Indemnification clause
A contract provision where one party agrees to compensate the other for specified losses, damages, or third-party claims. The structure (mutual vs. one-sided, capped vs. uncapped) is one of the highest-impact terms to scrutinize before signing.
An indemnification clause shifts financial liability from one party to the other when a specified event occurs (most commonly: a third-party claim arising from one party's actions). It is one of the most consequential clauses in any commercial contract.
Three structural patterns to recognize:
- Mutual indemnity — both parties indemnify each other for harms they cause. This is the balanced default in healthy commercial contracts.
- One-sided indemnity — only one party indemnifies the other. If you are the one indemnifying without receiving equivalent protection, this is a red flag. Common in templates sent by counterparties.
- Capped vs. uncapped — a healthy indemnity is capped at the contract value or at a multiple of it. An uncapped indemnity exposes you to unbounded financial risk.
Watch for hidden carve-outs that effectively make a "mutual" indemnity one-sided in practice: e.g. a mutual indemnity where the carve-out for "infringement" only applies to the user's deliverables, not the counterparty's materials.
If your contract contains an uncapped, one-sided indemnity against you, this is one of the top reasons to push back during negotiation before signing.