Indemnities in Contracts for UK Businesses

An indemnity can shift serious financial risk onto your business, often more aggressively than a standard liability clause. Founders and SME owners usually spot the price, delivery dates and term, but miss the wording that says who pays if a claim comes in from a third party, who covers legal costs, or whether the cap on liability even applies. Another common mistake is assuming an indemnity is just standard legal language that cannot be negotiated, or relying on a supplier's verbal assurance that it would never be enforced strictly.

If you are about to sign a customer agreement, supplier contract, software terms, services agreement or commercial lease, this is one of the clauses worth slowing down for. The right indemnity can protect your business from another party's conduct. The wrong one can leave you paying for losses that are indirect, hard to control, or far bigger than the contract value. This guide explains what indemnities in contracts for businesses mean in the UK, what to check before you sign, and where businesses commonly get caught out.

Overview

An indemnity is a promise by one party to cover certain losses, claims, costs or liabilities suffered by the other. In practice, it can move risk in a very specific way, especially where there is a third party claim, a breach of law, damage to property, intellectual property infringement, data protection issues or employee-related loss.

For UK businesses, the main question is not whether an indemnity exists, but exactly how wide it is, what triggers it, and whether it sits inside or outside the wider liability limits in the contract.

• Identify what event triggers the indemnity, such as breach of contract, negligence, infringement, data breach or third party claim.
• Check who is protected, including parent companies, affiliates, officers, employees, contractors and clients.
• Confirm what losses are covered, including legal fees, settlements, fines, remediation costs and indirect loss.
• See whether the indemnity is subject to the liability cap, exclusions and time limits elsewhere in the agreement.
• Review control of claims, including who appoints solicitors, approves settlement and manages correspondence.
• Look for unfair one-way drafting in standard terms, especially where your business has little control over the risk.
• Match the indemnity to your insurance position and your actual ability to manage the risk in practice.

What Indemnities in Contracts Means For UK Businesses

An indemnity is not just another boilerplate clause. It is a risk allocation tool that can require one party to reimburse the other for defined losses if a stated event happens.

That matters because a normal damages claim often requires the other side to prove breach, causation, remoteness and actual loss. An indemnity can sometimes make recovery simpler, broader or quicker, depending on how it is drafted. That is why businesses often negotiate them heavily in commercial contracts.

What an indemnity usually covers

The wording can be narrow or very broad. A narrow indemnity might only cover losses arising from a supplier's intellectual property infringement claim. A broad one might require your business to indemnify the other party against all losses arising in connection with your services, your staff, your systems, your data use, or any breach of the agreement.

In business contracts, common indemnities cover:

• third party intellectual property claims, such as software or branding allegedly infringing someone else's rights
• loss caused by breach of confidentiality
• data protection breaches and cyber incidents
• employment-related claims involving staff supplied into a project
• property damage or personal injury caused while performing services
• tax liabilities linked to contractor arrangements
• regulatory breaches, where one party is responsible for compliance in a specific area

Why indemnities matter more than many businesses expect

The practical effect of an indemnity often appears after something has gone wrong. A customer may receive a complaint from its own client and turn to you under the indemnity. A software provider may face an infringement allegation and ask whether your custom content triggered it. A landlord may seek recovery for repair costs, compliance failures or third party claims tied to your occupation.

This is where founders often get caught. The business signs standard terms without noticing that the indemnity is broader than the rest of the liability framework. The contract value may be modest, but the indemnity exposure can be much larger.

How indemnities interact with liability clauses

The most important drafting issue is whether the indemnity is limited by the general liability cap. If the contract says liability is capped at fees paid in the last 12 months, that sounds reassuring. But some contracts then carve indemnities out of the cap entirely, or only cap some indemnities and not others.

You should also check whether exclusions of indirect or consequential loss apply to indemnity claims. Some contracts state that those exclusions do not apply to indemnified losses. Others are silent, which can create argument later.

Before you sign, read the indemnity next to:

• the cap on liability
• any exclusions for indirect, consequential or special loss
• termination clauses
• insurance obligations
• notice requirements for claims
• dispute resolution and governing law clauses

What the law does and does not do for you

English law generally allows businesses to agree indemnities, but drafting still matters. A court will look closely at the wording used. If a party wants protection for a particular type of loss, especially unusual or extensive loss, the contract should say so clearly.

Some clauses may also be affected by statutory controls on exclusion and limitation wording, depending on the contract and the context. Business-to-business contracts often allow significant freedom, but unfair or unclear wording can still create problems. This is one reason careful contract drafting matters before you accept the provider's standard terms.

