Indemnity clause review checklist

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Indemnity clauses appear constantly in English-language contracts and increasingly in Japanese contracts with foreign counterparties, typically promising to indemnify a party against third-party IP claims, personal-data breaches or breach of representations. They look similar to a damages clause but often reach further, potentially covering defense costs, settlement amounts, attorney fees and regulatory response costs incurred because of a third-party claim, not just the counterparty's own loss.

The word "indemnify" needs unpacking

In Japanese contracts the word 補償 is used loosely. Sometimes it means the same thing as damages, sometimes it is limited to third-party claims, sometimes it extends to attorney fees and settlements, and sometimes it is indifferent to fault. None of this is usually settled by the wording alone; it has to be read against the rest of the contract, and against the reality that indemnity clauses both raise a party's exposure and allocate which side is better placed to manage a given risk.

Procedure decides whether the clause actually works

When a third-party claim arrives, the timing of notice, who controls the defense, who selects counsel, and whether settlement needs the other side's consent determine whether the clause is usable in practice. Without a defined procedure, the indemnifying party can end up handed a settlement bill with no chance to have been involved. The scope of covered loss, whether limited to direct loss or extending to lost profits and legal fees, any fault requirement, exclusions for the counterparty's own modification or misuse, and the survival period after termination all change how heavy the obligation really is.

How it interacts with the liability cap

Whether a general liability cap also limits the indemnity obligation, and whether IP infringement, data breaches or willful misconduct sit outside that cap, usually cannot be answered without reading the whole contract, and even a strongly worded indemnity is only as good as what insurance or a right of recourse against a subcontractor can actually recover.