You receive a supplier agreement. The contract is thirty pages long. You scan it quickly, notice the indemnity clause runs to half a page, and move on — it looks standard. A year later, a customer complaint triggers a third-party claim and you discover the indemnity required you to pay legal costs on demand, had no monetary cap, and covered losses you had no way of controlling.
An indemnity clause is not boilerplate to be skipped. It is one of the most consequential provisions in any commercial contract, because it determines who bears the financial consequences when things go wrong — and it can impose that obligation even before liability is formally determined. This article walks through the moving parts of a typical indemnity clause, what each part does, the drafting choices that drive outcomes, and the traps that regularly catch Australian businesses.
The trigger — what activates the indemnity
Every indemnity clause contains a trigger: the event or circumstances that activate the obligation to compensate. The trigger is the single most important drafting variable, and it is where the greatest divergence between "fair" and "aggressive" clauses appears.
Common trigger phrases include:
- "arising out of" the services or products
- "in connection with" the agreement
- "relating to" the party's activities
These phrases have broad judicial reach in Australia. Courts have consistently read "arising out of" and "in connection with" to capture losses that have only a loose causal relationship to the triggering act. A claim that your deliverable "in connection with" an advertising campaign caused the client's loss could sweep in events you had no part in — for example, a product liability claim arising from the client's own manufacturing defect, where your agency produced the ad.
Drafting minimum: Tighten the trigger to language such as "to the extent directly caused by [your] breach of this agreement, negligence, or wilful misconduct." This narrows the causal chain and excludes losses the other party contributed to.
Watch for:
- Triggers that apply regardless of fault or contributory conduct by the other party
- Triggers that capture claims by third parties as well as claims by the counterparty, without any carve-out for third-party conduct the indemnified party induced or aggravated
- The phrase "claims, demands, costs, losses, damages, and expenses" — a cumulative list that imports legal costs and can substantially exceed the core loss
The scope of loss covered
Once triggered, the indemnity specifies what categories of loss must be compensated. This provision determines the financial ceiling of your exposure (assuming no cap clause — more on that below).
Standard loss categories include direct losses, reasonable legal costs, and settlement amounts. Aggressive drafts add:
- loss of profit
- loss of revenue
- loss of goodwill or business opportunity
- business interruption costs
These are sometimes called "consequential" or "indirect" losses, though the legal classification in Australian courts can be contextual rather than fixed — what counts as consequential in one commercial setting may not be in another. The practical problem is that these heads of loss can dwarf the value of the underlying transaction. A fixed-fee consulting engagement worth $20,000 can generate a loss-of-profit claim worth multiples of that figure.
Drafting minimum: If you must accept an indemnity that covers broad loss categories, ensure the contract also contains a clear exclusion of consequential loss — and confirm the indemnity clause does not carve itself out from that exclusion.
Watch for:
- Indemnities that exclude consequential loss elsewhere in the contract but then include it within the indemnity — a structural inconsistency that creates unlimited exposure
- "Reasonably incurred" qualifiers missing from the legal costs limb — without this, the other side can incur substantial costs at their own pace and send you the bill
- Broad definitions of "loss" in the definitions section that feed silently into the indemnity
The direction — who indemnifies whom
Indemnities can run one way, the other way, or mutually. The direction of the clause tells you which party is bearing additional risk beyond ordinary legal liability.
One-way indemnities
In many template contracts — particularly platform agreements, enterprise procurement contracts, and commercial leases — the supplier or service provider indemnifies the customer or landlord, with no corresponding obligation flowing back. This is often presented as standard, but it is a negotiating position, not a legal requirement.
A one-way indemnity is not automatically unreasonable — if you supply software that processes a customer's data, it may be fair that you indemnify them for claims arising from your code. The question is scope: a one-way indemnity covering your direct breach is a different commercial risk from one covering everything "in connection with" the relationship.
Mutual indemnities
Mutual indemnities — where each party covers the other for losses caused by their own breach or negligence — are common in balanced commercial arrangements and generally fairer in principle. But the symmetry can be misleading. If one party's operations expose the other to much greater third-party risk (for example, a small consultant managing client funds or data at scale), the mutual structure may disguise an economically asymmetric outcome.
What to check regardless of direction
- Does the indemnifying party bear losses caused by the other party's own negligence or misuse? If so, push for an express carve-out.
- Is the indemnity aligned with who controls the relevant risk? A service provider should not indemnify for losses arising from customer-approved decisions, customer-supplied materials, or customer misuse of the deliverables.
The monetary cap (or lack of one)
One of the most common structural problems in Australian commercial contracts is the disconnect between the limitation of liability clause and the indemnity clause.
A typical structure looks like this: the contract limits each party's liability to the total fees paid in the preceding 12 months. Separately, the contract provides that indemnity obligations are excluded from that cap. The practical effect is that the limitation of liability clause offers no protection against the claims most likely to be large.
Whether this structure is acceptable depends on your commercial position and the risk being transferred. For a subscription service generating $3,000 per month in fees, an uncapped indemnity means your maximum exposure from a single incident could be unlimited — regardless of what the liability cap says.
Negotiating position:
- Ask for the indemnity to sit within the general liability cap, or
- Negotiate a separate, stated monetary ceiling for indemnity obligations — often expressed as a multiple of fees paid, or a fixed dollar figure, or
- If an uncapped indemnity is commercially required (for example, in IP infringement indemnities), ensure your insurance coverage expressly covers it
The notification and control of defence
If you are required to indemnify the other party for a third-party claim, the clause should address who controls the response — because the control of a dispute determines the cost of it.