Legal Issues To Check Before You Sign

The safest approach is to treat every indemnity as a clause that needs active review, not passive acceptance. The key question is whether the indemnity reflects a risk your business actually controls.

1. What exactly triggers the indemnity?

Some clauses are triggered only by your breach of the contract. Others are triggered by anything arising out of your goods, services, staff or use of the other party's systems. That difference is huge.

Before you sign, look for trigger wording such as:

• arising from your breach
• arising from your negligence
• in connection with your services
• resulting directly or indirectly from your acts or omissions
• relating to your performance under the agreement

The broader the trigger, the more likely the other side can bring in losses that are only loosely connected to what happened.

2. What losses are included?

Not all indemnities are limited to direct financial loss. Some include legal costs on a full indemnity basis, settlement amounts, investigation costs, remediation costs, regulatory penalties where recoverable, and third party claims. A broad clause can create open-ended exposure.

You should identify whether the indemnity covers:

• internal management time and investigation costs
• solicitors' and experts' fees
• settlement sums
• loss of profit or loss of business
• reputational harm or loss of goodwill
• fines and penalties
• future or contingent losses

If the drafting is very wide, ask whether those losses are realistic, insurable, and proportionate to the deal.

3. Who benefits from the indemnity?

Many contracts protect more than the contracting party itself. They may extend the benefit to affiliates, group companies, directors, employees, agents, subcontractors or end customers. That can multiply exposure fast.

If your customer wants an indemnity for all claims brought by its wider group or clients, ask whether your business can truly control that chain of risk. A narrower beneficiary definition is often more reasonable.

4. Is the indemnity mutual or one-way?

Some one-way indemnities are commercially reasonable. For example, if you license software to a customer, you may give an intellectual property indemnity, while the customer gives a separate indemnity for unlawful content it uploads. But many standard terms are one-sided simply because the stronger party drafted them.

Before you sign, ask whether each side should indemnify the other for the risks it actually creates. Mutuality is not always required, but imbalance should be deliberate, not accidental.

5. Who controls a claim?

A well-drafted indemnity should say what happens when a claim arises. If it does not, disputes can start before the real dispute is even resolved.

The contract should address:

• how quickly the indemnified party must notify the claim
• whether late notice affects recovery
• who controls the defence
• who chooses solicitors or experts
• whether settlement needs prior written consent
• what cooperation each side must provide

This matters in real founder moments. If a customer gets a complaint and settles too quickly, your business may be asked to reimburse a deal you never approved. Clear claims handling provisions can stop that.

6. Does the liability cap apply?

This is often the biggest commercial point. If the indemnity sits outside the cap, your business could face uncapped risk. That may be acceptable for a very limited indemnity, but it is dangerous for broad wording tied to general performance.

Many UK SMEs negotiate one of these positions:

• the indemnity is fully subject to the general cap
• only certain indemnities are uncapped, such as deliberate breach of confidentiality or intellectual property infringement
• the indemnity has its own separate cap
• the indemnity is capped by reference to insurance proceeds or a multiple of fees

7. Is the indemnity backed by insurance?

An indemnity is only as useful as the indemnifying party's ability to pay. If you are giving one, check whether your insurance actually covers the assumed liability. Contractual indemnities may not line up neatly with public liability, professional indemnity, cyber or employers' liability cover.

If the risk is material, compare the clause against:

• the policy wording
• coverage limits
• excess amounts
• relevant exclusions
• notification obligations

Do not assume insurance will automatically respond just because the contract says you must indemnify the other side.

8. Does the wording fit the deal?

A short, low-value consultancy agreement should not usually carry the same indemnity exposure as a high-risk outsourcing arrangement. The clause should reflect the nature of the services, the value of the contract, the industry risk and the parties' bargaining position.

If the indemnity looks copied from a very different deal, that is a sign to pause before you sign.

Common Mistakes With Indemnities in Contracts

Most indemnity problems come from businesses treating the clause as standard wording instead of a live commercial risk. The drafting is often fixable, but only before the contract is signed.

Mistake 1: Accepting broad “arising out of” wording without limits

“Arising out of” and “in connection with” can be very broad phrases. They may pull in losses that are not caused solely by your breach and may involve several contributing factors.

A better position is often to tie the indemnity to specific events, such as:

• your proven breach of confidentiality
• your infringement of third party intellectual property rights
• your negligence causing personal injury or property damage
• your breach of data protection obligations

The more specific the trigger, the easier the risk is to price and manage.

