What Is An Indemnity Clause? (2026 Updated)

If you've ever been handed a contract and your eyes landed on the word indemnify, you're not alone if you felt a little uneasy.

An indemnity clause can look like "standard legal boilerplate", but it can also be one of the biggest risk-shifting clauses in the entire agreement. If you're running a UK business, this is the kind of clause you want to understand before you sign - because it can decide who pays (and how much) when something goes wrong.

In this guide, we'll break down what an indemnity clause is, how it works in practice, where you commonly see it in UK contracts, and what to watch out for when you're negotiating one.

What Is An Indemnity Clause (In Plain English)?

An indemnity clause is a contract term where one party promises to compensate the other party for certain losses or liabilities.

In everyday terms, an indemnity clause is basically saying:

• "If X happens and you suffer a loss, I'll cover the cost."

That "X" can be drafted narrowly (for a very specific risk) or broadly (for almost anything connected to a party's work, products, or conduct). The more broadly it's drafted, the more important it is to negotiate it carefully.

Indemnity Vs Damages: What's The Difference?

People often assume an indemnity is just another way of saying "you can sue for damages". They're related, but not the same.

• Damages are a legal remedy for breach of contract (or another cause of action). A court decides the amount, and there are rules about what is recoverable (for example, remoteness and mitigation).
• An indemnity is a contractual promise to pay specified losses. If the indemnity is triggered, it can sometimes be easier for the claimant to recover losses - because the contract itself is doing a lot of the heavy lifting.

This is why indemnities can feel "stronger" than a standard breach of contract claim. They're often used as a deliberate risk allocation tool between businesses.

Indemnities sit within the broader framework of UK contract principles, so it helps to be comfortable with the basics of contract law and what makes an agreement enforceable in the first place (including legally binding contracts).

What Does "Indemnify And Hold Harmless" Mean?

You'll often see wording like "indemnify and hold harmless". In UK contracts, this is usually intended to reinforce that:

• the indemnifying party will reimburse losses (indemnify), and
• the indemnified party should not be left to carry the liability (hold harmless).

In practice, the actual effect depends on the full drafting - not the label - so you want to focus on what losses are covered, how they're calculated, and what processes must be followed.

Why Do Indemnity Clauses Matter For UK Businesses?

Indemnities matter because they're one of the clearest ways a contract can shift financial risk from one party to the other.

That risk-shift might be reasonable (and commercially normal). For example, if your supplier infringes someone's IP rights because they copied a design, it's fair that the supplier covers the resulting claim - not you.

But indemnities can also be drafted so widely that you end up effectively "insuring" the other party against problems you didn't cause, can't control, or can't realistically price into the deal.

Common Situations Where Indemnities Pop Up

You'll commonly see indemnity clauses in:

• Supply of goods/services agreements (especially B2B)
• SaaS and software contracts
• Construction and trade contracts
• Marketing and creative services (e.g. content, photography, brand work)
• Business purchases and sales (warranties + indemnities can both appear)
• Leases and licences

Indemnities And UK "Fairness" Rules

Even in B2B contracts, indemnities aren't automatically enforceable in every form. How enforceable they are can depend on:

• how the indemnity is drafted
• whether it attempts to exclude/limit liability in a way caught by the Unfair Contract Terms Act 1977 (UCTA) (particularly around negligence)
• whether the contract is B2C (where the Consumer Rights Act 2015 fairness requirements become highly relevant)

This is one reason indemnities should be considered alongside your limitation of liability drafting - because the two clauses often interact (and sometimes conflict).

How Does An Indemnity Clause Work? Key Parts To Look For

When you're reviewing an indemnity clause, don't just ask "is there an indemnity?". Ask what exactly is being promised, when it applies, and what the financial exposure could be.

Here are the building blocks that typically matter most.

1) The Trigger Event (What Has To Happen?)

