Reading time: 6 minutes

An indemnity is a promise by one party to compensate the other party for loss or damage suffered by the other party during the performance of the contract. Indemnities are the subject of much discussion in contract negotiations. Indeed, this is essentially because they make one party liable for the liability of the other party. Therefore, a properly drafted indemnity can significantly alter the common law, equitable and statutory rights of a party. Indemnities are often poorly drafted or understood, which can have unintended consequences for parties. 

Not all indemnities are obvious since parties do not always label them as such. Words such as “hold harmless”, “defend”, “make good”, or “compensate” often indicate the clause is, in effect, an indemnity clause. This article will look at three common types of indemnity clauses and how to spot each one.

Note that most insurance policies will not cover liabilities that go beyond what is recoverable at common law. That means they will only cover the contractually assumed liabilities. Therefore, it is unlikely you will be able to rely on insurance to cover you for liability under an indemnity. If the insurance is suitable, it needs to be in place for the duration of the indemnity. 

Note: The party who provides the indemnity is known as the indemnifier. The party that is covered by the indemnity is known as the indemnified party.

“Hold Harmless” vs. “Make Good”

A lawyer may write an indemnity into a contract as either a “hold harmless” clause or a “make good” clause. The former is a promise by the indemnifier to hold the indemnified party harmless against loss or damage due to entering into a transaction. The indemnifier will be in breach as soon as the indemnified party suffers loss or damage. This is subject to the agreed indemnity or the occurrence of the relevant event or circumstance covered by the indemnity.

A “make good” clause puts the indemnified party back in its original position before the claim. This clause means the indemnifier must compensate the indemnified party if loss or damage is suffered. This means that it is more of a debt than a liability for breach of contract.

The scope, risk and benefit of an indemnity can vary greatly. This will largely depend on the circumstance and bargaining power of each party. It is therefore vital to understand what your indemnity does and does not cover before signing your contract. Any ambiguity in drafting may lead to an indemnity not covering losses that you expected to be covered. 

In the following examples of indemnity clauses, consider a goods and service supplier to be the indemnifier, and the customer to be the indemnified party. 

1. Bare indemnities

This is where the supplier indemnifies the customer for loss caused by a set of circumstances under the contract. Losses from other events are not covered, even if the customer is at fault. Therefore, it is best practice to define what constitutes ‘loss’.

For example, “the supplier agrees to indemnify the customer for any loss or damage suffered in connection with the goods and services supplied.

2. Proportionate indemnities 

Here, a supplier indemnifies the customer only for losses that flow from the supplier’s acts or omissions. These must have occurred or been omitted during the contract term. The indemnity will not cover loss or damage that does not flow from the supplier’s acts or omissions. 

For example, “the supplier agrees to indemnify the customer for loss or damage suffered in connection with the goods and services supplied to the extent caused by the supplier’s acts or omissions.

If you are giving an indemnity, you should ensure it is reduced proportionately to the extent the other party causes such an act or omission. 

3. Third-party indemnities

This is where a supplier agrees to be responsible for any losses due to a claim against the customer by a third party to the contract.

For example, “the supplier agrees to indemnify the customer for any loss or damage suffered by, or claims arising against, a third party in respect of the goods and services supplied.

In addition to acts or omissions of a party, including performance under the contract, other common areas of coverage of an indemnity clause include:

  • negligence;
  • personal injury and death;
  • infringement of third party intellectual property rights;
  • property loss or damage; and
  • breach of privacy and confidentiality provisions.

It may not always be possible to remove an indemnity clause entirely from your contract. However, you should ensure that it is worded to include limits on the responsibilities you are prepared to accept. For example, you should exclude acts or omissions by the other party, or placing obligations on the other party to mitigate their loss. If not, a broad indemnity could mean you are unfairly held liable for losses not linked to the actual breach. Further, you may be held liable for losses that were caused or contributed to by the indemnified party.

Reminder

Unfair Contract Term provisions of the Australian Consumer Law will apply to unbalanced, unfair and unreasonable indemnities. For example, an indemnity clause that holds customers responsible for losses outside of their control. Asking your customers to provide you with an indemnity for any negligence you cause would also be a potentially unfair contract term. 

Note: In addition to any rights under any indemnity, a party may also have the benefit of certain rights under common law. 

Key Takeaways

An indemnity clause is a common provision in a contract where one party agrees to compensate the other party if harm or loss is incurred. It is an essential clause in a contract as it can have heavy consequences for the party offering the indemnity. Review these carefully if your contract includes a “hold harmless” or “make good” clause. Also, consider the coverage of your indemnity clause and whether it is a bare indemnity, proportionate indemnity, third party indemnity, or all three. To ensure you are fully aware of your obligations under an indemnity clause, speak to a lawyer. 

If you need further advice on indemnity clauses, call LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is an indemnity clause?

An indemnity clause is a promise by one party to compensate the other party for loss or damage suffered by the other party during the performance of the contract.

Will my insurance cover indemnity damages?

Most insurance policies will not cover liabilities that go beyond what is recoverable at common law. That means they will only cover the contractually assumed liabilities. Therefore, it is unlikely you will be able to rely on insurance to cover you for liability under an indemnity. If the insurance is suitable, it needs to be in place for the duration of the indemnity. 

Webinars

How to Sponsor Professionals For Your Healthcare Organisation

Thursday 24 March | 11:00 - 11:45am

Online
Plug skill shortages in your healthcare organisation by sponsoring professionals from overseas. Learn how in our free webinar.
Register Now

Everything You Need to Know about SaaS Agreements

Thursday 7 April | 11:00 - 11:45am

Online
Understand which contracts will protect your SaaS contract from risk, and how. Register for free today.
Register Now

What to Consider When Buying a Tech or Online Business

Wednesday 13 April | 11:00 - 11:45am

Online
Learn how to get the best deal when buying a tech or online business. Register for our free webinar today.
Register Now

Corporate Governance 101: Responsibilities for New Directors

Wednesday 27 April | 11:00 - 11:45am

Online
If you are a new company director, join our free webinar to understand your legal compliance obligations. Register today.
Register Now

Rogue Directors and Business Divorces: How to Remove a Director

Thursday 28 April | 11:00 - 11:45am

Online
Removing a board director is not simple. Join our free webinar to learn how to handle rogue directors. Register today.
Register Now

Employment Essentials for Tech Businesses

Thursday 5 May | 11:00 - 11:45am

Online
Protect your tech business and your employees by understanding your employment legal obligations. Register for our free webinar today.
Register Now

How to Protect and Enforce Your Trade Mark

Wednesday 11 May | 11:00 - 11:45am

Online
Protect your business’ brand from copycats and competitors. Register for this free webinar to learn how.
Register Now

How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Online
Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer