An indemnity clause is a promise to cover the other side’s losses, often including claims made against them by third parties and their legal costs. Depending on the wording, it can reach losses you did not cause, and many indemnities have no cap. Courts read the words used; the High Court has said the rule that ambiguous guarantees are read in favour of the guarantor is relevant to indemnity clauses. In a standard form small business contract, a one-way indemnity can be challenged as an unfair term. Before you sign, check who is covered, what triggers it, whether it covers their own fault, and whether it sits outside the liability cap.
This guide is based on High Court judgments and the Australian Consumer Law (Competition and Consumer Act 2010, Schedule 2) listed under Sources. Last checked 9 November 2026.
Indemnity clauses at a glance
| Question | The position (9 November 2026) |
|---|---|
| What is an indemnity? | “a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party” (High Court, quoted in Andar Transport v Brambles at [22]) |
| How is it different from a guarantee? | A guarantee is a promise to answer for “the debt, default or miscarriage of another”; an indemnity is a promise to keep someone harmless against loss |
| How do courts read it? | On its words, in the context of the contract. The principles for reading guarantees, including reading ambiguity in favour of the guarantor, “are therefore relevant to the construction of indemnity clauses” (Andar at [23]) |
| Is there a cap? | Only if the contract says so. Check whether the indemnity sits inside or outside the liability cap |
| Unfair contract terms | A one-way indemnity in a standard form consumer or small business contract can be tested under the three-limb unfairness test (ACL s 24). An unfair term is void (s 23) |
| Penalties for unfair terms | Since 9 November 2023, proposing or relying on an unfair term is a contravention. For a company, up to the greater of $100,000,000 and 3 times the benefit or, if the benefit cannot be worked out, 30% of adjusted turnover, for conduct from 28 March 2026 (s 224) |
What is an indemnity clause?
In plain terms, you promise that if a certain kind of loss lands on the other party, you will pay it. A typical clause reads something like: “The Customer indemnifies the Supplier against all loss, damage, liability, costs and expenses (including legal costs) arising out of or in connection with this agreement or the Customer’s use of the services.”
The High Court has adopted this description: “An indemnity is a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party” (Sunbird Plaza v Maloney, quoted in Andar Transport Pty Ltd v Brambles Limited [2004] HCA 28 at [22]).
Indemnities matter because they are written to shift risk. A claim for breach of contract normally needs you to have broken the contract. An indemnity is triggered by whatever the clause says triggers it, which may be any loss “arising out of or in connection with” the contract. The words decide how far it reaches.
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Indemnity, guarantee and limitation of liability: the difference
| Term | What it does | Who it usually helps |
|---|---|---|
| Indemnity | A promise to cover the other party’s losses of a stated kind, often including third-party claims and legal costs | The party receiving the indemnity |
| Guarantee | A promise to answer for someone else’s debt or default, such as a director guaranteeing a company’s account | The creditor |
| Limitation of liability | Caps or excludes what a party must pay | The party whose liability is limited |
The High Court described a guarantee as “a collateral contract to answer for the debt, default or miscarriage of another” (Sunbird Plaza v Maloney, quoted in Andar at [22]). Business documents often combine both under the heading “guarantee and indemnity”, especially in credit applications. If you are signing personally for a company, read the personal guarantees guide as well.
The indemnity and the liability cap need to be read together. A common pattern is that the supplier’s liability is capped, while the customer’s indemnities are expressly “excluded from” the cap. That leaves one side protected and the other uncapped. See the limitation of liability guide.
How do courts read indemnity clauses?
Courts start with the words. In Andar Transport v Brambles, the High Court said the starting point was its earlier decision in Ankar, where four judges said that “ambiguous contractual provisions should be construed in favour of the surety” (the person giving a guarantee) (Andar at [17]). The Court then held that, although guarantees and indemnities differ, “The principles adopted in Ankar, and applied in Chan, are therefore relevant to the construction of indemnity clauses” (at [23]).