Indemnities should specify the trigger clearly. Examples include losses arising from:

• a breach of the agreement
• negligence or wilful misconduct
• an IP infringement allegation
• failure to comply with law (e.g. advertising rules, data protection obligations)
• injury, property damage, or third-party claims linked to a party's operations

Watch out for vague triggers like "in connection with" or "arising out of". Those phrases can be interpreted broadly, meaning the indemnity may bite in more scenarios than you expect.

2) What Losses Are Covered?

Losses can include many categories, and this is where the commercial risk can balloon. A clause might cover:

• direct losses (e.g. replacement costs)
• legal fees and defence costs
• settlement payments
• fines or penalties (sometimes not appropriate, and not always enforceable depending on the context)
• loss of profits, loss of business, or indirect/consequential losses

If a contract says "any and all losses", that can be a red flag. It may be appropriate in some contexts, but it should always be weighed against your insurance position and the value of the deal.

3) Who Is Protected (And Who Pays)?

Indemnities can extend beyond the contracting entity to cover "related parties", such as:

• directors and officers
• employees
• agents and subcontractors
• group companies

This can be normal - but it can also expand exposure. For example, you might agree to indemnify not only your customer, but also their entire group of companies, which is a much larger risk footprint.

4) The Claims Process (This Is Often Overlooked)

A well-drafted indemnity clause usually includes a process for handling third-party claims. Without it, you could end up paying for a settlement you didn't approve or legal fees that weren't managed properly.

Key process points often include:

• Notice: the indemnified party must notify you promptly of any claim
• Control of defence: who gets to run the defence and choose solicitors
• Approval rights: whether you must approve settlements (and when approval can't be unreasonably withheld)
• Co-operation: obligations to provide information and assistance

If the other party controls the defence but you pay the bill, that's usually a negotiation point.

5) Caps, Carve-Outs, And How Indemnities Interact With Liability Limits

Many businesses assume the limitation of liability clause will automatically cap everything. That isn't always true.

Some contracts explicitly state that certain indemnities are:

• subject to the general liability cap, or
• excluded from the cap (meaning potentially unlimited liability).

This is why it's important to review indemnities alongside your broader risk settings, including limitation of liability clauses and any exclusions for indirect loss.

Common Types Of Indemnity Clauses (With Practical Examples)

Indemnities show up in a few predictable categories in UK commercial contracts. Understanding the "why" behind each type helps you negotiate them without turning the deal into a battle.

IP Infringement Indemnities

These are common in:

• software development agreements
• SaaS contracts
• branding/design engagements
• manufacturing and supply arrangements

An IP indemnity often says that if one party's deliverables infringe a third party's intellectual property rights, the delivering party will cover the claim.

Practical example: You hire a designer to create packaging for your product. Later, a third party claims the design copies their work and demands damages. An IP indemnity can allocate who pays for the legal defence and any settlement.

These indemnities are often reasonable - but you should still check scope. Does it cover only infringement caused by the supplier's work, or also infringement caused by your instructions, edits, or misuse?

Third-Party Claims Indemnities

These cover claims brought by someone outside the contract (e.g. a customer, a regulator, a member of the public).

Practical example: A contractor working on your premises damages a neighbouring unit and the landlord claims against you. Your contract with the contractor may require them to indemnify you for third-party property damage caused by their negligence.

These indemnities often sit alongside insurance obligations, so you'll want to make sure the indemnity you're giving aligns with your actual cover (public liability, professional indemnity, cyber insurance, etc.).

Tax Indemnities

Tax indemnities appear frequently in business sales, share purchases, and sometimes contractor arrangements.

Practical example: In a share sale, a buyer may require the seller to indemnify them if HMRC later assesses unpaid tax relating to periods before completion.

Tax indemnities can be heavily negotiated because they can be very specific and time-limited (and sometimes backed by retention arrangements).

Data Protection And Confidentiality Indemnities

If your business processes personal data, some customers (especially larger organisations) may push for GDPR-related indemnities.

