Indemnity vs Limitation of Liability
Last updated: February 2025
Quick Comparison
| Aspect | Indemnity Clause | Limitation of Liability Clause |
|---|---|---|
| Function | Shifts risk by requiring compensation for specific losses | Manages risk by capping the amount of liability |
| Direction | One party agrees to cover another's losses | Both parties' exposure is limited |
| Scope of recovery | Full recovery for defined losses without remoteness rules | Recovery capped regardless of actual loss |
| Typical interaction | Often carved out from the liability cap | Applies to general liability under the contract |
| Enforceability test | Subject to reasonableness and UCTA | Subject to reasonableness and UCTA |
What Is a Indemnity Clause?
A contractual promise by one party to compensate the other for specified losses, costs, or liabilities arising from defined events or breaches.
Key Features
- • Shifts specified risks from one party to the other
- • Covers losses on a pound-for-pound basis without proving breach of duty
- • Can include third-party claims and associated legal costs
- • Operates independently of the normal measure of damages
Best For
- • Allocating risk for IP infringement, data breaches, or regulatory fines
- • Covering third-party claims arising from one party's actions
- • Situations where one party is better placed to manage a specific risk
What Is a Limitation of Liability Clause?
A contractual provision that caps or restricts the amount or types of liability one or both parties can incur under the contract.
Key Features
- • Caps total liability at a defined amount (e.g., contract value)
- • May exclude certain types of loss such as indirect or consequential
- • Both parties can agree mutual or asymmetric caps
- • Cannot exclude liability for death, personal injury, or fraud
Best For
- • Managing financial exposure on commercial contracts
- • Providing certainty about maximum downside risk
- • Ensuring risks are proportionate to contract value
When to Use a Indemnity Clause
Use indemnities for specific, identifiable risks that one party is better placed to manage, such as IP infringement, data breaches, or regulatory non-compliance. Ensure the indemnity is clearly scoped.
When to Use a Limitation of Liability Clause
Use limitation of liability clauses in every commercial contract to cap financial exposure. Set the cap at a level proportionate to the contract value and the risks involved.
Which Does Your Business Need?
Most commercial contracts need both. Limitation clauses set the general ceiling on liability, while indemnities handle specific risks that may sit outside or above the cap. Ensure they work together coherently and neither clause undermines the other.
FAQ
Can a liability cap apply to indemnities?
What liability can never be excluded under English law?
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This is guidance for UK businesses, not legal advice. Consult a solicitor for complex matters.
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