An indemnity is a promise by one party to make good a loss suffered by another. Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity as one where a party promises to save the other from loss caused either by the promisor’s own conduct or by the conduct of any other person. Section 125 sets out what the indemnity holder can recover: damages, costs and sums paid under a compromise, provided the holder acted within authority and prudently. In commercial drafting, the clause is used to shift specified risks onto the party better placed to control them, and its value depends almost entirely on how precisely those risks are defined.
The mistake that costs money is treating indemnity as a formality. A one line clause promising to indemnify against “any and all losses” is either unenforceable in the way the drafter imagined, or so wide that the party giving it has accepted unlimited exposure without noticing.
Why parties contract for an indemnity at all
If a breach of contract already gives rise to a claim for damages, the obvious question is why an indemnity is needed. There are four answers, and they explain what the clause is actually for.
It removes the hurdles that limit ordinary damages
A claim for damages under Section 73 is subject to constraints: the loss must arise naturally from the breach or have been within the parties’ contemplation, remote and indirect loss is excluded, and the claimant is expected to mitigate. A well drafted indemnity defines the recoverable loss in the contract itself, which reduces the argument about what was foreseeable.
It covers events that are not breaches
Damages require a breach. An indemnity can be triggered by anything the parties choose: a third party claim, a regulatory penalty, a tax demand, the discovery of a defect in title. The trigger is a matter of drafting, not of default law.
It reaches third party claims
Most commercial indemnities exist to deal with claims brought by someone outside the contract, typically an infringement claim, an employee claim or a customer claim. Ordinary damages sit awkwardly with that scenario, and the indemnity is the mechanism that makes recovery straightforward.
It can be enforced before payment is made
The provisions of the Act on indemnity are not exhaustive, and Indian courts have applied equitable principles alongside them. In Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942), the Bombay High Court held that an indemnity holder need not wait until actual payment before enforcing the indemnity, and may compel the indemnifier to meet the liability once it has become absolute. That is a significant practical advantage over waiting to be out of pocket first.
The contract of indemnity as a statutory concept therefore sits underneath a much wider commercial practice, and the drafting is where the two meet.
Indemnity, damages and guarantee compared
These three are routinely conflated in drafting, and the differences decide who can recover what and from whom.
| Basis | Indemnity | Damages | Guarantee |
|---|---|---|---|
| Source | Section 124, plus the contract | Sections 73 and 74 | Section 126 |
| Parties | Two: indemnifier and indemnified | Two: parties to the contract | Three: creditor, principal debtor, surety |
| Nature of liability | Primary and independent | Arises on breach | Secondary, contingent on default |
| Trigger | Whatever the clause specifies | Breach of contract | Default by the principal debtor |
| Requires a breach | No | Yes | No, but requires default |
| Remoteness and foreseeability | Governed by the clause | Applies under Section 73 | Follows the principal obligation |
| Effect of the principal contract being void | Generally unaffected | Not applicable | Surety is usually discharged |
The distinction between indemnity and guarantee is worth stating in the way the old cases put it. A guarantee says: let him have the goods, and if he does not pay you, I will. An indemnity says: let him have the goods, I will be your paymaster. The first is secondary liability; the second is primary.
What an indemnity clause must actually contain
A clause that does only one of these things is not finished. Work through all eight.
- The trigger events. Define precisely what gives rise to the indemnity: breach of a specified warranty, third party infringement claims, regulatory penalties, employee claims, tax demands. Do not rely on a general reference to breach of the agreement, which adds little to the damages the innocent party already has.
- The scope of recoverable loss. State whether it covers direct loss only, or extends to legal costs, settlement sums, fines and internal management time. Say expressly whether indirect and consequential loss is included, because silence produces the largest disputes in this area.
- Who is indemnified. The counterparty alone, or also its group companies, directors, employees and agents. Extending the class widens exposure considerably, and beneficiaries who are not parties raise their own enforcement questions.
- Conduct of third party claims. Who controls the defence, who selects counsel, whether the indemnified party may settle without consent, and the obligation to give prompt notice. This is the clause most often omitted and the one that causes most friction when a claim actually arrives.
- Notification and time limits. A deadline for notifying a claim, and a longer stop date after which no claim may be brought at all.
- Financial caps and thresholds. A monetary ceiling, a de minimis figure below which small claims are not brought, and a basket that must be exceeded before any claim is made.
