What is an indemnity clause?
Written by For Founders Law, a Toronto firm licensed by the Law Society of Ontario. About us
Short answer
An indemnity is a promise to cover the other party's losses from specific kinds of claims, usually claims brought by third parties. In a SaaS contract, the vendor commonly indemnifies the customer if the software infringes someone else's IP, and the customer may indemnify the vendor for claims caused by its data or misuse. Because indemnities are often carved out of the liability cap, their scope matters as much as the cap itself.
An indemnity moves the cost of a particular risk from one party to the other. Instead of the injured party proving damages for breach of contract, the indemnifying party agrees in advance to pay for losses arising from a defined kind of claim.
How is an indemnity different from ordinary contract damages?
An indemnity is a direct promise to pay for a defined category of loss, usually including legal costs, whether or not the indemnifying party breached the contract. Ordinary damages require proof of a breach and are limited by the usual rules on what losses are recoverable. That is why indemnities are negotiated so closely.
Which indemnities do SaaS customers ask for?
| Indemnity | Who gives it | What it covers |
|---|---|---|
| IP infringement | Vendor | Claims that the software, as provided, infringes a third party’s copyright, trademark or other IP |
| Data and content | Customer | Claims caused by data or content the customer uploads, or its users’ misuse |
| Data breach | Vendor, if negotiated | Third-party claims and costs from a breach of the vendor’s security obligations |
| Compliance with law | Either | Claims from one party’s breach of applicable law |
| AI output | Vendor, sometimes | Claims that generated output infringes IP, usually with conditions and exclusions |
What limits should an IP indemnity have?
A vendor’s IP indemnity usually excludes claims caused by the customer’s modifications, combination with other products, use outside the documentation, or customer-supplied content. It also lets the vendor modify the product, get a licence, or end the subscription and refund prepaid fees if a claim is made. For AI features, see terms for AI products.
Before you give an IP indemnity, make sure your company actually owns what it sells. Code written by contractors without a written assignment is a common gap: see who owns code a contractor writes and our free who owns your code check.
How does the procedure work?
A well-drafted indemnity says the indemnified party must give prompt notice of the claim, let the indemnifying party control the defence and settlement, and cooperate, while the indemnifying party can’t settle in a way that admits fault for the other side without consent. Missing procedure terms are a common source of disputes.
Is an indemnity capped?
Only if the contract says so. Many SaaS contracts carve IP indemnities out of the general limitation of liability, leaving them uncapped. Others put them under a separate, higher cap. Read the indemnity and the cap together, and check what your insurance covers.
Can you refuse to give one?
You can, but larger customers will usually expect at least an IP indemnity. Narrowing scope, adding exclusions and setting a cap are more common than refusing outright. Avoid broad wording such as “any and all losses arising from this agreement”, which turns an indemnity into general uncapped liability.
What to do next
We draft SaaS agreements and review customer and vendor paper as a contract review, at fixed fees on our fees page.
This guide is general information about Ontario and Canadian law, not legal advice for your situation. If a customer is asking for an indemnity you’re unsure about, book a free 15-minute consult.