Indemnification Clause: Meaning, Examples and How to Negotiate It

An indemnification clause (or indemnity clause) is a promise by one party to cover specified losses of the other party if a defined event happens. Typical triggers are third-party claims: a customer is sued because the supplier’s software infringes someone’s copyright, and the supplier’s indemnity requires it to pay the customer’s defence costs and any damages. The clause shifts a specific risk to the party that controls it.

What does an indemnification clause mean in a contract?

It is a risk-allocation term: it says in advance who pays for a particular kind of loss, regardless of how the other side would fare in an ordinary claim for breach. Without it, the injured party would usually have to claim damages for breach of contract, which the governing law limits. Under the UNIDROIT Principles, for example, a non-performing party is liable only for harm it foresaw or could reasonably have foreseen when the contract was made (UNIDROIT Principles 2016, Art. 7.4.4), and the CISG applies the same limit to sales of goods (CISG, Art. 74). An indemnity can make the position wider, narrower or simply clearer than those defaults.

Common triggers include:

• third-party claims that a product, software or content infringes intellectual property;
• breaches of confidentiality or data-protection obligations (see confidentiality clauses and NDAs);
• death, personal injury or property damage caused by the indemnifying party’s staff or products;
• fines or claims caused by the indemnifying party’s breach of law.

The word “indemnity” comes from common-law drafting, but the clause is used in contracts governed by many legal systems. How far it is enforced depends on that system’s rules on liability clauses, described below.

What is the difference between indemnify, defend and hold harmless?

In drafting practice the three verbs describe different duties:

Wording	What it is meant to cover
Indemnify	Reimburse losses the other party has suffered (damages paid, settlements, costs)
Defend	Take on and pay for the defence of a claim against the other party from the moment the claim is made
Hold harmless	Not hold the other party responsible for the covered losses; often read as overlapping with “indemnify”

Courts do not always treat the three as separate duties, and the result depends on the governing law. Do not rely on the label: spell out in the clause which losses and costs are covered, when the duty starts (on a claim being made, or only on a final judgment), and who runs the defence.

One-way or mutual indemnification: which fits your deal?

Use a one-way indemnity where one side alone creates the risk; use a mutual one where both sides can cause the kind of loss being covered.

	One-way (unilateral)	Mutual
Who gives it	One party only	Each party, for its own acts or products
Typical use	A supplier’s IP indemnity for its software; a contractor’s indemnity for injury caused by its staff on site	Integration or joint-venture agreements; mutual data-protection indemnities
What to watch	Whether the one-way risk is priced into the fee; whether it is capped	Whether the two indemnities are really symmetrical (same triggers, same caps)

Are there legal limits on indemnities and liability caps?

Yes. Freedom of contract is the starting point (the UNIDROIT Principles open with it, Art. 1.1), but legal systems set limits on clauses that exclude or shift liability, and those limits differ by jurisdiction:

Jurisdiction or instrument	Rule	Source
Taiwan	Liability for intentional or grossly negligent acts cannot be released in advance	Civil Code, Art. 222
Taiwan	In pre-prepared standard-form contracts, terms that release or reduce the drafter’s liability, increase the other side’s, or restrict its rights are void if obviously unfair	Civil Code, Art. 247-1
England, Wales and Northern Ireland	A contract term cannot exclude or restrict liability for death or personal injury resulting from negligence; for other loss caused by negligence, an exclusion or restriction must satisfy the reasonableness requirement	Unfair Contract Terms Act 1977, s. 2
England, Wales and Northern Ireland	A party dealing on its own written standard terms cannot exclude or restrict liability for its breach unless the term is reasonable	UCTA 1977, s. 3
UNIDROIT Principles (where chosen)	A clause limiting or excluding liability cannot be invoked if that would be grossly unfair, having regard to the purpose of the contract	Art. 7.1.6

Two practical points follow. First, a cap or exclusion that is valid in one country may be void or open to challenge in another, so check the clause against the law that actually governs the contract. Second, these rules protect against the worst terms; they do not make a lopsided indemnity fair.

How do you negotiate a fair indemnification clause?

Focus on four levers: scope, cap, carve-outs and control of the defence.

1. Narrow the triggers. Tie the indemnity to losses caused by your own breach, negligence or infringement, not “any loss arising out of or in connection with” the contract. Exclude losses caused by the other party’s own fault.
2. Cap it, and decide what sits outside the cap. A cap is often linked to the fees paid or a fixed sum. Parties commonly leave certain risks uncapped (for example IP infringement or breach of confidentiality); check that list carefully, and remember the legal limits above.
3. Agree carve-outs and exclusions. Decide whether indirect or consequential losses and lost profits are covered, and define those terms; the defaults vary by governing law.
4. Set the claims procedure. Prompt written notice of a claim, the indemnifier’s right to control the defence and settlement, the indemnified party’s duty to cooperate, and no settlement admitting liability without consent.
5. Require mitigation. Under the UNIDROIT Principles the non-performing party is not liable for harm that the other side could have reduced by reasonable steps (Art. 7.4.8); say expressly that the indemnified party must mitigate.
6. Match it to insurance. Check that your liability or professional-indemnity insurance would actually respond to what you are promising.

Frequently asked questions

Is an indemnity the same as damages for breach of contract?

No. Damages compensate for a breach and are subject to the governing law’s limits, such as foreseeability. An indemnity is a promise to pay for a defined loss, which can apply even where the indemnifying party did not breach the contract, depending on how it is drafted.

Should an NDA include an indemnity?

Sometimes. A mutual NDA for early discussions often does without one, relying on damages and court orders. Where one side will receive valuable data or code, an indemnity for losses caused by its breach can be reasonable. See confidentiality clauses and NDAs.

What else should I check in the same contract?

The limitation-of-liability clause, insurance requirements and the governing-law clause, because they decide how the indemnity works in practice. Our guide on what to look for when reviewing a contract covers the full checklist.