- Carve-outs from the cap. The categories that sit outside any limit, commonly fraud, wilful misconduct, and breach of confidentiality.
- Survival. How long the indemnity continues after termination or completion. An indemnity that dies with the contract is worthless for claims that surface later.
The trap that catches experienced drafters
The single most consequential drafting error in this area is the interaction between the indemnity and the limitation of liability clause.
If the contract caps total liability at, say, the fees paid in the preceding twelve months, and the indemnity is not carved out of that cap, then the indemnity is worth no more than the cap however widely it is drafted. Parties negotiate hard over an intellectual property indemnity and then leave it subject to a cap that makes it commercially meaningless.
Conversely, a party giving an indemnity that is expressly excluded from the cap has accepted unlimited liability for that category, which is frequently not what the commercial team believes it agreed. Two habits prevent this:
- Read the indemnity and the limitation clause together, always, and satisfy yourself which one prevails.
- Say expressly in the indemnity whether it is subject to or excluded from the cap. Never leave it to inference.
This is precisely the kind of cross-clause interaction that gets missed when a document is assembled from precedent. Along with notices, governing law and severability, the limitation clause is one of the boilerplate clauses that is copied without thought, and it is the one most likely to defeat a heavily negotiated indemnity sitting twenty pages away.
Where indemnities appear in practice
The clause takes a different shape depending on the transaction.
- Service agreements. Typically an indemnity from the supplier for third party intellectual property claims arising from the deliverables, and from the customer for claims arising from materials it supplied. This is standard in a service agreement for a startup or any outsourcing arrangement.
- Employment contracts. Indemnity by the employer for acts done by the employee within the scope of authority, and by the employee for losses caused by wilful misconduct. Care is needed, since an employment agreement sits within a statutory framework that limits what can be recovered from an individual.
- Confidentiality agreements. Indemnity for losses arising from unauthorised disclosure, which is what gives an otherwise unenforceable promise commercial teeth. This is a standard feature when drafting NDAs in India.
- Joint ventures. Cross indemnities between the partners for liabilities arising from their respective contributions, which is one of the harder negotiations in drafting a joint venture agreement.
- Franchise and licensing. Indemnity from the licensor for challenges to the licensed rights, and from the licensee for its manner of use. Getting this backwards is among the recognised pitfalls in drafting franchise and licensing agreements.
- Property conveyances. The seller indemnifies the buyer against defects in title and prior encumbrances. A sale deed that omits this leaves the buyer relying solely on the statutory covenants for title under the Transfer of Property Act, 1882, which is a materially weaker position when a problem emerges years after the sale of immovable property has completed.
- Influencer and endorsement contracts. Indemnity from the influencer for content that breaches advertising or disclosure rules, which is one of the legal safeguards an influencer contract must include.
A sample indemnity clause
A structure to adapt, not to use unaltered. The bracketed choices are the negotiation.
Indemnity
- The Supplier shall indemnify and keep indemnified the Customer against all losses, liabilities, damages, costs and expenses (including reasonable legal fees) suffered or incurred by the Customer arising out of or in connection with: (a) any claim that the Deliverables infringe the intellectual property rights of any third party; (b) any breach by the Supplier of clause …… (Confidentiality); and (c) any claim by an employee or contractor of the Supplier relating to their engagement.
- The indemnity in clause 1 shall not apply to the extent that the loss arises from (a) the Customer’s own negligence, (b) any modification of the Deliverables not made or approved by the Supplier, or (c) the Customer’s use of the Deliverables otherwise than in accordance with this Agreement.
- The Customer shall (a) notify the Supplier in writing within …… days of becoming aware of any claim, (b) not admit liability or settle any claim without the Supplier’s prior written consent, such consent not to be unreasonably withheld, and (c) provide reasonable assistance in the defence of the claim at the Supplier’s cost.
- The Supplier shall be entitled to assume conduct of the defence of any claim under clause 1(a), provided that it shall not settle any claim in a manner that imposes any obligation on the Customer without the Customer’s prior written consent.
- The aggregate liability of the Supplier under clause 1 shall not exceed Rs. ………… [OR: The indemnity in clause 1 is not subject to the limitation of liability in clause ……].
- No claim may be brought under clause 1 unless written notice is given within …… months of [the date of this Agreement / the date the Customer became aware of the claim].
