Resolution ready: strengthen supplier indemnities before Q1 deals

Indemnities and liability clauses are central to allocating risk in commercial contracts. For suppliers, understanding how they work – and how to control them – reduces exposure and helps avoid disputes.

What are indemnities?

An indemnity is a contractual promise to reimburse another party for specified losses when a defined event occurs. Unlike a general damages claim for breach of contract, indemnities usually allow pound‑for‑pound recovery for covered losses, but the extent of that recovery depends entirely on the drafting of the indemnity.

For example, in a software-as-a-services (SaaS) agreement, the supplier may indemnify the customer against third‑party claims that the customer’s authorised use of the software infringes that third party’s intellectual property (IP) in the agreed territory. The indemnity is triggered by such a claim and the supplier repays the losses covered, which commonly include reasonable defence costs and any settlement or judgment.

Common pitfalls and consequences

Poorly reviewed or loosely drafted indemnity clauses can backfire. Typical traps include agreeing uncapped liability, vague or overly broad triggers, permitting claims by group companies or third parties, failing to align indemnities with caps and exclusions and omitting conduct‑of‑claims control.

This can result in uninsured or outsized exposure, multiple claimants, paying for avoidable or remote losses and loss of control over defence and settlement. The key points below set out practical steps to prevent these outcomes:

Tips for reviewing or giving indemnities

• Define a clear, narrow trigger: be precise about which events trigger payment and what is covered. Unclear drafting can skew interpretation and undermine intentions. For IP, you might limit triggers to third‑party claims alleging infringement in the agreed territory and the paying party may wish to exclude events it can’t control or where it isn’t at fault
• Include appropriate exclusions: clarify when the indemnity doesn’t apply. Using the IP example above, a SaaS provider may exclude liability to the extent the alleged infringement arises from modification to the software by anyone other than the provider, the customer’s use of the software outside the contract or the supplier’s written instructions, or the customer’s breach of contract
• Make indemnities subject to liability limits and caps: state expressly that indemnity liability is subject to your standard exclusions and overall liability cap (except where liability can’t be limited by law). Customers often seek uncapped  indemnities; resist this where possible. As a compromise, consider a separate, higher cap that applies only to the relevant indemnity, with the amount to be negotiated between the parties
• Limit who is covered: resist extending indemnities to group companies, affiliates, officers and contractors, which multiplies exposure. Aim to cover only the contracting customer. If it’s extended, require claims to be brought through the contracting entity and subject to the same controls, defences and limits
• Include a robust conduct‑of‑claims clause which requires prompt written notice, gives you the right to assume defence and settlement and obliges the customer to cooperate. Prevent admissions or settlements that increase your exposure without consent, while allowing settlements that fully release you.

Now is a good time to review your terms to check whether indemnities are included and, if so, whether they’re clear, capped and properly controlled.