If you run a small business, you’ve probably seen the word indemnity pop up in contracts and wondered what it really means for you.
Indemnity clauses can look like “standard legal wording”, but in practice they can decide who pays when something goes wrong - a customer claim, a third-party lawsuit, a data breach, damaged goods, or losses caused by someone else’s actions.
In this guide, we’ll walk you through what an indemnity clause is, when you should use one, and share a practical indemnity clause sample you can use as a starting point (with notes on how to tailor it for Australia).
Important context: indemnities are heavily dependent on the deal, the industry, and your risk profile. A good sample is a starting point - but it’s worth getting the clause reviewed in the context of your whole contract, especially where the dollar value or risk is high.
General information only: this article is designed to provide general information for Australian businesses and is not legal advice. Because indemnity wording can have major financial consequences, consider getting advice for your specific situation before you sign.
What Is An Indemnity Clause (And Why Does It Matter)?
An indemnity clause is a contract term where one party agrees to cover certain losses or claims suffered by the other party.
In plain English, it’s often a “you cover me if this happens” promise.
Indemnities commonly deal with things like:
- Third-party claims (for example, if a customer sues your client because of something you supplied or did).
- Loss or damage (for example, costs to repair property damage caused by a contractor).
- IP infringement (for example, a supplier indemnifies you if their materials infringe someone else’s copyright).
- Regulatory issues (for example, losses arising from one party’s breach of law - noting indemnities for penalties or fines can be restricted or unenforceable in some circumstances, depending on the law and the facts).
Indemnity clauses matter because they can shift risk dramatically. Two businesses can agree on the same price for the same job - but the party giving a broad indemnity could end up wearing far more risk than they priced for.
Indemnity vs Limitation Of Liability: Not The Same Thing
Small business owners often assume an indemnity clause is just another “liability clause”. It’s related, but different.
- A limitation of liability clause tries to cap or limit what you might have to pay.
- An indemnity clause is a positive promise to reimburse or compensate the other party for specified losses.
These clauses should be drafted to work together. If your contract has a broad indemnity but no sensible liability caps, you can end up with open-ended exposure.
When Should Your Business Use An Indemnity Clause?
Indemnities are common across many small business contracts in Australia - but the “right” indemnity depends on the relationship and who controls the risk.
Here are common scenarios where an indemnity clause is often appropriate.
1) You Provide Services (Especially Where Third Parties Are Involved)
If you provide professional services, consulting, marketing, IT, trades, or project-based services, your client may ask you to indemnify them for losses caused by your work (or your team’s work).
This often sits inside a broader Service Agreement, alongside scope, payment terms, IP ownership, and dispute resolution.
2) You Sell Products Or Supply Goods Into Someone Else’s Business
If you supply goods that will be resold or used in a customer’s product, they may seek an indemnity if the goods are defective, unsafe, or trigger a product liability claim.
In that case, you’ll want to be very clear about what you are (and aren’t) responsible for - especially if the customer modifies the goods, installs them incorrectly, or uses them outside your instructions.
3) You Operate Online (Websites, E-Commerce, SaaS)
Online businesses often use indemnities in website and platform terms - for example, requiring users to indemnify the platform operator if the user posts unlawful content or infringes someone’s IP.
That kind of indemnity usually appears inside Website Terms and Conditions.
Where sensitive information is shared, indemnities sometimes cover losses caused by misuse of information or breaches of confidentiality obligations.
This can sit alongside (or inside) a Non-Disclosure Agreement, depending on the commercial arrangement.
5) You Have Co-Founders, Investors Or Complex Ownership
If your business has multiple owners, indemnities can come up in internal governance too - for example, when dealing with director indemnities, access deeds, or risk allocation between stakeholders.
While it won’t replace proper corporate governance, it’s common for broader risk and decision-making to be documented in a Shareholders Agreement.
Indemnity Clause Sample (A Practical Example You Can Adapt)
Below is an indemnity clause sample written in a practical style for many Australian B2B service arrangements. It is not “one-size-fits-all”, but it’s a useful base to understand the moving parts.
Indemnity Clause Example (Sample)
Indemnity
1. Indemnifying Party
The Supplier indemnifies the Customer against any Loss suffered or incurred by the Customer arising out of or in connection with:
(a) any negligent act or omission or wilful misconduct of the Supplier, its Personnel or subcontractors in performing the Services;
(b) any breach of this Agreement by the Supplier; and
(c) any third party Claim alleging that the Services or Deliverables infringe that third party’s Intellectual Property Rights,
except to the extent that such Loss is caused or contributed to by the Customer’s negligent act or omission, breach of this Agreement, or unlawful conduct.
2. Mitigation and Conduct of Claims
(a) The Customer must promptly notify the Supplier of any Claim the Customer becomes aware of.
(b) The Customer must take reasonable steps to mitigate any Loss.
(c) The Supplier may, at its cost, assume conduct of the defence or settlement of the Claim, provided that:
(i) the Supplier keeps the Customer reasonably informed; and
(ii) the Supplier does not settle the Claim in a manner that admits liability on behalf of the Customer or imposes any obligation on the Customer without the Customer’s prior written consent (not to be unreasonably withheld).
3. Exclusions
The indemnity in clause 1(c) does not apply to the extent the alleged infringement arises from:
(a) any materials, data or instructions provided by the Customer; or
(b) any modification of the Deliverables not performed or authorised by the Supplier.
4. Liability Cap
The Supplier’s total liability under this indemnity is limited to in aggregate, except for liability that cannot be limited under applicable law.
This sample is intentionally structured to address the practical issues that come up in real disputes: what events trigger the indemnity, how claims are handled, carve-outs, and (often critically) a liability cap.
How To Read This Sample (In Plain English)
- Clause 1 says the supplier covers the customer’s losses for certain events (negligence, breach, and IP claims).