- This clause shall survive termination or expiry of this Agreement.
Clause 5 is where the value of the whole provision is decided, and clause 3 is the one most often left out.
Five failures that make an indemnity worthless
- No cap and no carve-out. Unlimited exposure on one side or a meaningless promise on the other, depending on which way the limitation clause runs.
- No conduct of claims provision. The indemnified party settles cheaply and hands the bill over, or refuses a sensible settlement while costs accumulate.
- No survival clause. The contract terminates and the indemnity terminates with it, just as latent claims begin to surface.
- “Any and all losses” and nothing else. Wide language reads as strong and drafts as vague, and vagueness is resolved against the party relying on it.
- No notice period. A claim arrives years later with no ability to investigate the facts.
All five are omissions rather than errors of expression, which is the consistent pattern across common mistakes made while drafting business contracts.
How the indemnity relates to the rest of the contract
An indemnity does not operate in isolation, and three neighbouring clauses change its effect.
- Limitation of liability, as above, which can cap or exclude it.
- Termination. Whether accrued indemnity claims survive depends on the drafting. This is one reason termination clauses in Indian contracts need to address consequences and not merely rights.
- Force majeure. A party excused from performance by a force majeure clause may still owe an indemnity, since the two provisions do different work and neither automatically overrides the other.
An indemnity bond given as a standalone instrument also attracts duty in its own right, and the stamp duty position for indemnity and guarantee bonds differs from that for a general agreement in most States.
Learning to draft this properly
Indemnity is where drafting stops being about expression and becomes about allocation. The words are not difficult. The difficulty is knowing which risks your client should accept, which they should refuse, and which they can accept only with a cap, and then holding that position across a negotiation where the other side wants the opposite.
That is why the gap between drafting and negotiating a contract is at its widest here, and why an indemnity drafted without understanding the commercial deal tends to be either useless or dangerous. Reading a clause with the question of what breaks is the habit that separates the two, and it runs through the basic principles of legal drafting as much as through improving drafting skills over a career.
LawMento’s Practical Training in Drafting of Contracts works through indemnity, limitation of liability and the interaction between them across 30 or more contract types, 26 hours of instruction and 230 pages of reading material. It builds on the foundation set out in contract drafting as a discipline, where the recurring lesson is that the clause nobody reads at signature is the clause that decides the dispute.
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Frequently asked questions
What is an indemnity clause in simple terms?
A promise by one party to cover a defined loss suffered by the other. Section 124 of the Indian Contract Act describes it as a contract to save the other party from loss caused by the promisor’s conduct or by the conduct of any other person.
What is the difference between indemnity and damages?
Damages arise by operation of law once a contract is breached, and are limited by rules on remoteness and mitigation. An indemnity is a contractual promise that can be triggered by events other than breach, and the recoverable loss is defined by the clause rather than by the general law.
What is the difference between indemnity and guarantee?
An indemnity creates primary liability: the indemnifier is directly responsible for the defined loss. A guarantee creates secondary liability: the surety is liable only if the principal debtor defaults, and is generally discharged if the principal contract is void.
Can an indemnity be claimed before the loss is actually paid?
Indian courts have held that an indemnity holder need not wait until they have actually paid, and may require the indemnifier to meet the liability once it has become absolute. The precise position depends on the wording of the clause and the facts.
Is an indemnity clause enforceable in India?
Yes, subject to ordinary contractual principles. It must be supported by consideration, be sufficiently certain, and not offend public policy. Vague drafting is the most common reason an indemnity fails to deliver what its beneficiary expected.
Should an indemnity be subject to the limitation of liability cap?
That is a commercial negotiation, but it must be answered expressly in the drafting. An indemnity silently subject to a low cap is worth little, and one silently excluded from the cap creates unlimited exposure.
How long should an indemnity survive after termination?
Long enough to cover claims that realistically emerge after completion. Tax and title indemnities commonly run for several years, while operational indemnities are often shorter. State a stop date rather than leaving it open.
Does an indemnity clause need to be separately stamped?
The agreement containing it is stamped as a whole. A standalone indemnity bond is a separate instrument and is charged separately, usually at a fixed rate that varies by State.
This guide explains the general framework and is not legal advice for any specific transaction. The effect of an indemnity depends on its precise wording and on the surrounding contract. Take advice on your own facts before relying on or giving an indemnity.
