Indemnity clauses explained: what you're really promising

Quick answer: An indemnity clause is a promise by one party to make good certain losses the other party suffers. The Indian Contract Act, 1872 defines a contract of indemnity in Section 124, and courts generally enforce wider contractual indemnities as written. Before signing, check what triggers the indemnity, whether it covers only third-party claims or all losses, whether it is capped, and what procedure applies to claims.

Indemnities are often the most expensive clause in a contract, and among the least read.

What is an indemnity?

Under Section 124, a contract of indemnity is one where one party promises to save the other from loss caused by the conduct of the promisor or any other person. Section 125 sets out what the indemnity-holder can recover, including damages and costs in suits about the matter covered.

In commercial contracts, indemnities are usually broader than Section 124 and spell out exactly what is covered.

How is it different from damages?

• Damages for breach (Section 73) compensate losses that naturally arose from the breach or were in the parties' contemplation, and the claimant usually has to prove the breach and the loss.
• An indemnity can cover specified losses whether or not there was a breach, such as third-party claims, and may allow recovery without waiting for a court to decide the underlying claim.

Common triggers

• Breach of the contract or of a warranty.
• Third-party claims for intellectual property infringement.
• Breach of data protection or confidentiality obligations.
• Negligence, wilful misconduct or fraud.
• Breach of law, including tax and labour laws.

What to negotiate

1. Scope: "third-party claims arising from…" is narrower than "all losses arising from…".
2. Mutual or one-way: should both sides indemnify each other?
3. Cap: is the indemnity inside or outside the limitation of liability? See [limitation of liability clauses](/blog/limitation-of-liability-clause-explained).
4. Exclusions: losses caused by the indemnified party's own fault.
5. Procedure: prompt notice, control of the defence, no settlement without consent.
6. Indirect losses: excluded or not.

Frequently asked questions

What is an indemnity clause in simple words?

A promise that if certain things go wrong, one party will pay for the other's losses or costs.

Is an indemnity clause enforceable in India?

Generally yes. Section 124 of the Indian Contract Act covers indemnity, and courts usually enforce wider contractual indemnities according to their terms.

Should an indemnity be unlimited?

Unlimited indemnities are usually reserved for specific risks such as IP infringement, data breaches or fraud. Most others are capped.

Check yours in minutes

Upload a contract to April's [review](/features/review) and it will flag broad or one-sided indemnities and suggest fairer wording you can apply with one click.

This article is general information, not legal advice.