That helps only where the words are genuinely unclear, so do not rely on it. The practical protection is negotiating the wording before you sign, not hoping a court reads it narrowly later.
Common indemnity clauses and what to look for
| Type | Typical wording | What to check |
|---|---|---|
| Broad “all loss” indemnity | “all loss … howsoever arising in connection with this agreement” | Whether it is tied to your breach or fault at all. “In connection with” can be read widely |
| Third-party claims | “claims by any third party arising from your use of the services” | Whether you control or are told about the claim, and whether it covers claims caused by the supplier |
| Their own negligence | “including where caused or contributed to by the Supplier” | Whether you are covering the supplier’s own fault. Ask for “except to the extent caused by” the other party |
| Intellectual property | “any claim that material you provide infringes a third party’s rights” | Whether the supplier gives you the same protection for its software, designs or deliverables |
| Breach of law | “any breach by you of any law, including privacy law” | Whether it is mutual, and whether fines or penalties are mentioned |
| Legal costs | “on a full indemnity basis” or “solicitor and own client basis” | Which party pays legal costs, and on what basis. Ask for costs to be limited to reasonable costs, or for the term to be removed or made mutual |
Red flags in an indemnity clause
- It runs one way. You indemnify the supplier, but the supplier gives you nothing back.
- No link to fault. The trigger is any loss “arising out of” the contract, not your breach or negligence.
- It covers their fault. Words like “even if caused by the Supplier’s negligence”.
- It is uncapped. It is excluded from the liability cap, or the contract has no cap at all.
- It covers their people and partners. “The Supplier, its related bodies corporate, officers, employees, agents and contractors”, which widens who can claim.
- No claims process. Nothing requiring them to tell you promptly about a claim, let you defend it, or not settle it without your consent.
- It survives forever. A clause saying the indemnity survives termination with no time limit.
Can an indemnity be an unfair contract term?
It can be tested like any other term. The unfair contract terms rules apply to a standard form contract where at least one party employs fewer than 100 people or had turnover under $10,000,000 in its last income year (ACL s 23(4)). If you allege the contract is standard form, it is presumed to be unless the supplier proves otherwise (s 27(1)).
A term is unfair if all three of these are met: it would cause a significant imbalance in the parties’ rights and obligations; it is not reasonably necessary to protect the legitimate interests of the party it favours; and it would cause detriment if relied on (s 24(1)). The term is presumed not to be reasonably necessary unless the supplier proves otherwise (s 24(4)). A court must also consider how transparent the term is and the contract as a whole (s 24(2)).
The law’s list of examples in s 25 does not name indemnities. The closest are terms that let one party but not the other “avoid or limit performance of the contract” (s 25(a)), terms that penalise one party but not the other for a breach (s 25(c)), and terms that limit one party’s right to sue (s 25(k)). A wide, uncapped indemnity that only you give, sitting beside a supplier who has capped its own liability, is the kind of imbalance the test is aimed at. Whether a particular indemnity is unfair is for a court to decide.
If a term is unfair it is void, and the rest of the contract continues if it can (s 23(1)-(2)). For contracts made or renewed from 9 November 2023, proposing or relying on an unfair term is also a contravention (s 23(2A), (2C); s 305).
Indemnities and your insurance
An indemnity is a promise to pay. Whether your own insurance would respond to a claim under it depends on your policy wording. Before you sign a wide indemnity, ask your insurer or broker in writing whether the policy covers liability you take on under a contract, and whether any limit or exclusion applies. If the contract requires you to hold insurance, check that the amount and type match what you actually hold.
What to ask for before you sign
- Make it mutual. If you indemnify the supplier for your breaches, it should indemnify you for its breaches.
- Tie it to fault. Replace “arising out of or in connection with” with “to the extent caused by” your breach, negligence or wilful misconduct.
- Exclude their own fault. Add “except to the extent caused or contributed to by” the other party.
- Cap it. Bring the indemnity inside the liability cap, or set a separate cap that reflects the real risk.
