The clause you are looking at probably reads something like "the Vendor shall indemnify, defend and hold harmless the Customer from and against all losses, damages, liabilities, costs and expenses arising out of or in connection with this Agreement". If you are the vendor, that sentence is your whole balance sheet. If you are the customer, it is a comfort that will be worth less than it looks the day the vendor cannot pay. Either way it is worth understanding why an indemnity is different from ordinary damages before you decide what to change.
Contract of indemnity. Section 124 of the Indian Contract Act, 1872 defines it as a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Section 125 spells out what the indemnity-holder recovers when sued on a matter the promise covers: all damages he may be compelled to pay, all costs of the suit if he acted prudently or as authorised, and all sums paid under a compromise that was prudent or authorised.
How is an indemnity different from a claim for damages?
Damages for breach of contract are governed by Section 73. The party who suffers by a breach recovers the loss that naturally arose in the usual course of things, or that the parties knew when they contracted to be likely to result, and the section says in terms that compensation is not to be given for any remote and indirect loss. The Explanation adds that the means which existed of remedying the inconvenience, meaning mitigation, must be taken into account. An indemnity is a different promise. It is not triggered by breach but by the event the clause describes, which may be a third-party claim, a regulatory penalty, a data incident or simply "any loss arising out of this Agreement". The measure is the loss itself, as defined, not the loss a court considers foreseeable. Unless the clause imports a foreseeability limit, a mitigation duty and an exclusion of indirect loss, none of those restraints applies of its own force. That is why "unlimited" and "indemnity" are a dangerous pair. Section 124 also covers loss caused "by the conduct of any other person", which is why third-party claims sit naturally in an indemnity and awkwardly in a damages claim.
Does the indemnifier have to pay before I have actually paid the third party?
On the Indian authorities, yes, once the liability is absolute. The Bombay High Court in Jet Airways (India) Ltd v. Sahara Airlines Ltd (4 May 2011) traced the line from Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942), where Chagla J held that Sections 124 and 125 are not exhaustive of the law of indemnity and that an indemnified person who has incurred an absolute liability may call on the indemnifier to pay without first paying himself, and from Khetarpal v. Madhukar Pictures, where a Division Bench held that the indemnity-holder may sue for specific performance of the indemnity before damage is incurred, provided a clear enforceable claim exists against him. For a customer this is the practical value of the clause: you can require the vendor to fund the defence and the settlement rather than pay and hope to recover. For a vendor it means the cash call comes early.
| Question | Damages under Section 73 | Indemnity under Sections 124 and 125 |
|---|---|---|
| Trigger | Breach of the contract | The event defined in the clause, breach or not |
| Measure | Loss naturally arising or within the parties' contemplation | The loss the clause covers, as drafted |
| Remote and indirect loss | Excluded by the section | Included unless the clause excludes it |
| Mitigation | Taken into account under the Explanation | Only if the clause requires it |
| Third-party claims and costs | Recoverable only if foreseeable | Expressly covered by Section 125 |
| When the money is due | After loss is proved | Once the liability is absolute, on the Bombay line of authority |
What should we change in the clause?
- A cap: an aggregate liability limit, commonly a multiple of the fees paid in the preceding twelve months or the total contract value, and a separate lower cap per claim if the relationship is long
- Carve-outs from the cap only for what genuinely deserves it, typically fraud, wilful misconduct, breach of confidentiality, and third-party intellectual property claims, each defined tightly
- An express exclusion of indirect, consequential and special loss, loss of profit, loss of business and loss of data, so that Section 73's limit is written back into the indemnity
- A duty to mitigate on the indemnified party, and a no-double-recovery clause where insurance or another party pays
- A claims procedure: prompt written notice, the indemnifier's right to conduct or participate in the defence, no settlement without consent, and cooperation
- Mutuality: the customer indemnifies the vendor for the customer's own data, content and instructions, on the same terms
- Insurance behind the promise, with the policy type and limit stated and evidence of cover delivered annually, because an uninsured indemnity from a small vendor is a promise, not protection
- A survival period, so the exposure ends at a date rather than running until limitation on each new claim
Is an uncapped indemnity actually enforceable?
Yes. Nothing in the Contract Act voids an indemnity for being large, and a court will not rewrite a commercial bargain because one side signed a bad one. The routes that sometimes help, such as arguing that a particular loss falls outside the words of the clause, or that the clause was never meant to reach a category of loss, are arguments about drafting, which is another way of saying the time to deal with this was before signature. If the contract is already signed, the realistic tools are renegotiation at renewal, an amendment tied to a price change, and insurance. If the clause is in a form the counterparty says is non-negotiable, ask for the cap and carve-outs in a side letter, which is the usual compromise.
What I tell founders reading this clause
Ask two questions of every indemnity. What event triggers it, and what is the most it can cost? If either answer is "anything" the clause is not finished. On the vendor side I would rather sign a higher cap with a clean exclusion of consequential loss than a lower cap with none, because the consequential claim is the one that arrives at ten times the contract value. On the customer side, insist on the insurance certificate, because the indemnity is only ever as good as the balance sheet behind it. Our guides to drafting a service agreement and to writing the arbitration clause that will decide this dispute belong on the same desk, and if the counterparty is a small supplier, the MSME payment rules will shape how any set-off against the indemnity can be run.