Why indemnities deserve close attention
Of all the clauses in a commercial contract, the indemnity is one of the most powerful and the most misunderstood. A well-drafted indemnity can move the entire financial burden of a specific risk – a data breach, an intellectual-property claim, a regulatory fine – from your company to the other side. A poorly drafted one can do the reverse without anyone noticing until a claim lands. This article explains what indemnification clauses actually do and how to approach them with confidence.
What an indemnity really is
An indemnity is a promise by one party (the indemnifying party) to compensate the other (the indemnified party) for defined losses. It is a contractual allocation of risk that can go further than ordinary damages. General damages under Swedish law require the claimant to prove breach, loss and causation, and are subject to rules on foreseeability and the duty to mitigate. A clear indemnity can bypass some of that friction by promising to cover a defined category of loss when a specified trigger occurs.
That extra reach is precisely why indemnities are negotiated hard. Whether you want a broad or narrow indemnity depends entirely on which side of it you sit.
The building blocks of a good clause
The trigger
Define exactly what event gives rise to the indemnity: a breach of a specific warranty, a third-party IP claim, a breach of data-protection obligations. A vague trigger like “any loss arising from this agreement” invites disputes and is often resisted.
The scope of loss
State which losses are covered – direct losses, third-party claims, defence costs – and whether indirect or consequential losses are included. Silence here is dangerous, because the parties will read it differently when money is at stake.
Caps, carve-outs and conduct
Indemnities interact with the contract’s liability cap. Decide deliberately whether the indemnity sits inside or outside the cap; a common compromise is to cap most liability but leave defined indemnities uncapped. Add procedural conditions too: prompt notice of a claim, cooperation, and who controls the defence and any settlement.
Practical example
A Swedish company licenses software from a vendor and resells it to its own customers. It negotiates an indemnity under which the vendor covers losses if the software infringes a third party’s intellectual-property rights, including the cost of defending any claim. When a competitor later alleges infringement, the indemnity means the vendor – not the reseller – carries the legal costs and any settlement, provided the reseller gives prompt notice and lets the vendor lead the defence. Without that clause, the reseller would have been left arguing about ordinary damages.
Common mistakes companies make
Companies often accept broad indemnities in their counterpart’s favour without reading how far they reach, effectively underwriting risks they cannot control. Others draft triggers so vaguely that the clause is unusable. A frequent error is ignoring the interaction with the liability cap, so an indemnity meant to be limited turns out to be unlimited – or vice versa. And many forget the procedural rules, leaving disputes about who runs the defence.
Recommended actions
Approach each indemnity by asking which specific risks each side is best placed to bear, and match the clause to that. Keep triggers precise and tie them to warranties or defined events. Spell out the categories of loss covered and decide consciously how the indemnity relates to the cap. Add notice, cooperation and defence-control mechanics. And always model the worst case: if this indemnity is called, what is the maximum exposure, and can the company absorb it or insure it?
Frequently asked questions
Is an indemnity the same as a warranty?
No. A warranty is a promise that something is true, breach of which leads to a damages claim. An indemnity is a direct promise to cover defined losses, often on easier terms for the claimant.
Should indemnities be capped?
It depends on the risk. Many are subject to the general cap, but parties often carve out certain indemnities – such as IP or confidentiality – for higher or unlimited liability. The point is to decide deliberately.
Are indemnities enforceable under Swedish law?
Yes, freedom of contract is the starting point, though a clearly unreasonable term can in principle be adjusted under general contract-law rules. Clear drafting is the best protection.
Conclusion
Indemnification clauses are where commercial contracts quietly decide who pays when things go wrong. Treated as boilerplate, they can expose your company to risks it never meant to accept; treated with care, they are a precise tool for allocating risk to the party best able to manage it. Lawgent helps businesses negotiate and draft indemnities that are clear, balanced and enforceable – so your contracts protect you when it matters most.
