Negotiating Indemnity Clauses In Commercial Contracts: A Simple Practical Guide

Why Indemnity Clauses Create the Most Negotiation Drama

In almost every commercial contract, whether it is a services agreement, a supply contract, a technology deal, a private equity agreement, a share purchase agreement, a distribution arrangement, or even a simple vendor engagement, there is one clause that almost always sparks the most debate.

That clause is the indemnity clause.

Commercial teams often believe the "real negotiation" is about pricing, payment schedules, deliverables, service levels, or termination rights. But anyone who has worked on contracts for long enough knows that the real negotiations usually begin once the discussion reaches indemnity.

Because indemnity answers one question very clearly: If something goes wrong, who will pay?

And in business, "who pays" is not a theoretical issue. It can decide whether a dispute becomes manageable or becomes a financial disaster.

Indemnity clauses are not just legal text. They are essentially a contract's "risk allocation engine." Clear drafting helps prevent disputes and builds confidence in the agreement.

What is an Indemnity Clause, in Simple Terms?

An indemnity clause is basically a promise. One party says to the other: "If you suffer loss because of certain events, I will compensate you."

That is the simplest meaning of indemnity.

The reason indemnity becomes sensitive is that it is often drafted to serve as a quick recovery mechanism. Many indemnity clauses are worded so that the indemnified party can seek reimbursement for legal fees, settlements, and damages without the usual burden of proving every detail, as in a standard breach-of-contract claim.

That is why indemnity clauses often seem "stronger" than standard contract remedies. In everyday business language, an indemnity clause is akin to saying: "If you get dragged into trouble because of me, I will handle the bill."

India-Specific Legal Context: What Indian Law Says About Indemnity?

In India, indemnity clauses are recognised under the Indian Contract Act, 1872, primarily under Sections 124 and 125.

Section 124 defines indemnity as a contract where one party promises to save the other from loss caused by the promisor's conduct or by someone else's conduct.

While the statutory definition is narrow, commercial contracts in India frequently include broader indemnities, for example, covering third-party claims, regulatory penalties, and data breaches.

Indian courts generally uphold such commercial indemnities, provided they are clearly drafted and do not violate public policy.

A practical point worth noting is this. Indian courts rely heavily on the wording of the contract. If a clause is broad, courts may interpret it broadly. If a clause conflicts with the limitation-of-liability clause, courts may consider the overall intent and structure, but ambiguity almost always leads to disputes.

Therefore, in commercial contracts, the strength of an indemnity clause depends less on "legal jargon" and more on clear drafting.

Buyer's Perspective: Why Buyers Want Strong Indemnities?

From the buyer's perspective, indemnity is essential protection.

Buyers often feel that once they sign the agreement and start relying on the vendor's products or services, they are exposed to risks they cannot fully control, especially in compliance, cybersecurity, intellectual property sourcing, subcontractor behaviour, and statutory obligations.

And buyers are not wrong. Even if the vendor is responsible, it is usually the buyer who receives the first legal notice, regulatory email, customer complaint, or media attention.

In such cases, buyers insist on indemnity for regulatory penalties, customer claims, legal fees, investigation and audit costs, and settlement expenses.

Seller's Perspective: Why Sellers Push Back Against Broad Indemnities?

From the seller's side, indemnity clauses often look like unlimited exposure. Sellers typically worry about "catch-all" language, such as: "Vendor shall indemnify the customer against all losses arising out of this agreement."

Such wording can cover almost anything, whether or not the vendor was at fault. Sellers also worry about commercially disproportionate claims. A contract may be worth ₹50 lakhs, but a broad indemnity clause can create a liability exposure of ₹10 crores or more.

The seller's concern is also based on fairness: "I should be responsible for my mistakes, not for your internal failures."

The Real Negotiation Points in Indemnity Clauses

Indemnity clauses appear to be a single paragraph, but they contain multiple hidden negotiation points.

A. Scope: How Wide is the Indemnity?

Words like "arising out of", "in connection with", and "related to" are extremely broad.

Buyers prefer them. Sellers fear them. A balanced approach is to add causation language, such as "to the extent caused by the vendor's breach, negligence or wilful misconduct." This one line often prevents future disputes.

B. What Triggers the Indemnity?

Indemnity can be triggered by breach of contract, breach of confidentiality, IP infringement, data breach, statutory non-compliance, employee/contractor claims, injury or property damage.

Sellers typically accept indemnity for high-risk issues but resist indemnity for every minor breach.

A common middle ground is ordinary breaches handled under the limitation of liability and indemnity reserved for third-party claims and serious exposures.

C. What Counts as "Loss"?

This is the most sensitive part of the clause.

Buyers want "loss" to include penalties, legal costs, settlements, regulatory actions, and damages paid to third parties.

Sellers want to exclude indirect losses, loss of profits, loss of business opportunity, and reputational damages.

This is the most sensitive part of the clause. Defining losses clearly and avoiding vague language helps both sides feel more in control and reduces potential disputes.

D. Notice and Defence Control

Another major issue is: who controls the defence if a claim comes in?

Sellers want control to avoid inflated settlements. Buyers want control because their reputation is at stake.

Notice and Defence Control: To aid negotiation, outline strategies for balancing control over defence and settlement approvals, emphasizing the importance of clear, mutually acceptable procedures to prevent disputes and protect reputations.

E. Is Indemnity Capped?

Buyers often ask for uncapped indemnity. Sellers almost always insist on caps.

In modern commercial contracting, a tiered cap is common:

• general cap: contract value
• higher cap for confidentiality/data breach
• separate cap for IP infringement
• uncapped only for fraud or wilful misconduct

This is often the only way both sides can sign without feeling exposed.

The Most Common Drafting Mistake: Indemnity vs Limitation of Liability Conflict

One of the biggest drafting errors occurs when contracts contain a broad indemnity clause and a limitation-of-liability clause that caps liability.

If the agreement does not clearly state whether indemnity within falls inside or outside the cap, disputes are inevitable.

Buyers will say: "Indemnity is separate. Limitation does not apply."

Sellers will say: "Limitation applies to everything."

A simple drafting fix is to state clearly whether indemnity is subject to limitation and whether certain indemnities (such as IP or confidentiality) are carved out. This one clarification can save years of argument later.

Conclusion: Indemnity is a Commercial Tool, Not Just a Legal Clause

Indemnity clauses are often treated as standard contract language, but in reality, they are one of the most powerful commercial clauses in any agreement. They decide risk allocation and financial responsibility when disputes, claims, or regulatory issues arise.

A buyer needs indemnity to protect business continuity. A seller needs limits to ensure liability remains proportionate to commercial value.

The best indemnity clauses are not the broadest ones. They are the clearest ones. They define scope, provide exclusions, set procedure, and align with the limitation of liability.

In real-life negotiations, parties do not close deals by insisting on extreme positions. Deals close when both parties agree that risk must be allocated to the party best placed to control it, and liability must remain commercially sensible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.