What is an indemnity clause?


An indemnity clause is a common clause in contracts, whether for the supply of goods, terms and conditions of the provision of services, leasing of assets or the sale of property.

The indemnity is intended to assign responsibility for risks in performing the contract to a particular party – it either confirms or alters the position at common law which would otherwise apply to determine responsibility for such events.


When drafting an indemnity, the nature and types of losses that may arise need to be considered.

Common areas that you may want an indemnity clause or limitation of liability cause to cover may include: negligence; injury to or the death of any person; loss of or damage to property; infringement of third party rights, such as intellectual property rights; duties and taxes; and legal costs and disbursements.


The common law (extending back to the 1854 case of Hadley v Baxendale) basically provides that if a head of damage wasn’t contemplated by the parties at the time of contracting (wasn’t reasonably foreseeable) or didn’t arise naturally arises from the breach according the usual course of thing (is too remote) – it may not be a recoverable loss.

Accordingly, if the damages that you may want the other party to wish the other party to bear on the occurrence of a certain event are considered remote, then they would probably not be recoverable at common law and therefore, you may wish to specifically provide for them in the clause.

The other party may not agree, so the negotiation would then begin and the parties will ultimately have to agree on what is a reasonable compromise in the circumstances.


Commonly, indemnity clauses are drafted such that where a right to indemnity arises, the liability reduced to the extent that the party benefited by the clause caused or contributed to the loss, that is reduced proportionally.

The extreme in indemnity clauses is where the liable party is liable absolutely (ie, there is no carve out to reduce the liability proportionally). This type of clause, given its strict nature, is usually only agreed to where the event is wholly within the control of the indemnifying party.


Just as the strength of a personal guarantee is in the financial standing of the guarantor, you also need to be satisfied that the party providing the indemnity has the means to meet any claim if called upon. Often, a party is required to have insurance to support any indemnity but they fail to investigate the extent of their cover and are often not insured at all.


Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to any contract negotiation, agreement drafting issue commercial dispute, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.


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