Can An Indemnity Bypass A Liability Cap?

An indemnity can bypass a liability cap, but only if the contract is drafted that way. In many UK supplier contracts, the real answer is: it depends on the wording, the structure of the limitation clause, and whether any exclusions are legally enforceable.

That can feel frustrating when you're trying to sign a supplier agreement and move on with the job. The good news is that this doesn't have to be mysterious. Once you know what each clause is doing, you can spot whether the contract is giving you a fair risk position or quietly leaving your business exposed.

In UK supplier contracts, the indemnity vs liability cap question often comes down to one practical issue: are indemnity claims included within the cap, or carved out from it?

What Is An Indemnity In A Supplier Contract?

An indemnity is a promise to cover another party for a particular type of loss. In a supplier contract, it usually means one party agrees to reimburse the other if a defined risk happens.

For example, your supplier might indemnify your business if:

• their product infringes someone else's intellectual property rights
• their staff damage your premises while providing the services
• their software causes a data breach because of their security failure
• they breach confidentiality and your business suffers a loss
• they fail to pay their subcontractors and you get pulled into the dispute

Indemnities are often used where the risk is specific, serious, or mostly within one party's control. They're not the same as a general right to sue for breach of contract.

With a normal breach of contract claim, you usually need to show things like the breach, the loss, causation, and that the loss isn't too remote. An indemnity can sometimes make recovery easier, because the contract says a particular loss must be covered if the trigger happens.

That said, an indemnity isn't magic. It still needs careful clause drafting. If the wording is vague, too broad, or conflicts with the rest of the contract, you may end up arguing about what it actually covers.

What Is A Liability Cap?

A liability cap is a limit on how much one party has to pay if something goes wrong under the contract. It's one of the main tools businesses use to keep contractual risk commercially manageable.

For example, a supplier agreement might say the supplier's total liability is capped at:

• the fees paid under the contract in the last 12 months
• 100 percent or 200 percent of the annual fees
• a fixed amount, such as GBP 50,000
• the amount recoverable under the supplier's insurance policy

Liability caps are common in commercial contracts because suppliers don't want one mistake to create unlimited exposure. Customers, on the other hand, want enough protection if the supplier's breach causes real damage.

The right cap depends on the deal. A small website maintenance contract won't usually justify the same liability position as a business-critical logistics, payroll, payment processing, or software contract.

Under English law, limitation clauses can be enforceable, but they need to be drafted clearly and may be tested under the Unfair Contract Terms Act 1977. This is especially relevant where a party is using standard terms or trying to limit liability for negligence or breach of contract.

Some liabilities can't be excluded or restricted in the usual way. For example, you can't exclude liability for death or personal injury caused by negligence. Attempts to exclude liability for fraud are also highly unlikely to work.

Does A Liability Cap Apply To An Indemnity?

It depends on the wording, because a liability cap doesn't automatically apply to every indemnity and an indemnity doesn't automatically sit outside the cap.

This is where supplier contracts often become confusing. You might see one clause saying the supplier indemnifies you for certain losses, then another clause saying the supplier's total liability is capped at a set amount. If the contract doesn't explain how those clauses interact, you may not know your true position until a dispute happens.

Courts in England and Wales usually look at the contract as a whole. They ask what the parties objectively agreed from the words used, read in context. So the answer turns on drafting, not labels.

Here are three common approaches.

Option 1: The Indemnity Is Included Within The Cap

The supplier agreement might say that the cap applies to all liability arising under or in connection with the agreement, including liability under any indemnity.

This means the indemnity gives you a clearer route to claim, but the amount recoverable is still capped.

This approach is common where the supplier accepts responsibility for a risk but wants certainty about maximum exposure. It can be fair if the cap is high enough for the risk.

Option 2: The Indemnity Is Carved Out From The Cap

The contract might say the cap doesn't apply to specific indemnities. For example, intellectual property infringement indemnities, confidentiality breaches, or data protection indemnities might be uncapped or subject to a separate higher cap.

