All about indemnities

Indemnity clauses are a common inclusion in contracts, and for good reason. Essentially, they safeguard one of the contracting parties from losses caused or contributed to by the other. While this may sound simple, the law related to indemnity clauses is nuanced. This article explores what an indemnity clause is, provides some tips for drafting a good indemnity clause, and considers them in the context of franchise agreements. 

What is an indemnity clause?

An indemnity clause is a contractual provision wherein one party agrees to compensate, defend, and/ or hold harmless another party from specified liabilities, losses, and/ or or damages arising from the contract or related transactions. A simple example might look something like this: 

The Seller shall indemnify and hold harmless the Buyer from any claims, liabilities, and expenses, including legal fees, arising out of any breach of warranties or misrepresentation concerning the sale of the product

What are the types of indemnity provisions?

There are different types of indemnity provisions, most notably: 

  • Bare indemnity – here the indemnity will apply to losses that arise in a specified set of circumstances. I.e. a clause whereby one party indemnifies the other for a ‘failure to deliver the goods’ is a bare indemnity. The indemnity will not apply to other losses or damage. 
  • Third party indemnities – such a clause extends the obligation to make good loss to losses suffered by third parties. For example, if a franchisee’s customers suffer loss because the franchisor failed to maintain the relevant system, a third party indemnity clause could require the franchisor to make good that loss. 
  • Proportionate indemnities – here, the obligation to make good loss or damage is reduced to the extent that the indemnified party caused or contributed to the relevant loss. 

Some tips for reviewing or crafting an indemnity clause 

  • Make the clause clear and unambiguous – having a poorly worded clause runs the risk of it being deemed unenforceable or read down by the court. Broad terms like ‘in connection with’ leave an indemnity provision open to interpretation, which can lead to dispute. What the indemnity applies to should be clearly set out. Similarly, having a clause that is very wide or all-encompassing could be dangerous to the indemnifier, so limiting the application is key;
  • Consider what third parties could suffer loss as a consequence of the specific contract not being adhered to, and consider if the scope of the indemnity should apply; 
  • Consider if a liability cap is appropriate – these clauses, in effect, put a ceiling on the quantum of loss or damage the indemnifier can be required to pay; 
  • Consider the period which you wish the indemnity to apply – it’s not uncommon for an indemnity clause to be limited to, for example, ‘during the term of this agreement and a period of 24 months thereafter’. Without any time limitation, the indemnity clause will, theoretically, apply in perpetuity, albeit the law of limitations will apply (in Australia, the most common limitation period, being the period in which an action may be commenced, is 6 years). Importantly, that limitation period will only ‘run’ from the time the cause of action arose, here being when the indemnifier failed or refused to comply with the indemnity.
  • Include an obligation on the indemnified party to mitigate (reduce) their loss – this will mean the indemnified party cannot simply ‘sit on their hands’ and allow the loss to accumulate on the basis it can be recovered in its totality from the indemnifier. 

How do they work in Franchising?

It’s common for franchise agreements to contain a clause whereby the franchisee indemnifies the franchisor, but not the other way around. Practically speaking, this means if the franchisee breaches the franchise agreement and the franchisor suffers harm as a result, the franchisee is contractually bound to pay to the franchisor the sum of that harm. This may become operative, for example, if the franchisee misuses intellectual property, causing harm to the franchise brand, or if they abandon the franchise business and, as a consequence, custom and goodwill of the franchise brand is damaged. 

However, the validity of one-sided indemnity provisions in franchise agreements has been called into question by the ACCC in its consideration of the application of the unfair contract terms (UCT) laws to typical franchise agreement provisions. This suggests that a one sided indemnity, whereby the franchisor gets the benefit of an indemnity but not the franchisee, may be an unfair contract term and deemed void by the courts, though there have been no judicial determinations to this effect at the time of publication. Our article here explores this topic further. 


While indemnities serve a legitimate purpose in contracts, there is no one size fits all indemnity provision and care should be taken in including them. If you require assistance with review of commercial contracts or the enforcement of indemnity provisions, Magnolia Legal would love to help. 

Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply