucial to risk management and liability allocation in your contracts. Whether you're entering into a new business partnership or signing a service agreement, understanding indemnity clauses can help safeguard your company's interests while preventing future disputes. Simply put, an indemnity clause is your legal shield.

But what exactly is an indemnity clause? How can they go wrong? And how should you use them? 

In this brief introductory article, we tackle:

• What are indemnity clauses?
• Why are they important?
• Common mistakes with indemnity clauses
• Best practice uses with indemnity clauses

Let's get started.

What are indemnity clauses?

Indemnity clauses act as an assurance that if something goes awry in a contractual relationship, let's say, an event that triggers losses or damages, there is a mechanism in place that can address those issues. Typically, this looks like one party taking on a financial responsibility to protect the other, allowing for a smooth business relationship overall. 

You'll find indemnity clauses in all sorts of agreements, from mergers and acquisitions to SaaS agreements, T&Cs, and more. They're a key component of any well-functioning contract, mitigating risks from the outset.

Tackling your contracts in 2025? Take a look at our contract lawyer guide for the UK.

Why are they important?

You can think of indemnity clauses as a safety net, that define who is responsible for certain losses, and the potential compensations that can come with an issue. By clarifying this before signing on the dotted line, disputes can be prevented, or greatly reduced, with both parties intimately understanding expectations before diving into an agreement. 

For example, let's say a business enters into a service agreement but fails to hammer out the finer details of liability and indemnity. Halfway through the project, an issue occurs that temporarily prevents the project from being completed - resulting in untold financial losses for the business. Without an indemnity clause in place, disputes, financial repercussions, and a soured relationship are all but guaranteed. The unpredictability here can be catastrophic - for both parties.

Indemnity clauses play a crucial role in allocating risk between parties. They set out when one party needs to step in and cover specific losses or liabilities—whether from breaches, third-party claims, or other agreed scenarios.

Put simply, the importance of indemnity clauses extends to:

• Risk mitigation and allocation
• Relationship management
• Financial management

What are common mistakes with indemnity clauses?

By now it's pretty clear: indemnity clauses are a critical part of any contract. With this in mind, it's important to ensure they're fit for purpose, with a scope that clearly addresses the who, what, and when of potential issues. Given their importance, we always recommend working with a commercially pragmatic lawyer to hammer out clauses that benefit both parties.

Below are just some of the common mistakes you should avoid when drafting indemnity clauses.

Avoiding the specifics

A common mistake when dealing with indemnity clauses is failing to negotiate the specifics, which often results in taking on more liability than originally intended. Make sure clauses are clearly detailed, appropriate, and easy to understand.

Convoluted language

While we're on the topic of clarity, another common indemnity clause mistake is the use of overly broad or convoluted language. In the efforts to cover all potential scenarios, parties can sometimes create clauses that are vague or too inclusive to actually function. This can result in more misunderstandings than solutions, and can even render a clause unenforceable. 

Unreasonable claims

Finally, it's important to note the distinction between reasonable claims and all claims. Not every issue will deserve indemnification and you'll want to ensure your clauses focus on reasonable and applicable claims only. 

By dodging these common mistakes, you can adopt a more strategic, and protective, approach to handling indemnity clauses.

What are the best practice uses of indemnity clauses?

So, we've covered common mistakes - but what are some best practice approaches to indemnity clauses?

Be crystal clear

When drafting your indemnity clauses, clarity and specificity are key. You should outline the scope of indemnities with precision, to avoid ambiguous language that could easily lead to disputes. 

Mutually beneficial terms

Legal contracts should be thought of as an opportunity to establish and foster long-term commercial relationships. In many cases, mutual indemnity terms can promote fair negotiations and strengthen business partnerships. However, one-sided indemnity clauses may be entirely appropriate in certain scenarios, such as when one party shoulders significantly more risk or control over a situation. The key is to tailor indemnity provisions to the context of the agreement, ensuring they protect your interests without unnecessarily straining the commercial relationship. 

Tailor your clauses

One size does not fit all! Remember to tailor your indemnity clauses to the specific context of your agreements. For example, in SaaS agreements, indemnification may cover claims related to intellectual property infringement. Meanwhile, in mergers and acquisitions agreements, indemnity might focus on tax indemnity, third-party claims, or employment liabilities. 

Consider local laws

Finally, consider jurisdictional implications. Indemnity laws will vary significantly across different regions, so you need to ensure your contracts are compliant with local requirements. Here, it can be particularly useful to work with law firms that have a global reach to help navigate the finer details of indemnity clauses. 

Support with indemnity clauses

Tackling indemnity clauses? We're a commercially-minded law firm operating across the globe with a focus on securing the best possible outcomes for our clients. Get in touch to see how we can support you with your indemnity clauses.

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