A short clause, often accepted without much argument, that can carry more risk than the rest of the contract combined
Indemnities have a way of slipping through. They are short, they sound reassuring, and the language is familiar enough that they rarely attract the scrutiny given to price or termination. Yet an indemnity can create an obligation to pay that is wider than anything the general law would impose, that outlasts an ordinary contract claim, and that may sit outside whatever liability cap has been negotiated elsewhere in the agreement. This article explains how they work in business-to-business contracts governed by the law of England and Wales, and what to look at before agreeing one.
What an indemnity actually is
An indemnity is a primary obligation: a promise to make good a specified loss on the occurrence of a specified event. That distinguishes it from the ordinary position on breach of contract, where the obligation to pay damages is a secondary obligation, arising because a primary obligation has not been performed. As the distinction was put in AB v CD [2015] 1 WLR 771 and applied in Costcutter Supermarkets Group Ltd v Vaish [2024] EWHC 152 (KB), the primary obligation of a party is to perform the contract; the requirement to pay damages on breach is secondary.
That structural difference drives most of the commercial consequences. Because the trigger is the specified event rather than a breach, the party relying on the indemnity need not prove that anyone did anything wrong – only that the event happened and that the loss falls within the words used.
What the indemnified party gains – and the honest caveat
The received wisdom is that an indemnity escapes the rules limiting ordinary damages claims: the remoteness principle in Hadley v Baxendale, the duty to mitigate and the reduction available for contributory negligence. There is real substance to this. There is authority – at first instance and with some support in the Court of Appeal – that a failure to mitigate gives the indemnifier no defence, and the apportionment machinery of the Law Reform (Contributory Negligence) Act 1945 has no natural application to a claim for a sum due.
Two qualifications are worth stating, because the shorthand is often over-sold. First, how far an indemnity escapes those rules depends on whether the claim is properly analysed as one in debt or one in damages – a question on which the English authorities are not uniform, and which turns on the drafting. Second, the courts control the reach of indemnities through construction and causation instead. In Total Transport Corp v Arcadia Petroleum Ltd (The Eurus) [1998] 1 Lloyd’s Rep 351, the Court of Appeal held that an indemnity for losses due to a failure to comply with instructions did not extend to losses outside the parties’ contemplation. Remoteness may not apply as a rule; the clause’s own causal language often does similar work.
The trigger, and the words in the middle
Two drafting features do most of the work, and both are easy to skim.
The trigger determines how much the indemnity adds. An indemnity against “any breach of this agreement” adds less than it appears to, because it largely tracks the damages claim you already had – though even then it can change the measure of recovery and the date from which time runs. The real value of an indemnity lies in a trigger that is not a breach: a third-party claim, a regulatory fine, a tax liability, an event occurring whether or not anyone was at fault.
The causal connector is the risk dial. “Resulting from” is comparatively narrow; “arising out of or in connection with” is very wide, and can pull in losses only loosely related to the event described. If you are being asked to give an indemnity, the connector is often a more productive negotiating point than the trigger.
The part that outlives the contract
Limitation is where indemnities cause the most surprise. A claim for breach of contract must ordinarily be brought within six years of the breach (section 5 of the Limitation Act 1980), whether or not the loss has yet appeared. An indemnity works differently. An indemnity against loss or expense does not give rise to a claim until the loss is suffered or the expense incurred; and an indemnity against liability to a third party generally does not accrue until that liability is established and ascertained, by judgment, award or settlement – see Telfair Shipping Corp v Inersea Carriers SA (The Caroline P) [1984] 2 Lloyd’s Rep 466; [1985] 1 WLR 553.
The practical effect is that an indemnity can keep exposure alive for many years after the events that gave rise to it, and long after the contract itself has ended. The six-year period still applies; it simply starts later, and the general law supplies no long-stop. If you want one, it has to be negotiated: a long-stop date, a financial cap and a notification regime requiring claims to be made within a defined period.
Does it cover the other side’s own negligence?
Often the most important question, and the answer has moved. The older approach, drawn from the Canada Steamship guidelines, required something close to express reference to negligence. In Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29, Lord Leggatt described that test and the contra proferentem rule as “steadily losing their last vestiges of independent authority”, subsumed within the broader principle that a party is unlikely to have agreed to give up a valuable right without clear words – adopting Moore-Bick LJ’s formulation that “the more valuable the right, the clearer the language will need to be”.
Applying that, the Commercial Court held in PA (GI) Ltd v Cigna Insurance Services (Europe) Ltd [2023] EWHC 1360 (Comm) that there is no need for express words for an indemnity to cover the indemnified party’s negligence, and that it sets the bar too high to treat it as inherently improbable that parties would allocate responsibility for one party’s wrongdoing to the other. Clear words are still required; the word “negligence” is not. Dishonesty is treated more strictly – liability for fraud must be excluded with unmistakable clarity, and general words will not do (HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6).
So if you are giving an indemnity, do not assume the absence of the word “negligence” protects you – and if you are taking one, do not assume general words will reach dishonest conduct.
