Is an indemnity capped by the limitation of liability clause?

Only if the contract says so. Many agreements expressly carve indemnity obligations out of the cap, which means the cap does not limit them. Others cap everything. Because this single drafting choice can change exposure by orders of magnitude, the interaction between the indemnity and the cap should be stated expressly rather than left to interpretation.

Can I claim under an indemnity before I have paid the third party?

That depends on the drafting. Section 125 of the Indian Contract Act, 1872 sets out the indemnity holder’s rights when sued, and well-drafted commercial indemnities expressly address whether the obligation arises on the claim being made or only on loss being suffered. If you want the indemnifier to fund the defence as it goes, the clause must say so.

Should indemnities always be mutual?

Mutuality sounds fair but is often not symmetrical in effect. What matters is whether each side’s indemnity is triggered by risks it actually controls and can insure. A customer indemnity for misuse of a service and a supplier indemnity for IP infringement are both reasonable, but they are not equivalent exposures, and matching wording does not make them so.

Contracts

What is an indemnity clause?

An indemnity clause is a contractual promise by one party to compensate the other for a specified category of loss if a defined trigger occurs. Sections 124 and 125 of the Indian Contract Act, 1872 deal with contracts of indemnity. Unlike a damages claim for breach, an indemnity does not require proof of breach, and is usually easier to recover under because remoteness and mitigation principles applicable to damages under Section 73 do not apply in the same way.

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Key takeaways

An indemnity is triggered by a defined event, not necessarily by breach.
Indemnities are frequently carved out of the liability cap, so exposure can be uncapped.
Scope, trigger, conduct of claims and survival are the four things to negotiate.
A mutual indemnity is not automatically balanced — check the trigger on each side.

Relevant law and authority

Indian Contract Act, 1872, Section 124: Defines a contract of indemnity.
Indian Contract Act, 1872, Section 125: Rights of the indemnity holder when sued.
Indian Contract Act, 1872, Section 73: Compensation for loss caused by breach of contract — the damages route.
Indian Contract Act, 1872, Section 74: Compensation where a sum is named in the contract as payable on breach.

Indemnity compared with damages

A damages claim requires the claimant to prove breach, causation and loss, and the recoverable amount is limited by the remoteness rule in Section 73 and the duty to mitigate. An indemnity operates differently: if the trigger event occurs, the indemnifier is obliged to make good the specified loss according to the terms of the clause.

This is why indemnities are used for risks that would be difficult to recover as damages — third-party IP infringement claims, regulatory penalties, data breach costs, and tax liabilities arising from a pre-closing period.

What to negotiate

The trigger should be specific. "Any loss arising out of or in connection with this agreement" is effectively an unlimited transfer of risk and should be resisted. Well-drafted indemnities list the categories: third-party IP claims, breach of confidentiality, breach of data protection obligations, and so on.

Conduct of claims matters. Whoever controls the defence controls the settlement, and an indemnifier paying for a claim will usually want the right to conduct it. Conversely, an indemnified party will want to protect its reputation and its relationship with the claimant.

Check the interaction with the liability cap. If indemnities sit outside the cap, the negotiated cap may give far less protection than it appears to.

Common Indian drafting issues

Indian contracts frequently combine an indemnity with a limitation of liability clause drafted from a different template, producing an internal contradiction about whether indemnity claims are capped. The resolution should be express.

Indemnities for consequential or indirect loss also need attention, because an exclusion of indirect loss elsewhere in the agreement may conflict with an indemnity that is intended to cover exactly that.

Practical implications

List indemnified categories expressly instead of using a general sweep-up.
State clearly whether indemnities are inside or outside the liability cap.
Agree a conduct-of-claims procedure with notice, cooperation and settlement consent.
Confirm the indemnity survives termination and for how long.
Check that insurance actually responds to the indemnified categories.

Common questions

Is an indemnity capped by the limitation of liability clause?: Only if the contract says so. Many agreements expressly carve indemnity obligations out of the cap, which means the cap does not limit them. Others cap everything. Because this single drafting choice can change exposure by orders of magnitude, the interaction between the indemnity and the cap should be stated expressly rather than left to interpretation.
Can I claim under an indemnity before I have paid the third party?: That depends on the drafting. Section 125 of the Indian Contract Act, 1872 sets out the indemnity holder’s rights when sued, and well-drafted commercial indemnities expressly address whether the obligation arises on the claim being made or only on loss being suffered. If you want the indemnifier to fund the defence as it goes, the clause must say so.
Should indemnities always be mutual?: Mutuality sounds fair but is often not symmetrical in effect. What matters is whether each side’s indemnity is triggered by risks it actually controls and can insure. A customer indemnity for misuse of a service and a supplier indemnity for IP infringement are both reasonable, but they are not equivalent exposures, and matching wording does not make them so.

Sources & editorial information

Jurisdiction: India
Last reviewed: 17 September 2026
Legal status: Current

Primary sources

Indian Contract Act, 1872

This page is general legal information about Indian law, prepared against identified legal sources. It is not legal advice and does not create a lawyer–client relationship. Apply it to your own facts only after a consultation with a qualified legal professional.

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