Indemnification
Indemnity · Hold Harmless · Indemnity Clause
Indemnification is a contractual promise by one party (the indemnitor) to cover losses suffered by another party (the indemnitee) arising from specific events — typically third-party claims, breach of representations, or specified harms. The clause defines which losses are covered, triggers, caps, and any exclusions.
What an indemnification clause actually does
An indemnity shifts economic risk from one party to the other. Without it, each side generally bears its own losses under the default rules of contract law. An indemnification clause changes that: if a customer is sued by a third party claiming the vendor’s software infringes a patent, a well-drafted IP indemnity requires the vendor to pay the customer’s legal fees, damages, and settlement. Key drafting levers include the trigger (third-party claim only vs. direct losses), the scope of covered losses (direct only vs. consequential), the cap (matching the contract value, a multiple, or uncapped), the survival period after termination, and carve-outs (often, the indemnity does not cover the indemnitee’s own negligence).
Why it matters
Indemnification is where contracts allocate the largest dollar risks. A broadly drafted uncapped indemnity can expose a company to unlimited liability far exceeding the contract’s value. A narrowly drafted indemnity may leave you exposed to exactly the risk you thought you shifted. Reviewing indemnification clauses is the single highest-leverage activity in contract review — more so than any other clause in a typical commercial agreement. Small word changes (e.g., "caused by" vs. "arising from") can shift millions in potential liability.
Common pitfalls
- 1.Scope is imbalanced — one party indemnifies broadly while the other indemnifies narrowly or not at all.
- 2.Cap is missing — uncapped indemnity exposes the indemnitor to unlimited liability. Most mature contracts cap at the fees paid or a multiple.
- 3.Defense obligation is unclear — who controls the litigation, who picks counsel, what happens if the parties disagree about settlement.
- 4.Survival period after termination is absent — indemnities typically need to outlast the contract itself.
- 5.Carve-outs are missing — indemnitee’s own negligence, fraud, or wilful misconduct usually should not be covered.
Frequently asked questions
- What is the difference between indemnification and warranty?
- A warranty is a promise that something is true (the software works as documented). An indemnity is a promise to pay for losses if something specified happens. A breach of warranty may trigger an indemnity, but they are distinct clauses with distinct remedies.
- Does "hold harmless" mean the same as "indemnify"?
- In most jurisdictions they are functionally equivalent and often used together ("indemnify and hold harmless"). Some drafters treat "hold harmless" as narrower — only meaning the indemnitor will not sue — but the dominant modern interpretation treats them as synonymous.
- Can an indemnity cover the indemnitee’s own negligence?
- In some jurisdictions yes, if the clause is explicit and unambiguous. In others, courts refuse to enforce such indemnities or require very specific wording. This is a jurisdiction-sensitive question — worth flagging to a local lawyer.
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