This means the indemnity can bypass the general liability cap.

Customers often ask for this where the potential loss could be much bigger than the contract fees. Suppliers usually push back, because an uncapped indemnity can be a major commercial risk.

Option 3: The Contract Is Silent Or Unclear

If the contract is silent or unclear, you may need a contract review because you have a drafting problem. Both sides may have reasonable arguments, and the answer may depend on the exact wording.

For example, if the cap says it applies to all claims for breach of contract, but the indemnity creates a separate payment obligation, one party may argue the cap doesn't catch it. If the cap says it applies to all liability under or connected with the agreement, including indemnities, the argument is much harder.

The practical lesson is simple: don't leave this to chance. If you want indemnities inside the cap, say so. If you want certain indemnities outside the cap, say that clearly too.

How Should You Draft A Contract Indemnity Clause In The UK?

As part of contract drafting, you should draft an indemnity so it clearly says what risk is covered, who is protected, what losses are included, and whether the liability cap applies.

A good indemnity isn't just a big sentence saying one party indemnifies the other against everything. Broad wording can create more fights, not fewer, especially if it doesn't match the commercial deal.

When reviewing or negotiating a supplier indemnity, look at these points:

• The trigger: What has to happen before the indemnity applies? For example, a breach of confidentiality, a third party IP claim, or a data protection breach.
• The protected parties: Does it protect only your company, or also your directors, employees, group companies, customers, or contractors?
• The types of loss: Does it cover damages, legal costs, regulatory fines where legally recoverable, settlement amounts, investigation costs, and lost revenue?
• Third party claims: Is it limited to claims brought by someone else, or does it also cover direct losses between the contracting parties?
• Control of claims: If a third party makes a claim, who controls the defence, settlement decisions, and communications?
• Mitigation: Does your business need to take reasonable steps to reduce the loss?
• The cap position: Is the indemnity capped, uncapped, or subject to a separate cap?

Say you run an online retailer and you hire a fulfilment company to store and ship your products. Your contract says the supplier indemnifies you for customer claims caused by its warehouse errors. That's helpful, but you still need to know whether that indemnity is capped at one month's fees, annual fees, or a higher amount linked to insurance.

If the supplier loses a large batch of high-value stock, a low cap could leave you recovering far less than your actual loss. If the indemnity is uncapped, the supplier may be taking on a risk it can't insure. A tailored middle ground is often better than either extreme.

What Should A Limitation Of Liability Clause Cover?

A limitation of liability clause should clearly explain what is capped, what is excluded, what is carved out, and how different claims are treated.

A supplier contract often needs more than one sentence on liability. If the clause is too simple, it may not deal with the risks that actually matter in your business relationship.

Common drafting points include:

• Overall cap: The maximum total liability for all claims under the contract.
• Separate caps: Higher or separate caps for higher-risk areas such as data protection, confidentiality, IP infringement, or regulatory breaches.
• Excluded losses: Categories of loss the supplier won't be liable for, such as loss of profit, loss of business, or indirect losses. These need careful drafting because labels can be disputed.
• Uncapped liabilities: Claims that sit outside the cap, such as fraud, death or personal injury caused by negligence, or specific indemnities if agreed.
• Insurance link: Whether the cap reflects the supplier's insurance cover and whether the supplier must maintain that cover.
• Time limits: Whether claims need to be notified within a certain period after the issue is discovered.

For business-to-business contracts, the Unfair Contract Terms Act 1977 can affect whether certain exclusions and caps are enforceable. A court may look at whether the term is reasonable, including the parties' bargaining positions, whether the customer knew about the term, and whether insurance was available.

If you supply consumers, the Consumer Rights Act 2015 also matters. It controls unfair terms in consumer contracts and sets standards around goods, digital content, and services. Even if your current contract is B2B, it's worth checking your wider business terms and conditions if your business also sells to consumers.

Which Indemnities Should Sit Outside The Liability Cap?

It depends on the risk, but only the higher-impact or harder-to-price risks usually sit outside the main liability cap.

Not every indemnity needs to be uncapped. If every risk is uncapped, the cap stops being useful and negotiations can stall. A better approach is to decide which risks genuinely justify special treatment.

Common carve-outs include:

• Intellectual property infringement: If your supplier's software, designs, or content infringe someone else's rights, your business could face claims, disruption, and replacement costs. The UK Intellectual Property Office is the main UK body for trade marks, patents, and registered designs, but copyright often arises automatically.
• Confidentiality breaches: If sensitive pricing, customer lists, trade secrets, or investor information is leaked, your loss may exceed the fees paid under the contract.
• Data protection breaches: If personal data is mishandled, you may face investigation, remediation costs, customer communications, and possible UK GDPR and Data Protection Act 2018 exposure. The ICO can take regulatory action for serious breaches.
• Deliberate wrongdoing or fraud: You generally shouldn't accept a cap that protects a party from its own fraud or deliberate misconduct.
• Non-payment: If your customer doesn't pay, you may want the full unpaid amount recoverable rather than capped in a way that cuts across your invoices.

For many supplier contracts, a sensible structure is:

• a general cap for ordinary contract claims
• a higher separate cap for data protection, confidentiality, or IP claims
• a short list of liabilities that are uncapped because the law or commercial position requires it

This gives both sides clarity. Your supplier knows its exposure, and your business knows which serious risks are properly protected.

How Can You Align Indemnities And Liability Caps Before You Sign?

You can align them by reading the indemnity clause and limitation clause together, then making the contract say exactly how they interact.

This is the part worth slowing down for. Many businesses negotiate the indemnity and the cap separately, then discover they don't fit together.

Before you sign, work through this checklist:

• Identify each indemnity: List every indemnity in the contract, including any hidden in schedules, data processing terms, service levels, or order forms.
• Match each indemnity to a cap: Decide whether each one is under the general cap, under a separate cap, or uncapped.
• Check the wording of the cap: Look for phrases like all liability, claims arising under or in connection with the agreement, and including indemnities.
• Check the carve-outs: Make sure the clause clearly lists what sits outside the cap.
• Compare the cap to the real risk: Think about worst-case scenarios, not just the contract value.
• Check insurance: Ask whether the supplier has insurance that matches the risks they're accepting.
• Remove contradictions: If one clause says an indemnity is uncapped and another says all liability is capped, fix it before signing.

Templates often miss these details because they can't know your risk profile, contract value, insurance position, or industry. A short clause can work well, but only if it's doing the right job for your deal.

For example, Mike runs a facilities management company and signs a contract with a cleaning chemicals supplier. The supplier offers an indemnity for product defects but caps all liability at GBP 10,000. If a defective chemical damages a client's flooring and Mike has to pay for replacement, the cap may be nowhere near enough. Mike could ask for product defect indemnities to sit under a separate cap linked to the supplier's product liability insurance.

That kind of drafting doesn't make the contract more complicated for the sake of it. It makes the commercial bargain clearer, which is what helps prevent costly disputes later.

Key Takeaways

• An indemnity can bypass a liability cap, but only if the contract clearly says it does.
• A liability cap can apply to indemnities if the drafting captures indemnity claims.
• Don't rely on labels. Read the indemnity clause and limitation clause together.
• Some liabilities, such as fraud and death or personal injury caused by negligence, can't be neatly capped or excluded in the usual way.
• Higher-risk areas like IP infringement, confidentiality, and data protection often need separate treatment.
• The cleanest approach is to state which indemnities are capped, which have separate caps, and which are uncapped.

If you'd like help with reviewing your supplier contracts, drafting indemnities and liability caps, or checking your data protection and confidentiality risk, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.