Indemnity Clause Example: Drafting Clear, Enforceable Terms for UK Businesses

An indemnity clause can shift a lot of risk in a contract, often more than business owners realise when they sign. The common problem is not spotting how wide the wording is, who it protects, or whether it makes you pay for losses you did not directly cause. Another frequent mistake is copying an indemnity clause example from another agreement without checking whether it fits your deal, your insurance, or the actual risk you are trying to manage.

This matters before you sign a supplier agreement, software contract, services agreement, manufacturing terms, or a set of standard customer terms. A badly drafted indemnity can leave you paying uncapped legal costs, third party claims, and losses that sit well outside the price of the contract. This guide explains what an indemnity clause example means in practice for UK businesses, what to check before you accept the other side's standard terms, and how to draft clearer, more enforceable wording.

Overview

An indemnity is a contractual promise that one party will cover certain losses or liabilities suffered by the other. In UK business contracts, the real issue is rarely whether an indemnity exists, it is how far it extends, what triggers it, and whether it lines up with the commercial deal.

• Identify exactly whose losses are covered, including whether affiliates, staff, contractors or customers are included.
• Check what events trigger the indemnity, such as breach of contract, negligence, IP infringement, data protection failures, or third party claims.
• Confirm whether the indemnity is capped, excluded, or carved out from the general liability cap.
• Review whether legal costs, settlement sums, investigation costs and indirect losses are included.
• Make sure the clause sets out claim handling rules, including notice, control of defence and settlement approval.
• Compare the clause against your insurance cover so you do not assume a policy will pick up every indemnified loss.

What Indemnity Clause Example Means For UK Businesses

An indemnity clause example shows the structure of a risk allocation clause, but the wording only works if it matches the transaction. Founders often search for a sample indemnity and assume the same wording can be dropped into any contract, but that approach usually creates either unnecessary exposure or a clause too vague to be useful.

In plain English, an indemnity says one party will compensate the other for a defined type of loss. That sounds similar to an ordinary damages claim for breach of contract, but it can operate differently. Depending on the wording, an indemnity may help the protected party recover specific losses without having to argue through every element of a standard breach claim in the usual way.

This is why indemnities are negotiated so heavily in commercial contracts. They often sit alongside warranty clauses, limitation of liability clauses, insurance obligations and dispute provisions. If those sections do not line up, the contract can become internally inconsistent.

A simple indemnity clause example

A very basic example might read like this:

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

That wording may look straightforward, but even this short clause raises several legal and commercial questions.

• What counts as "losses" and does that include legal fees?
• Does "intellectual property rights" include copyright, trade marks, patents, database rights and confidential information?
• Does the indemnity apply only to the services as delivered by the supplier, or also to modifications made by the customer?
• Can the supplier control the defence of the claim?
• Is the indemnity subject to a financial cap?
• Does the customer have to notify the supplier promptly?

Without detail, the clause may create argument rather than certainty.

When UK businesses usually use indemnities

Indemnities are common when one party is better placed to control a particular risk. That usually happens where one side creates, supplies, hosts, processes, installs, or licenses something that could expose the other side to a claim.

You will often see indemnities in:

• software and SaaS agreements, especially for intellectual property infringement and data protection breaches
• consultancy and professional services contracts
• supplier and manufacturing agreements
• distribution, reseller and white label contracts
• commercial leases, especially around damage, contamination or breaches by occupiers
• share purchase agreements and investment documents, where specific tax or compliance liabilities are allocated contractually

For startups and SMEs, the practical issue is leverage. A large customer may ask for a broad indemnity covering almost every claim connected with your product or service. If you accept that wording without negotiation, you may end up taking responsibility for risks you cannot fully control.

Why the exact wording matters

The exact language matters because courts interpret indemnities by reading the words used in the context of the whole contract. UK law does not treat every indemnity the same way. A narrow clause may only cover direct third party claims. A wider clause may extend to internal losses, legal expenses and statutory liabilities.

This is where founders often get caught. They focus on the headline commercial points, price, term and deliverables, then treat the indemnity as boilerplate. In reality, a single sentence can shift a large amount of financial responsibility.

For example, compare these approaches:

• An indemnity for losses caused by the supplier's breach of data protection law.
• An indemnity for any and all claims connected with the services.
• An indemnity for third party IP claims, excluding claims caused by customer modifications.
• An indemnity for all losses, whether direct or indirect, and whether foreseeable or not.