Be careful here. UK GDPR obligations are real, but an indemnity that covers "any breach of data protection law" can be too broad if you're not fully controlling the compliance environment.

Tip: if you're signing contracts where personal data is exchanged, the indemnity often needs to align with your data processing terms and the operational reality of how you handle information.

Indemnities In Employment-Related Contracts

Indemnities can appear in senior hire arrangements, consultancy agreements, and settlement situations.

They may cover things like:

• a contractor indemnifying the company for employment status claims (though these aren't always effective in practice and won't stop HMRC scrutiny)
• indemnities around confidentiality breaches or misuse of company property

Because these issues can get complex quickly, it's worth getting advice early - especially if you're combining indemnities with restrictive covenants, confidentiality, or status provisions.

How Do You Draft And Negotiate An Indemnity Clause In 2026?

If you're negotiating an indemnity clause, the goal usually isn't to delete all indemnities. The goal is to make sure the indemnity is:

• clear
• commercially fair
• priced into the deal
• consistent with your insurance

Here are practical levers you can use.

Keep It Specific (Avoid "Any And All" If You Can)

Try to tie the indemnity to specific events within a party's control, such as:

• their breach of contract
• their negligence
• their infringement of third-party rights
• their failure to comply with law

This is where careful clause drafting makes a real difference - a few words can dramatically change exposure.

Build In A Sensible Claims Process

Even if the indemnity is acceptable in principle, the process needs guardrails. You generally want:

• prompt notice of claims
• the right to control or participate in the defence
• settlement approval rights
• requirements to mitigate loss and avoid unnecessary costs

This keeps the indemnity practical, not open-ended.

Make Sure It Matches The Liability Caps (Or Clearly Decide If It Doesn't)

In many SME contracts, it's common to cap liability at:

• the fees paid in the last 12 months, or
• a fixed ? amount, or
• a multiple of fees.

The important bit is not the "perfect number" - it's whether the indemnity is inside or outside that cap, and whether you're comfortable with that outcome.

Also watch out for internal inconsistencies. For example, a contract might exclude "indirect or consequential loss" but then include an indemnity that specifically covers "loss of profits". If you're not careful, the indemnity can override the limitation clause.

Exclude Losses You Can't Control

Common exclusions you might negotiate include losses arising from:

• the other party's breach or negligence
• the other party's instructions or modifications
• your compliance with the other party's specifications
• use of deliverables outside the agreed scope

This kind of "carve-out" is especially important in creative, tech, and manufacturing arrangements.

Check How The Contract Is Executed (Especially For Deeds)

Some indemnities are contained in deeds (for example, a deed of indemnity, deed of settlement, or a deed given by a director). Execution formalities matter, and getting them wrong can create enforceability problems later.

If you're signing something as a deed, it's worth checking the rules around executing contracts and deeds so you don't accidentally end up with an improperly executed document.

And if your contract includes "override" wording (for example, "notwithstanding anything else in this agreement?"), treat that as a signpost that certain clauses may trump the rest - the effect of notwithstanding clauses can be significant when combined with indemnities.

Key Takeaways

• An indemnity clause is a contractual promise to cover specified losses, and it can shift major financial risk from one party to the other.
• Indemnities often go beyond ordinary damages claims, so you should check what triggers the indemnity, what losses are covered, and whether there's a clear claims process.
• Indemnities should be reviewed alongside your limitation of liability clause, because some indemnities are carved out of liability caps (which can create effectively unlimited exposure).
• Common indemnities include IP infringement indemnities, third-party claims indemnities, tax indemnities, and data protection/confidentiality indemnities.
• When negotiating, focus on specificity, exclusions for losses outside your control, sensible notice/defence/settlement provisions, and clear alignment with insurance and liability caps.
• If an indemnity sits in a deed or uses override wording, make sure execution and "priority" clauses are handled properly to avoid enforceability and interpretation disputes.

If you'd like help reviewing or drafting an indemnity clause (or negotiating a contract before you sign), you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.