In English law, can indemnity be uncapped while other liability is capped?

Yes, parties commonly carve out indemnity for IP infringement and confidentiality breaches from the liability cap, leaving those indemnities uncapped. This reflects market practice because IP and confidentiality risks are viewed as fundamental and potentially unlimited. However, the indemnity must be clearly worded to exclude it from the cap, or a court may infer it is subject to the cap.

Must an English indemnity clause only cover third-party claims?

No. While indemnity originates in insurance law (third-party claims), English commercial contracts frequently include indemnities for first-party losses between the contracting parties themselves. However, the clause must explicitly state this scope; courts will not readily imply indemnity for pure economic loss if the language suggests only third-party claims.

Can a service provider be held strictly liable for IP infringement under an indemnity clause?

Yes, indemnity clauses commonly impose strict liability (without a negligence requirement) for IP infringement, on the basis that the provider warrants the deliverables do not infringe. To manage risk, providers often negotiate exceptions for claims arising from client-directed modifications, or offer a remedy hierarchy: redesign, replacement, or termination of the affected service, before damages become due.

What happens if indemnity language is ambiguous under English law?

The contra proferentem rule applies: ambiguity will be construed against the party that drafted the indemnity. Additionally, if the clause is considered an exclusion of liability (rather than genuine risk allocation), it may be subject to reasonableness scrutiny under UCTA 1977, particularly if one party has significantly weaker bargaining power.

The indemnity clause in a master services agreement (MSA) under the United Kingdom law

Indemnity clause in English MSAs: allocation of risk, third-party claims, IP infringement, cap negotiation, and UCTA compliance.

Standard Position

In English contract law, indemnity clauses in master services agreements typically allocate risk by requiring one party to compensate the other for losses arising from specified events or breaches. The indemnifying party agrees to "hold harmless" the indemnified party against third-party claims, losses, damages, and legal costs. Under English law, indemnity is narrower than warranty: it protects against losses that occur, rather than promising that something will not occur. Market practice for MSAs typically sees the service provider indemnifying the client for intellectual property infringement, breaches of confidentiality, and direct losses from the provider's negligence or willful misconduct. The client often indemnifies the provider for claims arising from the client's use of deliverables outside the scope agreed, or for the client's own breach.

Legal Basis

Indemnity clauses are contractual risk-allocation mechanisms governed by ordinary contract law principles. English law does not require indemnity to be "triggered" only by third-party claims; commercial parties frequently agree bilateral indemnities for first-party losses too. However, indemnity for pure economic loss requires clear contractual language: courts will not readily imply indemnity obligations. The Unfair Contract Terms Act 1977 (UCTA) constrains exclusion of liability for negligence causing death or personal injury, and may render unreasonable any clause excluding liability for other types of negligence loss, particularly in B2B contexts involving unequal bargaining power. Where one party relies on the indemnity as its sole remedy, this may be subject to scrutiny if the clause is considered "one-sided." The indemnity must also satisfy the contra proferentem rule: ambiguous language will be construed against the drafter.

Drafting and Negotiation

Key terms to negotiate include: (1) scope of indemnified events (is it limited to third-party claims, or does it cover direct losses?); (2) exclusions (most parties exclude indemnity for claims arising from the indemnified party's own negligence or breach); (3) caps and baskets (whether the indemnity is subject to the overall liability cap in the MSA, or carved out as uncapped); (4) procedure (does the indemnified party have a duty to mitigate, and must it notify the indemnifying party promptly?); and (5) control (may the indemnifying party control the defence of third-party claims, or must it be approved by the indemnified party?). In service agreements, clients often push for uncapped indemnity for IP infringement, while providers resist. A middle ground is a tiered approach: capped indemnity for most risks, uncapped for IP infringement and confidentiality breaches. Procedural obligations should specify that the indemnified party must provide prompt written notice, allow the indemnifying party to participate in defence (but not control it unilaterally), and not settle without the indemnifying party's consent.

Common Pitfalls

One common error is drafting indemnity without excluding the indemnified party's own negligence or breach; this creates ambiguity and may fall foul of UCTA if unreasonable. Another is failing to specify whether the indemnity is subject to the liability cap: if silent, a court may infer it is not, defeating the purpose of capping total exposure. Service providers frequently fail to carve out indemnity for claims arising from the client's modification of deliverables or use outside the permitted field. A third pitfall is imposing strict liability on the provider for IP infringement without a "sole and exclusive remedy" mechanism; this can expose the provider to unquantified risk. Finally, failing to set a basket (minimum threshold for claims) can generate administrative burden and disputes over trivial losses. Ensure indemnity language clearly ties indemnification to the triggering event, defines "losses" to include costs, expenses, and damages, and specifies the procedure for notice and control of defence.

Sample language

Each party shall indemnify, defend, and hold harmless the other party against all third-party claims, damages, and reasonable costs (including legal fees) arising from (a) its material breach of this MSA, (b) its infringement of any third party's intellectual property rights in performing its obligations, or (c) its negligence or willful misconduct; provided that the indemnifying party shall have no obligation to indemnify if the claim arises wholly from the indemnified party's breach, negligence, or use of deliverables outside the scope agreed. The indemnified party must provide prompt written notice and permit the indemnifying party to control the defence of any claim, and shall mitigate losses. This indemnity shall not be subject to any liability cap.

This is general drafting guidance, not legal advice, and not a substitute for advice on your specific facts and jurisdiction. Sample language is a starting point to adapt, not a finished clause.

Frequently asked questions

In English law, can indemnity be uncapped while other liability is capped?: Yes, parties commonly carve out indemnity for IP infringement and confidentiality breaches from the liability cap, leaving those indemnities uncapped. This reflects market practice because IP and confidentiality risks are viewed as fundamental and potentially unlimited. However, the indemnity must be clearly worded to exclude it from the cap, or a court may infer it is subject to the cap.
Must an English indemnity clause only cover third-party claims?: No. While indemnity originates in insurance law (third-party claims), English commercial contracts frequently include indemnities for first-party losses between the contracting parties themselves. However, the clause must explicitly state this scope; courts will not readily imply indemnity for pure economic loss if the language suggests only third-party claims.
Can a service provider be held strictly liable for IP infringement under an indemnity clause?: Yes, indemnity clauses commonly impose strict liability (without a negligence requirement) for IP infringement, on the basis that the provider warrants the deliverables do not infringe. To manage risk, providers often negotiate exceptions for claims arising from client-directed modifications, or offer a remedy hierarchy: redesign, replacement, or termination of the affected service, before damages become due.
What happens if indemnity language is ambiguous under English law?: The contra proferentem rule applies: ambiguity will be construed against the party that drafted the indemnity. Additionally, if the clause is considered an exclusion of liability (rather than genuine risk allocation), it may be subject to reasonableness scrutiny under UCTA 1977, particularly if one party has significantly weaker bargaining power.

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