Each version allocates risk differently. Some may be commercially reasonable. Others may be too broad to accept without a cap, carve-outs or clearer limits.

Legal Issues To Check Before You Sign

Before you sign a contract with an indemnity clause, check whether the clause is specific, proportionate and consistent with the rest of the agreement. A useful indemnity should identify a defined risk and explain how claims will be handled, not create open-ended exposure with no practical boundaries.

1. What event actually triggers the indemnity?

The trigger tells you when payment responsibility arises. If the clause is drafted around vague wording such as "in connection with" or "relating to" the agreement, the protected party may argue for a much broader scope than you intended.

Clear triggers often include:

• breach of confidentiality obligations
• infringement of a third party's intellectual property rights
• breach of data protection obligations
• personal injury or property damage caused by negligence
• tax liabilities expressly allocated to one party

Broad triggers are not automatically unenforceable, but they deserve closer review. The wider the trigger, the greater the chance of dispute.

2. Is the indemnity limited to third party claims?

This is a major drafting point. Many business owners assume an indemnity only applies where someone outside the contract sues the other party. That is not always true.

If the clause is not expressly tied to third party claims, it may extend to losses the other party says it suffered itself. That can make the indemnity much wider than expected. In many contracts, especially around IP infringement or data breaches, keeping the indemnity focused on third party claims makes the obligation easier to understand and insure.

3. Does the clause sit inside or outside the liability cap?

The liability cap often appears elsewhere in the contract, and this is where the real commercial negotiation happens. Some contracts state that indemnity claims are included within the overall cap on liability. Others carve them out completely.

If the indemnity sits outside the cap, your exposure may be uncapped even where the rest of the contract is carefully limited. Before you accept the provider's standard terms or your customer's template, confirm:

• the amount of the general liability cap
• whether the indemnity is subject to that cap
• whether only certain indemnities are carved out
• whether fraud, death, personal injury, or deliberate default are treated separately

4. What types of loss are covered?

The phrase "all losses" can be deceptively broad. It may capture legal fees, expert costs, settlement payments, remediation costs, regulatory penalties where recoverable, and internal management time if the wording is wide enough.

Many UK contracts also distinguish between direct losses and indirect or consequential losses. If your contract excludes indirect losses generally but the indemnity covers "all losses", you need to check which provision takes priority. The answer depends on the drafting.

Here is what to sort out first:

• whether legal and professional costs are included
• whether settlement sums are covered
• whether the indemnity extends to loss of profit, loss of revenue or reputational harm
• whether internal costs of investigation and remediation are recoverable

5. Who controls the defence and settlement of a claim?

If a third party claim arises, both sides need a process. Without one, the indemnified party might admit liability, settle too quickly, or run up costs without input from the party paying.

A better-drafted indemnity usually includes claim management terms such as:

• prompt written notice of the claim
• an obligation not to admit liability without consent
• the indemnifying party's right to conduct or assist with the defence
• reasonable cooperation obligations
• limits on settlement without written approval, especially if the settlement affects the other party's business or reputation

6. Is the clause reasonable and likely to be enforceable?

An indemnity is not automatically invalid just because it is broad, but enforceability can be affected by the wider contract, the bargaining position of the parties, and statutory controls in some contexts. Exclusion and limitation clauses in business-to-business contracts can also be affected by reasonableness rules, particularly where one party relies on standard terms.

The details matter. A clause that tries to shift every imaginable risk, regardless of fault or control, may be challenged or may create costly uncertainty. Clear wording, fair allocation and consistency with the deal usually produce a stronger result than maximalist drafting.

7. Does the indemnity match your insurance?

Your contract and your insurance policy are not the same thing. A common founder mistake is assuming public liability, professional indemnity, cyber or product liability cover will respond to every indemnified loss. Policies often contain exclusions, conditions and financial limits.

Before you sign, compare the clause against:

• the scope of insured activities
• policy exclusions
• claim notification requirements
• territorial limits
• whether contractual liabilities are covered only if they would exist at law anyway

If the contract makes you responsible for losses beyond your insurance position, that may still be a commercial choice, but it should be a deliberate one.

Common Mistakes With Indemnity Clause Example

The biggest mistake with an indemnity clause example is treating sample wording as a finished legal answer. A precedent can help you spot structure and issues, but a usable indemnity has to reflect the risk, bargaining position and liability model in the actual contract.

