Indemnity in Construction Contracts
Why It’s the Most Dangerous Clause You’re Not Reading Closely EnoughAka: “The Clause That Sounds Boring Until Someone Sends You a Legal Notice with a 10-Cr Price Tag.”
What Is Indemnity Really About?
In construction, indemnity isn’t just legal jargon—it’s about shifting risk.
It’s like saying:
“If something goes wrong—even if it’s not entirely my fault—you’re paying the bill.”
And those bills don’t arrive in pretty envelopes. They come loaded with legal fees, third-party claims, and project delays.
It’s Not Just About Fault—It’s About Who Pays First
Unlike general liability, which usually requires a court ruling, indemnity claims can be triggered immediately—even before fault is decided.
This means cash might leave your account while you’re still arguing whether it should have.
I’ve seen contractors forced into arbitration over a ₹2 crore indemnity call-out—not because they were at fault, but because the clause didn’t require proof of fault before payout.
Where Indemnity Usually Lurks
Third-party personal injury or property damage
→ A subcontractor drops scaffolding on a parked BMW. You’re liable—even if you never met the guy.IP infringement indemnity
→ You use a standard design. Turns out it’s copied. Now you’re indemnifying your employer against a software company in Texas.Breach of statutory obligations
→ ESG, EHS, fire safety, labour laws—a missed permit can become a claim for regulatory fines plus damages.Indemnity for employer’s own losses
→ The sneaky one: “Contractor shall indemnify employer for all losses incurred.” No third party required.
Real Clauses: Let’s Talk War Stories
1. The Unlimited Indemnity Trap
Clause said: “Contractor shall indemnify employer for all losses.”
Actual fallout: Indemnity was uncapped. There was no insurance for consequential damages, leaving us exposed to unlimited risk.
2. The “Negligence of the Employer” Clause (Missing)
You indemnified for everything—even losses caused by the employer’s negligence. They delayed a crane inspection. It collapsed. Guess who got the bill?
3. The “Duty to Defend” Clause
A third party sued the employer. They invoked indemnity. We had to fund their legal defence—even though we weren’t the ones sued, and even though we ultimately won.
Practical Nuances That Only the Battle-Hardened Know
Don’t ignore procedural control:
If you must indemnify, negotiate the right to control the defence. Otherwise, they might hire a $1000/hour silk—and you’ll foot the bill.Push for proportionality:
Include carve-outs like: “Indemnity shall not apply to the extent the loss is caused by the employer’s negligence or breach.”Insurance ≠ Indemnity:
Insurers may cover third-party claims—but many exclude contractual indemnity obligations.Subcontractors must mirror you:
You can pass on risk—but only if your subcontracts include back-to-back indemnity clauses. Otherwise, you’re left holding the bag.
Mutual Indemnities—Sounds Fair, But Read the Fine Print
Everyone loves the phrase “mutual indemnity.” But they’re not always equal. Check:
Scope (does theirs cover less?)
Carve-outs (are you taking on more risk?)
Triggers (is theirs fault-based while yours is no-fault?)
Defence cost obligations (theirs “may” pay, yours “shall” pay?)
A Quick Litmus Test Before You Sign
Ask yourself:
Can I cap this indemnity?
Do I control the defense if I pay?
Is there a clear link between indemnity and actual fault?
Are subcontractors back-to-back?
Is my insurer okay with this clause?
If you answered “no” to more than two… walk into the next meeting with coffee, courage, and a red pen.
Indemnity sounds like a formality. It’s not. It’s one of the few clauses that can bankrupt a subcontractor, derail a JV, or trigger an internal investigation.
So yes—mark it up. Push back.
And if someone says:
“This is industry standard,”
Just smile and say:
“So was asbestos once.”
How to Enforce an Indemnity Claim
Gather Evidence & Quantify Loss
Support your claim with:
Proof of the indemnified event (photos, emails, inspection reports)
Incurred or anticipated losses (invoices, legal fees, damage assessments, third-party claims)
A clear link between the loss and the indemnified conduct
E.g. the subcontractor’s faulty welding caused the collapse—not some unrelated event.
Issue a Formal Indemnity Demand
Send a well-documented claim letter:
Refer to the specific contract clause
Set out the facts, timeline, and evidence
Quantify the claim with detailed breakdowns
Mention your duty to mitigate losses (if applicable)
Request indemnification within a reasonable timeframe
Attach all supporting documents to make it easy for the indemnifier to assess and respond.
Check for Insurance Coordination
For indemnity claims involving third parties (like bodily injury or property damage):
Is the indemnifier insured for this risk?
Can the claim be channeled through their insurer?
Is a tender of defense possible?
Note: Insurers may reject claims based on voluntary indemnities—check policy terms carefully.
Key Legal Nuances
Indemnity ≠ automatic liability: Courts still require proof of loss and a triggering event.
Some indemnities (especially for third-party claims) require you to suffer an actual loss before suing—not just the possibility of a future loss.
Even if the contract entitles you to indemnity, enforcement demands:
Legal positioning
Commercial pragmatism
Tactical documentation
Third-Party Claims Don’t Always Require Court First
Under general liability, you often have to be sued and lose before claiming against the other party.
Under indemnity, as soon as a third party makes a claim, you may be able to pass it on to the indemnifier—even before paying out—depending on how the clause is worded.
Here's the Caveat
If:
Your indemnity clause is vague,
Doesn’t specify timing or “pay on demand” terms, or
Requires proving breach or fault,
Then enforcing the indemnity can become as slow and messy as a general liability claim.
Practical Tip from the Trenches
To make indemnity work efficiently:
Draft it as a primary obligation.
Include “pay on demand” or “as a debt” language.
Ensure costs, expenses, and legal fees are included.
Make sure indemnity survives termination of the contract.