Mistake 2: Missing that the indemnity is uncapped

Many business owners focus on the contract's main liability cap and assume it covers everything. Then a carve-out says the cap does not apply to indemnities, or does not apply to certain indemnities. That can completely change the deal.

This point is easy to miss in software terms, agency contracts, manufacturing agreements and enterprise customer paper. Always compare the indemnity clause with the limitations section line by line, or get a contract review before signing.

Mistake 3: Giving an indemnity for risks you do not control

Your business should not usually indemnify the other side for matters largely controlled by them, such as how they deploy your product, what they say to their own customers, or changes they make without your approval. If the clause covers all losses connected with the use of your service, regardless of cause, that is a warning sign.

Look for carve-outs where the claim results from:

• the other party's misuse
• unauthorised modifications
• combination with third party systems not approved by you
• their failure to follow instructions or the contract
• materials, data or content supplied by them

Mistake 4: Ignoring the claims process

Even where the principle of indemnity is acceptable, poor claims handling language can create unnecessary exposure. If the other side can settle a claim without your involvement and then invoice you, the commercial control is weak.

Reasonable procedural protections usually include prompt notice, control of defence by the indemnifying party, and no settlement without prior written consent, not to be unreasonably withheld where appropriate.

Mistake 5: Overlooking employee and contractor issues

Staffing arrangements often contain indemnities for tax, employment status, discrimination, health and safety, and workplace conduct. Businesses using contractors, agency workers or secondees should check who bears the risk if the relationship is later challenged or if workplace claims arise.

This is particularly important where the contract tries to make one party responsible for all claims relating to personnel, even where supervision and day-to-day control sit elsewhere.

Mistake 6: Assuming “mutual indemnity” means fair indemnity

Mutual wording can still be uneven if one side's risk is easy to trigger and the other's is narrow or unlikely. The real question is whether the obligations reflect the actual commercial relationship.

For example, if each party indemnifies the other for “all losses arising from breach”, that may sound balanced but still create broad and uncertain exposure for both sides. Narrow, targeted indemnities are often safer than broad mutual promises.

Mistake 7: Relying on side conversations instead of the contract

A sales rep or account manager may say, “We never enforce that clause”, or “That only applies in extreme cases”. If that limitation is not written into the agreement, it may not help later.

Before you rely on a verbal promise, get the drafting changed. Contracts are far easier to fix before signature than after a claim lands.

Mistake 8: Forgetting sector-specific risk

Some industries carry indemnity issues that need special attention. A tech business may focus on IP infringement, service outages and data incidents. A manufacturer may focus on product liability and recall costs. A marketing agency may need clear client-content indemnities. A business taking commercial premises may need to review repair, compliance and third party claim wording in the commercial lease.

The clause should fit the real risk profile of your sector, not generic template language.

FAQs

Are indemnities enforceable in UK business contracts?

Yes, indemnities are commonly enforceable in UK business-to-business contracts, provided the drafting is clear and the clause is not affected by any statutory limits or other enforceability issues. The exact wording matters a lot.

Is an indemnity the same as a liability clause?

No. A liability clause usually sets the overall rules on what each party is responsible for and how much can be claimed. An indemnity is a specific promise to cover certain losses or claims if a stated event happens.

Should indemnities always be capped?

Not always, but broad uncapped indemnities are risky for most SMEs. Many businesses try to cap indemnities generally, or at least cap all but a small number of high-risk categories.

Can a small business negotiate standard indemnity wording?

Usually, yes. Larger counterparties may resist, but indemnity wording is negotiated regularly, especially where the clause is wider than the deal justifies or the business cannot insure the risk properly.

What is the main thing to check before you sign?

Check whether the indemnity is tied to a risk your business controls and whether it sits inside the liability cap. Those two points often determine whether the clause is manageable or dangerous.

Key Takeaways

• An indemnity can shift significant financial risk, sometimes more aggressively than the general damages rules in a contract.
• The key issues are the trigger event, the types of loss covered, who benefits, how claims are handled, and whether the clause is capped.
• Broad wording such as “arising out of” or “in connection with” can create exposure far beyond what founders expect.
• Do not assume the contract's general liability cap applies to indemnities. Check the carve-outs carefully before you sign.
• Only agree to indemnify for risks your business can control, monitor and, ideally, insure.
• Get side assurances reflected in the contract wording rather than relying on verbal promises.

If you want help with liability caps, claims procedure wording, supplier terms, customer agreements, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.