- Add a claims process. Prompt notice of any claim, the right to take part in or control the defence, and no settlement without your consent.
- Reasonable legal costs only. Ask for any costs term to cover reasonable costs, and to apply both ways.
What our review checks
Upload the supplier, software (SaaS), equipment or service terms and get a plain-English report written for the small business customer, usually about 5 minutes after you pay. On indemnities it:
- quotes every indemnity, in both directions, and says what triggers it
- flags indemnities with no link to your fault, or that cover the other side’s own negligence
- checks whether each indemnity sits inside or outside the liability cap
- flags one-way legal costs terms and missing claims processes
- checks one-sided terms against the unfair contract terms rules
- gives you the specific wording changes to ask for
The report explains what the terms say and what the law provides. It does not say a term “is void” or “is unenforceable”: only a court decides that. It is not legal advice. You decide what to sign.
Get my business terms reviewed – $49
Questions people ask
What does an indemnity clause mean?
It is a promise to cover the other party’s losses of a stated kind, often including claims by third parties and legal costs. The High Court has described an indemnity as a promise to keep the other party harmless against loss.
What is the difference between an indemnity and a guarantee?
A guarantee is a promise to answer for someone else’s debt or default, such as a director guaranteeing a company’s account. An indemnity is a promise to cover the other party’s loss. Many credit applications contain both, under the heading “guarantee and indemnity”.
Should I sign a contract with an indemnity clause?
Indemnities are common and signing one is not unusual. Read it first: check what triggers it, whether it is mutual, whether it covers the other party’s own fault, and whether it is capped. Ask for changes before signing if it is wider than the risk you are taking on.
Is an uncapped indemnity normal?
It is common in supplier terms, but it is a risk worth negotiating. Check whether the indemnity is excluded from the liability cap. If it is, ask for a cap that reflects the real risk, or for the indemnity to be brought inside the main cap.
Can I be made to indemnify the other party for their own negligence?
The contract can be worded that way, so read it closely. Look for words like “even if caused by” or “including negligence”. Ask for the indemnity to exclude loss to the extent caused or contributed to by the other party.
How do courts interpret indemnity clauses?
By the words used, in the context of the contract. The High Court has said the principles for reading guarantees, which read ambiguous provisions in favour of the guarantor, are relevant to indemnity clauses (Andar Transport v Brambles [2004] HCA 28 at [17], [23]). That only helps where the words are unclear.
Can an indemnity clause be an unfair contract term?
It can be tested under the unfair contract terms rules if it is in a standard form consumer or small business contract. A term is unfair if it causes a significant imbalance, is not reasonably necessary to protect the other party’s legitimate interests and would cause detriment (ACL s 24). Only a court decides.
Does my insurance cover an indemnity I give in a contract?
That depends on your policy wording. Ask your insurer or broker in writing before you sign whether the policy covers liability taken on under a contract, and whether any limit or exclusion applies.
What is a mutual indemnity?
Each party indemnifies the other for losses caused by its own breach, negligence or misconduct. It is fairer than a one-way indemnity and is a reasonable request in most supply contracts.
Is the business terms review legal advice?
No. It is a plain-English report that explains what the terms say, which ones may be unfair under the law and what to ask the supplier to change. Claim Done is not a law firm.
Related guides
- Limitation of liability clauses explained
- Personal guarantees in Australian business contracts
- Unfair contract terms for small business: the rules since 9 November 2023
- Should I sign this contractor agreement?
Claim Done is not a law firm and does not give legal advice; this page is general information about Australian law as at 9 November 2026. Whether a clause is unfair or enforceable, and what it means, is for a court or tribunal to decide.
Sources (checked 9 November 2026)
- Andar Transport Pty Ltd v Brambles Limited [2004] HCA 28 (at [17], [22]-[23], quoting Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 and Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245)
- Competition and Consumer Act 2010 (Cth), Schedule 2 (Australian Consumer Law), Compilation No. 167 (ss 23-27, 224, 305, 310)
- ACCC: contracts
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