Without adequate control provisions, you may be paying for legal proceedings you had no say in — including settlement decisions made without your consent. A claimant who knows you are the indemnifying party has an incentive to settle quickly and generously; your interests as the party writing the cheque may be very different.
What to negotiate:
- Prompt notice of any claim for which indemnification will be sought — notice obligations protect you from claims that have been allowed to escalate before you are informed
- The right to participate in or take over the conduct of the defence
- Approval rights over any settlement, so you are not bound by a settlement you consider excessive or commercially unreasonable
- A requirement that the indemnified party mitigate its losses — that is, take reasonable steps to reduce the impact rather than allowing costs to accumulate
Watch for clauses that require you to pay legal costs "on demand" or "as they are incurred." This can generate substantial cash-flow pressure during a dispute, even if the underlying claim is ultimately defeated.
Carve-outs and exceptions
A well-drafted indemnity includes express carve-outs that exclude liability where the indemnifying party should not fairly bear the risk. These are the clauses that most often disappear in template contracts and most often need to be reinserted.
Common carve-outs worth including:
- Losses arising from materials, information, or specifications provided by the indemnified party
- Losses arising from the indemnified party's approval of a deliverable, specification, or approach
- Losses caused or contributed to by the indemnified party's own breach, negligence, or misrepresentation
- Losses arising from third-party conduct entirely outside the indemnifying party's control
For businesses in marketing, design, professional services, or information technology, these carve-outs are particularly important. If a client approves advertising copy and that copy later attracts a claim under s 18 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)) — which prohibits conduct that is misleading or deceptive — an indemnity clause without appropriate carve-outs could transfer the entire burden of that claim to you, even though the client controlled the content.
Survival
Indemnity obligations frequently survive the termination or expiry of a contract. A survival clause specifies which obligations continue after the agreement ends and for how long.
If the indemnity survives termination without a time limit, you may face claims arising from work completed years earlier — potentially after your insurance has lapsed or your business structure has changed. This is particularly relevant for businesses that wind down specific product lines, exit customer relationships, or undergo restructuring.
Negotiating position: Specify an express survival period — typically aligned with the relevant limitation period for legal proceedings in your jurisdiction — rather than leaving the indemnity open-ended.
Optional and situational clauses
Depending on the commercial deal, the following provisions may be worth including or negotiating even though they will not appear in every contract:
- Indemnity cap separate from the general liability cap: Useful where the parties agree the indemnity should be subject to a ceiling but want that ceiling to be different from the general limitation of liability — for example, a higher cap for IP infringement claims.
- Back-to-back indemnities with subcontractors: If you are required to indemnify a principal for third-party losses and you subcontract part of the work, you may need corresponding indemnities from your subcontractors so the risk passes down the chain.
- Insurance alignment clause: A provision requiring each party to maintain insurance adequate to cover its indemnity obligations, and to provide certificates of currency on request.
- IP-specific indemnity with stepdown: Where you are indemnifying for intellectual property infringement, a clause allowing you to modify the deliverable, obtain a licence, or refund fees as alternatives to paying an indemnity — reducing your exposure where you can control the fix.
- Data and privacy indemnity: If your services involve processing personal information, consider whether the contract addresses responsibility for data breaches — and ensure your obligations align with your internal processes and any applicable requirements under the Privacy Act 1988 (Cth).
How Artificer Legal can help with indemnity review and negotiation
Indemnity clauses sit at the intersection of contract drafting, commercial risk, and insurance — and they interact with provisions across the agreement. The clauses we push back on most consistently, and the questions we raise earliest in a contract review, include:
Trigger scope: Is the trigger drafted broadly enough to capture events the other party controls or contributes to? We narrow triggers to direct causation and push for proportionate language where contributory conduct is a realistic scenario.
Cap structure: Does the indemnity sit outside the liability cap? If so, is that commercially justifiable? We review the interaction between the liability limitation and the indemnity at the same time — not as separate provisions — because the gap between them is where the real exposure sits.
Notification and control: Does the clause give you adequate notice and control rights? We insist on these provisions in any indemnity where the indemnifying party is a smaller business or has less litigation experience than the counterparty.
Carve-outs: Are the carve-outs appropriate for the way you actually deliver your services? Standard templates rarely contain carve-outs for customer-approved materials or customer instructions. We add them based on how the work is structured.
Insurance alignment: We regularly identify indemnities that exceed what a client's insurance policy covers — including policies that exclude or limit cover for contractual liability that goes beyond the insured's ordinary legal liability. Identifying this mismatch before you sign is far more manageable than discovering it after a claim.
If you are reviewing a contract that contains a significant indemnity, or if you are putting together customer-facing or supplier-facing terms for your business, our team can review the agreement and advise you on the practical risk before you commit.
The trigger wording
The trigger wording is the clause that most often decides the outcome when an indemnity claim is made. It determines whether a particular loss falls within the indemnity at all — and in commercial litigation, the dispute frequently turns on that threshold question rather than the quantum of the loss. A broadly drafted trigger is a mechanism for transferring to you the financial consequences of things you did not cause and cannot control.
Indemnity clauses can be reasonable, commercially necessary, and appropriately scoped — or they can quietly expose your business to liability that dwarfs the value of the contract. The difference is almost always in the drafting details. Understanding what triggers the indemnity, what losses it covers, whether it is capped, who controls the defence, and how it interacts with the rest of the contract allows you to make informed decisions about the risk you are accepting — and to negotiate effectively where the current terms do not reflect the commercial reality of the deal.