- The “except to the extent…” wording prevents the customer from being indemnified for their own wrongdoing.
- Clause 2 sets a process: notify, mitigate, and allow the indemnifying party to run the claim (with safeguards).
- Clause 3 stops unfair outcomes (like the supplier being liable for customer-provided materials or unauthorised changes).
- Clause 4 introduces a cap (often heavily negotiated).
How Do You Tailor An Indemnity Clause For Your Contract?
Most problems with indemnities happen when a clause is copied from a template without reflecting the commercial reality of the deal.
To tailor an indemnity clause sample into something that actually works for your business, focus on these levers.
1) Define “Loss” Carefully
Many indemnities define “Loss” very broadly (including legal costs, indirect loss, and third-party claims). Broad definitions can be risky.
Consider whether “Loss” should include:
- legal costs (sometimes specified on an indemnity basis, depending on how the contract is drafted and what is enforceable in the circumstances);
- loss of profits, loss of revenue, or indirect / consequential loss (often resisted);
- fines and penalties (often excluded, and in some cases may not be recoverable or enforceable via an indemnity);
- internal management time (sometimes included, often negotiated out).
This is also where your indemnity should align with your broader contract risk allocation, including warranties, exclusions, and any limitation of liability terms.
2) Be Specific About The Trigger Events
Indemnities can be drafted broadly (“arising out of the Agreement”) or narrowly (“caused by negligence” or “caused by breach”).
As a general risk-management approach:
- If you’re receiving an indemnity, you’ll usually want it tied to risks you don’t control (for example, supplier defects, IP infringement, safety issues).
- If you’re giving an indemnity, you’ll usually want it limited to things within your control (for example, your negligence, your breach, your staff).
3) Add Carve-Outs So You’re Not Paying For Someone Else’s Mistakes
Carve-outs are essential in most indemnities. Common carve-outs include losses caused by:
- the other party’s negligence or breach;
- the other party’s unlawful acts;
- instructions provided by the other party;
- unauthorised modifications;
- use outside the agreed scope or specifications.
This is one of the easiest ways to make an indemnity commercially fair without removing it entirely.
4) Include A Claims Process (So You’re Not Kept In The Dark)
If you are the party providing the indemnity, you generally want:
- prompt notification of claims;
- the right to run the defence or settlement (with reasonable consent protections);
- a duty on the other party to mitigate losses.
Without this, you can end up paying a bill you didn’t control - including legal strategy decisions you wouldn’t have agreed to.
5) Consider A Liability Cap (And Make Sure It Actually Applies)
Liability caps can be set as:
- a fixed dollar amount;
- the contract value (for example, fees paid in the last 12 months);
- an insurance-based cap (for example, capped to the amount recoverable under insurance).
The key is making sure the contract is internally consistent. Sometimes a contract has a general liability cap but then says “the cap does not apply to indemnities” - which can defeat the purpose.
If you’re unsure whether your indemnity and liability clauses align, it’s usually worth getting a Contract Review so the risk allocation works as intended.
Common Mistakes With Indemnity Clauses (And How To Avoid Them)
Indemnities are one of the most negotiated clauses in commercial contracts because small wording differences can have large financial consequences.
Here are common traps we see small businesses run into.
1) Agreeing To An Indemnity For “Any Loss” Without Limits
Broad “any loss” indemnities can effectively make you the insurer of the entire relationship - even where you didn’t cause the issue.
If the other party wants a broad indemnity, you’ll usually want to negotiate:
- a narrower trigger (for example, “to the extent caused by your breach/negligence”);
- clear exclusions and carve-outs;
- a liability cap.
2) Indemnifying For Things You Can’t Control
A common example is a service provider indemnifying a client for losses arising from client-provided data, client instructions, or client systems.
As a business owner, it’s fair to take responsibility for your own work - but it’s risky to take responsibility for someone else’s inputs.
3) Forgetting The Relationship Between Indemnities And Insurance
Insurance can help manage risk, but an indemnity can expose you beyond what your insurance covers.
Before you agree to a high-risk indemnity, it’s worth checking:
- whether your policy covers that type of claim;
- whether exclusions apply (for example, contractual liability exclusions);
- the policy limits versus the contract’s liability exposure.
4) Using An Indemnity Clause Sample In The Wrong Contract Type
An indemnity clause that makes sense in a construction contract might be inappropriate in a SaaS agreement, and vice versa.
For example:
- In a software contract, IP infringement indemnities are common, but you’ll often see detailed exclusions around customer configurations and integrations.
- In a physical services contract, personal injury and property damage indemnities are often front and centre.
5) Overlooking Privacy And Data Risks
If you collect personal information (for example, customer contact details, billing details, or employee records), privacy obligations can affect your contracts - including how responsibility is allocated if there’s unauthorised access or a data incident.
In many small businesses, privacy compliance starts with clear customer-facing documentation like a Privacy Policy, and then flows into the contracts you sign with suppliers and platforms.
Key Takeaways
- An indemnity clause is a promise to cover the other party for specific losses or claims, and it can significantly shift risk in a contract.
- A good indemnity clause sample should include clear trigger events, sensible carve-outs, a claim-handling process, and (often) a liability cap.
- Indemnities should match the commercial reality of the deal - especially who controls the risk and who is best placed to prevent the loss.
- Common indemnity mistakes include overly broad “any loss” wording, indemnifying for things outside your control, and failing to align indemnities with insurance and liability limits.
- Indemnities often sit alongside other key documents like a Service Agreement, Website Terms and Conditions, and Privacy Policy, and should be consistent across the whole contract suite.
If you’d like help tailoring an indemnity clause for your business (or reviewing one you’ve been asked to sign), reach out to Sprintlaw on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