“Hold harmless” may not be padding
The phrase “indemnify and hold harmless” is often treated as legal boilerplate, and the conventional English view is that “hold harmless” adds little to “indemnify”. It can, though, do real work. In Deepak Fertilisers and Petrochemical Corp v ICI Chemicals and Polymers Ltd [1999] 1 Lloyd’s Rep 387 the Court of Appeal took the view that a promise to hold harmless is incompatible with a right to sue – reasoning applied by the Commercial Court in JP Morgan International Finance Ltd v Werealize.com Ltd [2025] EWHC 1842 (Comm), where an anti-suit injunction was granted on the basis of a comparable clause. Whether any particular clause has that effect is a question of construction, but if you give one you may be giving up a claim you would otherwise have had.
Indemnity or guarantee?
The label does not decide the question; the substance does. A guarantee is a secondary obligation, contingent on someone else’s default, and must be evidenced in writing and signed to be enforceable under section 4 of the Statute of Frauds 1677. An indemnity is primary and is not subject to that requirement. In Actionstrength Ltd v International Glass Engineering In.Gl.En. SpA [2003] UKHL 17, the House of Lords held an oral promise amounting to a guarantee unenforceable for want of writing, and declined to let estoppel be used to get round the statute.
Mischaracterisation cuts both ways: a clause headed “indemnity” that in truth makes liability contingent on another party’s default may be a guarantee, and unenforceable if the formalities were not observed – while a party who believes it has given a guarantee may find it has given a free-standing primary obligation instead.
Does the liability cap apply?
There is no default rule, and this is worth stating plainly because both extremes are asserted with confidence. Whether an indemnity sits inside or outside a negotiated liability cap is a question of construing the particular wording – and the answer may not be the one either party assumed.
The warning comes from Costcutter. The cap there was drafted in familiar, broad-looking terms, covering total liability in respect of all acts, omissions, events and occurrences “whether arising out of any tortious act, breach of contract or statutory duty or otherwise”. The court held that it did not reach a claim to enforce a primary payment obligation, because such a claim is not a claim for breach of contract, and that the words “or otherwise” were not sufficiently clear to change that. Costcutter itself concerned a claim for the price of goods rather than an indemnity, so the point is an argument by analogy – but an indemnity is a primary obligation too, and the analogy is a real one. A cap that looks comprehensive may not do what a supplier expects.
Where the parties deal with the point expressly, it works as drafted. In Learning Curve (NE) Group Ltd v Lewis [2025] EWHC 1889 (Comm) an indemnity was expressly subject to the agreed caps and to a bar on double recovery, with the result that the buyer had to elect between its indemnity claim and a larger warranty claim. More recently, in Sutton and East Surrey Water plc v Monarch Chemicals Ltd [2026] EWHC 1260 (TCC) an indemnity and a cap were read as a layered structure rather than as competing provisions – again, a matter of what the words did. The lesson is not to rely on a default: say expressly which way you want it.
The statutory controls are thinner than assumed
It is sometimes suggested that the Unfair Contract Terms Act 1977 polices indemnities. In business contracts it largely does not. Section 4, which dealt with indemnity clauses, applied only where a person was dealing as a consumer, and was removed by the Consumer Rights Act 2015. Its repeal changed nothing for business-to-business indemnities.
What remains is indirect. Where one party deals on the other’s written standard terms of business, section 3 subjects terms by which the party imposing those terms excludes or restricts liability for its own breach to the reasonableness test, and an indemnity achieving the same thing in substance may be exposed. An arrangement between two businesses about which of them bears the cost of compensating a third-party victim is different: in Thompson v T Lohan (Plant Hire) Ltd [1987] 1 WLR 649, the Court of Appeal held that section 2(1) was concerned with protecting the victim of negligence, not with how the wrongdoer and others share that burden. Contrast Phillips Products Ltd v Hyland [1987] 1 WLR 659, where a clause in similar form operated against the other contracting party as the victim, and was caught by section 2 – there, the reasonableness test in section 2(2), which it failed. Which way the indemnity points makes all the difference.
Two commercial realities
An indemnity is only as good as the balance sheet behind it. It is a contractual promise, not insurance, and against a thinly capitalised counterparty it may be worth very little; where the exposure is significant, a parent company guarantee or insurance backing is worth asking for.
Nor should you assume your own insurance will respond. Professional indemnity and general liability policies commonly restrict cover to liability arising from a negligent act, error or omission, and often exclude liability assumed under contract – so liability voluntarily accepted under a broad indemnity, to the extent it goes beyond what you would have owed anyway, may not be covered. That is a question of construing your particular policy rather than a rule of law, which is precisely why it is worth checking the wording, and speaking to your broker, before agreeing the clause.
Before you agree an indemnity
Identify the trigger and ask what it captures beyond a straightforward damages claim. Narrow the causal connector if you can. Ask for a long-stop, a cap and a notification requirement, and say expressly whether the indemnity is inside or outside the general liability cap. Check whether conduct of any third-party claim sits with you or with the other side. And make sure whoever signs understands that an indemnity is not a formality.
This article is general information about business-to-business contracts governed by the law of England and Wales, as at August 2026. Consumer and employment contracts are subject to different rules; Scotland has its own statutory regime under Part II of the Unfair Contract Terms Act 1977, and the position in Northern Ireland may differ. It is not legal advice, no solicitor and client relationship arises from reading it, and it should not be relied upon: indemnities turn on their precise wording and on the circumstances of the parties, and the law may have changed since the date given. Please take advice on your own position before agreeing or relying on an indemnity.
Been asked to give an indemnity, or not sure what one in your contract covers? Our commercial team advises businesses on indemnity and liability terms, and on negotiating them before signature. Please get in touch to discuss your situation.