Indemnity clause: what it means and how to read one

An indemnity is a promise by one party (the indemnifier) to compensate another (the indemnified) for specified losses or liabilities. It is a primary obligation to make good a defined category of loss: commonly losses arising from third-party claims, IP infringement, data breaches or breach of specific warranties.

The reason it matters so much is what it bypasses. In an ordinary claim for breach of contract, the claimant has to prove the breach caused the loss, that the loss is not too remote, and must generally mitigate. A well-drafted indemnity can sweep several of those hurdles aside, turning prove your damages the hard way into pay this defined amount because you promised to.

The gap between the two is the whole point of asking for an indemnity.

• Trigger. Ordinary damages: breach of the contract. Indemnity: the specified event, which may not be a breach at all.
• Causation and remoteness. Ordinary damages: must be proven, and remote losses are excluded. Indemnity: often covered on the clause's own terms.
• Duty to mitigate. Ordinary damages: applies. Indemnity: may be reduced or excluded, depending on the drafting.
• Amount. Ordinary damages: what the court assesses. Indemnity: defined by the clause, and potentially broader.

A party giving an indemnity is accepting a materially heavier obligation than ordinary contractual liability, and the party receiving one should be clear about exactly what it covers.

Illustrative only, to show the shape:

"The Supplier shall indemnify the Customer against all losses, liabilities, costs and expenses (including reasonable legal fees) suffered or incurred by the Customer arising out of any third-party claim that the Services infringe that third party's intellectual property rights."

Every phrase is negotiable: all losses versus a capped amount, arising out of versus a narrower directly caused by, and whether it is subject to the contract's overall liability cap.

Five points decide how heavy the obligation really is.

• Scope of covered losses. All losses, including indirect and consequential is far broader than direct losses. An uncapped indemnity for indirect loss is where real exposure hides.
• Does the liability cap apply? Indemnities are frequently carved out of the limitation-of-liability clause, making them uncapped. Whether they sit inside or outside the cap can be the single biggest number in the contract.
• Trigger precision. Is it triggered by an actual breach, or by any occurrence of the event, even without fault? Fault-independent indemnities are much heavier.
• Conduct of claims. For third-party-claim indemnities, who controls the defence and settlement? An indemnifier paying the bill usually wants to run the claim.
• Mitigation and contribution. Silence can leave an indemnifier paying for losses the indemnified party could have reduced, or losses partly its own fault.

The most expensive drafting mistake in practice is an indemnity that is excluded from the liability cap without anyone deciding that deliberately. A supplier with a £50k contract and a £50k cap can find its data-breach indemnity is unlimited, because the cap says except for indemnities. That carve-out should be a conscious risk decision, not boilerplate.

What is an indemnity clause? A promise by one party to compensate another for specified losses or liabilities: a primary obligation to make good a defined category of loss, often bypassing some of the hurdles of an ordinary damages claim.

What is the difference between an indemnity and damages? Damages compensate for loss caused by a breach, subject to proof of causation, remoteness and mitigation. An indemnity can cover defined losses on its own terms, sometimes without those hurdles, and may be triggered by events that are not breaches at all.

Are indemnities capped? Not automatically. They are frequently carved out of the contract's limitation-of-liability cap, which can make them uncapped. Whether an indemnity sits inside or outside the cap is a key negotiation point.

What does indemnify and hold harmless mean? It is a common formulation of the same promise: to compensate for losses and to protect the other party from being held liable for them. In English-law drafting the hold harmless wording adds little beyond indemnify, but it is conventional.

Should I accept an uncapped indemnity? Only as a deliberate, risk-assessed decision. An uncapped indemnity, especially one covering indirect loss, can dwarf the contract's value, so it should never be accepted as unread boilerplate.

The question that decides an indemnity, whether it sits inside or outside the liability cap, is answered by two clauses that may be twenty pages apart, and on a due diligence exercise it has to be answered for every contract in the data room. LegalAI Space's Document Review grid asks it of each document in turn: who indemnifies whom, for what, and whether the cap applies. Each cell holds the answer, the passage it was taken from, and a link that opens the agreement at that clause, so the uncapped indemnity in the fourteenth contract is one row that reads differently from the other thirteen.

The grid surfaces the allocation; whether it is acceptable for the client's commercial position is judgement on the facts. The Document Review page describes the grid and the review playbooks, and the workflow Customer-side redline of a supplier MSA shows the indemnity and the cap being read together from the customer's side. Both are linked below.