Copying a generic clause from another deal

A clause taken from a software agreement may not work in a manufacturing contract. Wording from a customer contract may be inappropriate in a supplier agreement. The result is often a clause that is too broad, misses the real risk, or conflicts with the rest of the document.

For instance, an IP indemnity may make sense for software code you created, but not for customer content uploaded to your platform or designs provided by the customer.

Using vague catch-all language

Terms like "all claims of any nature whatsoever arising in any way" may sound powerful, but they can create uncertainty and trigger disputes over scope. Overly broad language can also derail negotiations because the other side will assume the worst.

Good drafting is usually more precise. It identifies:

• the risk event
• the type of claim
• the losses covered
• the process for dealing with claims
• the financial limits, if any

Ignoring the interaction with warranties and liability clauses

An indemnity does not sit in isolation. If the contract already contains warranties, service levels, termination rights and a liability cap, the indemnity should work with those provisions.

This is where businesses often end up giving a double remedy. A customer may be able to claim for breach of warranty and also seek recovery under an uncapped indemnity based on similar facts. That may be intended, but often it is not.

Failing to include carve-outs

An indemnity should not usually apply where the protected party caused or contributed to the problem. Carve-outs are especially important where the other side can modify, combine, misuse or ignore your product, service or instructions.

Examples of useful carve-outs include where the claim results from:

• the other party's unauthorised modification
• use outside agreed specifications
• combination with third party systems not approved by you
• the other party's own negligence, misconduct or legal breach

Leaving out notice and defence mechanics

Even a fair indemnity becomes risky if the process is unclear. If you are paying, you need timely notice and a chance to respond. If you are receiving the indemnity, you need practical cooperation from the other side.

Before you rely on a verbal promise that the other party will be "reasonable", make sure the contract says what happens when a claim lands.

Accepting uncapped indemnities in low-value contracts

This is common in early-stage deals. A startup signs a modest customer contract, but the indemnity is unlimited and sits outside the cap. If a serious issue occurs, the exposure can dwarf the contract value many times over.

That does not mean every indemnity must be capped the same way. Some risks may justify a separate cap or a tailored cap. The key point is to negotiate consciously rather than assume the indemnity is standard boilerplate.

Overpromising where you depend on third party inputs

If your product relies on open source components, external APIs, customer-provided materials or third party data sets, a sweeping indemnity may promise more than you can realistically control. That is especially relevant for software, AI-enabled tools, design work and white labelled products.

In those cases, narrower wording, exclusions, and clear assumptions about permitted use are often more realistic than an absolute promise.

FAQs

What is a simple indemnity clause example?

A simple example is a clause where a supplier agrees to cover the customer's losses from a third party IP infringement claim caused by the supplier's services. The key is to define the trigger, the losses covered, and any exclusions or claim procedures.

Is an indemnity the same as a liability clause?

No. An indemnity is a specific promise to cover certain losses or claims, while a liability clause usually sets the wider limits and exclusions that apply across the contract. The two clauses should be read together.

Are indemnity clauses enforceable in the UK?

They often are, but enforceability depends on the wording, the type of contract, the surrounding terms and, in some cases, statutory reasonableness controls. Clear and proportionate drafting usually reduces the risk of dispute.

Should an indemnity be capped?

Often yes, at least for many commercial risks. Some indemnities are capped under the general liability cap, some have a separate cap, and some are carved out altogether. The right approach depends on the risk being allocated and the bargaining position of the parties.

Can I use a free indemnity clause example from the internet?

You can use a sample to understand structure, but relying on generic wording is risky. A clause should be tailored to the contract, the industry, the risk profile, and your insurance position before you sign.

Key Takeaways

• An indemnity clause can transfer significant financial risk, so it should never be treated as standard boilerplate.
• A useful indemnity clause example helps with structure, but the wording must be tailored to the actual deal and the specific risk being allocated.
• Before you sign, check the trigger event, whether the clause is limited to third party claims, what losses are covered, and who controls defence and settlement.
• Always review how the indemnity interacts with the liability cap, warranties, exclusions and insurance cover.
• Common drafting mistakes include copying generic wording, accepting uncapped exposure, and failing to include carve-outs for customer misuse or modification.
• Clear, precise drafting usually gives better protection than broad catch-all language that creates uncertainty.

If you want help with contract drafting, contract review, liability caps, carve-outs, and claim handling terms, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.