What is Indemnification?

Indemnification differs from a liability limitation clause. Liability addresses harm that one contracting party causes to the other. Indemnification addresses claims from outsiders — third parties who have no direct relationship with the contract but seek compensation from the buyer.

A concrete example: you purchase software from a supplier, and that software turns out to infringe a third party's patent. The patent holder brings a legal claim against you as the end user. An indemnification clause means the supplier assumes that claim and compensates you. Without it, you are the primary defendant.

Other situations where indemnification is relevant: a cleaning company whose employee injures one of your customers, a software supplier whose data breach exposes your customers' personal data, or a contractor who damages third-party property on your site.

Indemnification clauses are often drafted unilaterally in the supplier's favour. As a buyer, it is worth asking whether mutual indemnification is possible — meaning you are also protected against claims arising from the supplier's actions.

Pay attention to scope: indemnification need not be unlimited. Link it to specific risk situations and exclude scenarios too remote from the core of the agreement.

Third-party legal claims are expensive even if the court ultimately decides in your favour. Legal fees, management time, and reputational harm are real costs. A strong indemnification clause puts those burdens back on the party who caused them.

For SMBs this is particularly relevant for software, outsourced services, and contracts where the supplier's staff work on your premises. In all these situations you risk being drawn into legal proceedings for mistakes that someone else made.