Indemnity Clauses Explained: Shield or Sword?

Indemnity Clause

Introduction

In commercial contracts, few clauses are as powerful—or as misunderstood—as the indemnity clause. Whether you’re a business owner, vendor, or legal professional, indemnity can act as both a shield (protection from loss) and a sword (a tool to recover damages).

In a world of increasing risk—cyber breaches, third-party claims, regulatory penalties—clear and well-drafted indemnity clauses are more critical than ever. This blog explores the dual nature of indemnity clauses, how they operate under Indian contract law, and how to draft them to your advantage.

What is an Indemnity Clause?

An indemnity clause is a contractual provision where one party (the indemnifier) agrees to compensate the other party (the indemnified) for losses, liabilities, or damages that arise under specified circumstances.

Example:

A software vendor agrees to indemnify a client for any legal claims arising from third-party intellectual property infringement

Purpose of Indemnity: Why It Matters in Commercial Contracts

Indemnity provisions serve three main purposes:

1. Risk Allocation – Shift responsibility to the party better able to control or insure against the risk.

2. Financial Protection – Provide a safety net against losses caused by third parties or breach.

Legal Recourse – Offer remedies beyond general contract damages.

Indemnity Under Indian Contract Law

The concept of indemnity is governed by Section 124 of the Indian Contract Act, 1872, which defines it as:

“A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor or by the conduct of any other person.”

Key Legal Points:

• Indemnity applies only to losses already suffered, not future or anticipated damages—unless specifically stated.

• Courts interpret indemnity clauses strictly, and parties must show clear intent and agreed language.

However, Indian law is evolving to recognize broader interpretations through case law, especially in commercial contracts.

Indemnity vs. Warranty vs. Limitation of Liability

Clause Type	Purpose	Trigger
Indemnity	Protects against specified losses	Loss or liability incurred
Warranty	Promise about the product/service	Breach of representation
Limitation of Liability	Caps or excludes damages	Limits total liability exposure

Pro tip: Always align your indemnity clause with your limitation of liability to avoid unintended exposure.

The “Shield” Function of Indemnity

An indemnity clause acts as a shield when:

• You are being indemnified (i.e., protected from third-party claims).

• It covers legal fees, settlements, penalties, and losses.

• It helps recover costs outside the scope of breach-related damages.

Example Use-Case:

A company contracts a logistics firm. The indemnity clause ensures the company isn’t liable if the logistics firm causes damage while delivering goods.

The “Sword” Function of Indemnity

It becomes a sword when:

• You (as indemnifier) have broad liability and unlimited exposure.

• You are required to cover not only direct but also indirect or consequential losses.

• It imposes strict duties, often regardless of fault.

Example Risk:

A freelancer agrees to indemnify a client for “any loss, claim, or expense” arising out of service defects. This could expose the freelancer to unpredictable liability.

Key Elements of a Well-Drafted Indemnity Clause

To ensure clarity and fairness, an indemnity clause should address the following:

1. Scope of Indemnity

Define what losses are covered:

• Third-party claims

• Legal costs

• Government penalties

• Data breaches

Avoid vague phrases like “any and all losses” unless intentionally broad.

2. Triggering Events

Specify when indemnity will apply:

• Breach of contract

• Negligence or misconduct

• IP infringement

Data protection failures

3. Procedural Requirements

Include notice period and defence rights:

• The indemnifier should be notified promptly.

• Right to control or participate in legal proceedings.

4. Cap and Duration

Limit exposure by adding:

• Indemnity cap (e.g., fees paid in 12 months)

• Survival period post-contract (e.g., 2 years after termination)

5. Exclusions

List what will not be indemnified:

• Consequential damages

Acts of gross negligence or willful misconduct

Common Pitfalls in Indemnity Clauses

Overly Broad Language – Leads to open-ended liability.

No Cap or Time Limit – Exposes parties indefinitely.

Mismatch with Liability Clause – Creates confusion in enforcement.

Lack of Third-Party Claim Clarity – Makes enforcement difficult in disputes.

Best Practices for Drafting Indemnity Clauses

1. Negotiate from Position of Risk Control Whoever controls the risk (e.g., vendor, contractor) should bear the indemnity.

2. Ensure Clarity of Language Avoid legalese. State exactly what’s covered and under what circumstances.

3. Align With Insurance Coverage Confirm whether the indemnity can be covered under your business insurance.

4. Review Local Laws Tailor indemnity language to suit Indian law or other applicable jurisdictions.

5. Balance With Mutual Indemnities In balanced contracts, mutual indemnity clauses can ensure fairness and reciprocity.

   
   
   
   

Conclusion

The indemnity clause is both a protective shield and a powerful sword—depending on how it’s drafted and who bears the burden. In India’s evolving contract law landscape, parties must move beyond template language and treat indemnity clauses as strategic risk tools.

Whether you're drafting a SaaS agreement, a service contract, or a master supply deal, get your indemnity clauses reviewed for clarity, enforceability, and proportionality.

FAQs

Q1. Is an indemnity clause legally enforceable in India?

Yes, if it is clearly worded and supported by contractual intent, courts in India enforce indemnity clauses as per Section 124 of the Indian Contract Act.

Q2. What’s the difference between indemnity and damages?

Damages compensate for breach, while indemnity covers loss—even without breach—often including third-party claims and legal costs.

Q3. Can indemnity cover future losses?

Only if explicitly stated. Indian courts require indemnity clauses to clearly mention future or anticipated liabilities to be enforceable.