Indemnities take various forms and are all about allocating (or reallocating) risk in commercial transactions. However, achieving the correct balance is frequently contentious and can be a real headache if you get it wrong.

An appropriate indemnity can provide a valuable mechanism for risk allocation between parties to commercial dealings but only if you get it right. Our Commercial Team provides some useful tips.

Indemnity Basics

An indemnity is an obligation written into a contract that legally binds one party to bare the risk of loss that another party may suffer in specified circumstances.

Depending upon drafting, an indemnity can allow the indemnified party to alter factors which limit its rights to recover damages for breach of contract. These factors include:

  • Remoteness: Whether the loss flows in the usual course of things or was in the reasonable contemplation of the parties at the time of centering into the contract ;
  • Mitigation: The extent to which a party has taken reasonable steps to mitigate its loss;
  • Limitation of Actions: Ordinarily a claim for breach of contract must be made within 6 years of the breach rather than 6 years from the time of suffering the consequent loss. Where there is an indemnity claim the 6 year period will be triggered by failure to indemnify the loss; and
  • Proportionate Liability: The apportionment of loss between concurrent wrongdoers.

Common Difficulties

Unfortunately, it is not uncommon for even highly experienced parties to reach an impasse whilst trying to negotiate an acceptable indemnity or, worse, to find themselves unacceptably exposed by what they have signed.

These issues arise for a variety of reasons, but often it is a case of:

  • Poor drafting and or reliance “boiler plate” (precedent based) clauses;
  • Outcomes being driven by a disparity in bargaining power between the parties and without due regard to who is best placed manage the risks involved;
  • The contingent liabilities involved being difficult to quantify and or more than an indemnifying party is comfortable assuming;
  • Failure to obtain proper advice or work through the issues.

5 Considerations to Keep in Mind When Negotiating Indemnities

1. Do not just accept boiler plate provisions: An appropriate indemnity should be crafted by the parties’ lawyers having due regard to the nature of the transaction and particular risks to the parties. Eg.

a. Who should be indemnifying? If more than one party, should liability be joint and several?

b. What are the key areas of risk for loss and damage? Who would ordinarily be liable? Who is best placed to manage these risks?

c. Who should be covered by the indemnity? Should it include directors and officers?

d. How long should the indemnity operate for?

2. Understand the asset position of the indemnifying party: An indemnity is only valuable if the indemnifying party has assets to recover against. When dealing with special purpose vehicles or parties with limited assets or significant secured debts, particular caution should be exercised. The indemnified party may need to consider:

a. whether to include an express obligation on the indemnifying party to take and maintain insurance covering particular liabilities; and or

b. seeking appropriate security (eg. personal guarantees, retention amounts, bank guarantees, PPSR security interests).

3. Understand the insurance position of the indemnifying party: The indemnifying party should confirm the extent of any insurance coverage to be relied upon with their insurer. This is critical for understanding exposure. Many policies contain contractual liability exclusions in relation to losses which are assumed under a contract but would not have otherwise attached to the insured. Knowledge of coverage and applicable claims limits can also often be a good starting point for negotiating caps or exclusions (discussed below).

4. Generate greater certainty through carve outs and caps: Do not be disheartened if you are asked for an extremely broad indemnity. Whilst there are situations where a party might ultimately choose to walk away, most impasses are resolved via series of carve outs and caps in favour of the indemnifying party. Depending upon the nature of the transaction, some of the more common to consider are:

a. Limiting the scope to specific types of loss (eg. taxation liability, injury, death or property damage at a particular location, employee claims, third party claims for intellectual property infringement or product defects);

b. Limiting the parties covered (eg excluding indemnification of directors, officers or employees);

c. Capping the total aggregate amount of an indemnifying party’s liability under the indemnity or the liability amount in respect of a particular type of claim;

d. Excluding liability for loss to the extent caused or contributed by the acts or omissions of the indemnified party or its officers, employees or agents (or a variant such the “breach, wrongful act or negligence of those parties”);

e. Limiting loss to “direct” and or “reasonably foreseeable loss”;

f. Limiting recovery of costs to “reasonable” costs;

g. Limiting the duration of how long the indemnity or claim for a particular type of loss to run for;

h. Expressly obliging the indemnified party to take reasonable steps to mitigate its loss;

i. Granting the indemnifying party rights to step in/control third party claims against the indemnified party.

5. Consider alternatives: Often a key motivation behind the push for broad indemnity is the need to manage an unknown risk. In certain situations such as sale contracts it may be possible to instead offer comfort in the form of a warranty and or further disclosure.


If you require any assistance negotiating, drafting or interpreting a commercial contract or indemnity provision, please contact a member of the Tisher Liner FC Law Commercial Team for further advice.


The material contained in this publication is meant to be informational only and is not to be construed as legal advice. Tisher Liner FC Law will not be held liable or responsible for any claim, which is made as a result of any person relying upon the information contained in this publication.

Related Articles

View All
Commercial Law / Commercial Contracts & Agreements / Litigation & Dispute Resolution

Recording | TLFC Law Lunchtime Briefing | Commercial Matrimony – Marry/Battle/Kill

The slides are also available Please click here to view the PowerPoint Slides   Facilitated by Ron Cohen...
Read More
Commercial Law / Real Estate Agents / Owners Corporations & Strata

Changes for Real Estate Agents and Owners Corporation Managers

What are the applicable jurisdictions Current jurisdictions included are Victoria, New South Wales, South Australia,...
Read More
Commercial Law / Commercial Contracts & Agreements / Start-ups & Emerging Enterprises

Frustration, Force Majeure & Risk: Lessons for Business in Uncertain Times

Why is a force majeure clause so important A “force majeure” clause is a provision addressing the parties’ rights...
Read More
Commercial Contracts & Agreements / Commercial Law / Leasing & Lease Disputes

The 2022 Commercial Tenancy Relief Scheme Regulations are now in effect

The 2022 Regulations were foreshadowed in a press release issued by the Victorian Government on 15 January 2022 Click...
Read More
Commercial Law / Commercial Contracts & Agreements

Commercial Tenancy Relief Scheme Regulations 2021

In the technology space, this time of year is often linked with the anticipated release of the new models of Apple...
Read More
Commercial Law

Directors beware – Corporations Act changes tighten the rules for exiting Directors.

Recent changes to the Corporations Act can prevent a director from exiting and alter the effective date of resignations...
Read More
Leasing & Lease Disputes / Real Estate Agents / Commercial Law

COVID-19 – Commercial Tenancy Relief Scheme to be extended (again)

The CTRS was initially expected to end on 29 September 2020 under the COVID-19 Omnibus (Emergency Measures)(Commercial...
Read More
Commercial Law

Verification of online customers: Is your business complying with the new AML/KYC laws?

The changes apply to any business receiving funds from customers that are not already known to them This includes...
Read More
Retail Clients & Chains / Commercial Law

A win for the Tigers on the field and in the Court of Appeal

On 16 October 2020 the Court of Appeal confirmed that a ‘retail premises lease’ will remain subject to the Retail...
Read More
Commercial Law / Leasing & Lease Disputes

COVID-19 Lease Variations- How to document it properly

We have written several blogs about commercial leases and licences and the impact COVID-19 has had on them and what the...
Read More
Commercial Law / Commercial Contracts & Agreements / Corporate Advisory and M&A

Announcing our Promotions

Rob joined us in 2017 and immediately impressed us with his litigation skills and incredible work ethic It’s no...
Read More
Commercial Contracts & Agreements / Commercial Law

When contracts end: The perils of miscommunication and misunderstanding

From a practical perspective, the most critical thing for any party to a contract to appreciate is the importance of...
Read More