A Singapore SME should accept an indemnity in a customer or supplier contract only if it is tied to a defined risk, triggered by your own fault or breach, limited to third-party claims where possible, capped at a figure you can survive, and backed by a claims procedure that lets you control the defence. Do not accept a one-line promise to cover “any and all losses howsoever arising”. It turns an ordinary commercial deal into an open-ended liability that your insurance may not cover.
Why do customers and suppliers push indemnities on small businesses?
A larger customer or supplier uses a standard form to move risk down the chain. If something goes wrong, it wants a clear right to be paid by you, without having to prove a breach and calculate damages. An indemnity does that, because it is a promise to make good a specified loss. Our explainer on the indemnity clause and how it differs from a guarantee covers the basics. This article is about what to do when the clause lands on your desk.
The courts read indemnities strictly. In HSBC Institutional Trust Services v DNKH Logistics [2023] SGHC(A) 13, the Appellate Division repeated that a party who wants its liability limited, or wants its losses indemnified, must say so in clear words. That cuts both ways: vague drafting may not give the customer what it expects, but you should not rely on vagueness to protect you. Fix the wording before you sign.
Which indemnities are usually reasonable for an SME to give?
Some indemnities are normal and insurable. The questions to ask are whether you control the risk and whether you can insure it.
- Third-party intellectual property claims: if you supply software, designs or branded goods, a customer commonly asks you to cover a claim that your deliverable infringes someone else’s rights. This is reasonable if it is limited to what you supplied, and excludes changes made by the customer or use outside the contract.
- Death, injury and property damage caused by your negligence: usual for services performed on the customer’s premises, and normally covered by public liability insurance.
- Breach of data protection obligations: acceptable if the clause is tied to your own breach of the contract or law, with a realistic cap.
- Your staff’s or subcontractors’ claims: sensible where you are the employer, for example claims by your own workers for injury on site.
Be wary of indemnities for your customer’s own negligence, for fines imposed on the customer, for the customer’s lost profit, or for “any breach of this agreement” with no link to loss caused by you.
How do you narrow and cap an indemnity?
Work through the clause using the table below. Each row shows a common customer draft and a counter-position you can propose. Whether the other side agrees depends on bargaining power, but asking is routine.
| Common draft | Counter-position | Why it matters |
|---|---|---|
| “Indemnify against all losses howsoever arising” | Indemnify against losses caused by your breach, negligence or wilful default | Links liability to fault rather than any event |
| First-party and third-party losses | Third-party claims only, with direct loss for your own breach under the normal damages rules | Keeps the indemnity for the risk it was designed for |
| Uncapped | Cap at the contract value, or a fixed multiple, with a separate higher cap for IP and data claims if needed | Lets you price the risk and match your policy limit |
| Includes indirect and consequential loss | Exclude indirect loss, lost profit and loss of goodwill | Removes loss you cannot predict |
| Customer may settle on any terms | No settlement without your written consent, not to be unreasonably withheld | Stops the customer committing you to a bad settlement |
| Survives forever | Expires after a fixed period, for example a set number of years after the contract ends | Gives you an end date for the risk |
| One-way | Mutual indemnities for each side’s breach | Balances the contract |
Check how a cap interacts with your policy. If you promise unlimited cover but your insurer pays only up to a limit, the shortfall is yours. Our article on a client contract that requires PI insurance explains how to line up the cap, indemnity and policy.
What claims procedure should the clause contain?
Most SME contracts omit this, and it is where a manageable claim turns into a dispute. A fair clause says:
- The customer must notify you promptly in writing once it receives a third-party claim. Late notice should reduce your liability to the extent it harms your defence.
- The customer must not admit liability or settle without your consent.
- You may take over the defence with advisers of your choice, at your cost, if you accept the indemnity applies.
- The customer must give reasonable help and documents.
- The customer must take reasonable steps to limit its loss.
- Your liability is reduced to the extent the customer’s own act or omission contributed to the loss.
Many customers will agree to this if you ask politely, because it protects their interest in a quick resolution too. Your insurer will also expect control of the defence of a claim it pays, so the contract should not conflict with the policy conditions.
Will the Unfair Contract Terms Act protect you?
Do not count on it. The Unfair Contract Terms Act 1977 limits how far a party can exclude or restrict its own liability. It does not prevent a business from accepting a wide indemnity in a negotiated contract. The Act does matter in these ways:
- Liability for death or personal injury caused by negligence cannot be excluded or restricted by a contract term.
- Other exclusions of negligence liability must satisfy a reasonableness test, and a similar test can apply where one party deals on the other’s written standard terms.
- Sections on indemnities against negligence apply to consumers, not to businesses dealing with each other.
So an SME dealing with a company on its standard terms may have some protection for exclusions, but little for a broad indemnity it agreed to. For the detail, see our article on exclusion clauses and the Unfair Contract Terms Act.
Example: a supplier’s indemnity in a purchase contract
Example (hypothetical): A small marketing agency signs a services agreement with a retail group. The draft says the agency will “indemnify the group against all claims, losses, costs and expenses arising out of the services”. Reading it, the agency sees that it would cover a claim even if the group’s own staff supplied wrong product claims for an advertisement.
The agency proposes: an indemnity for third-party IP claims arising from material the agency created; no cover for content supplied by the group; a cap equal to fees paid in the previous twelve months, with a higher cap for IP claims set at the limit of its professional indemnity policy; notice and conduct-of-claims wording; and an end date. The group accepts most points but insists on the higher IP cap. The agency checks the figure with its insurance broker before agreeing, and records the final position in the signed contract.
What should you check before signing?
- Is the indemnity linked to your fault, or to any event?
- Does it cover third-party claims only, or also the customer’s own losses?
- Is there a cap, and does it match your insurance limit?
- Does the contract exclude indirect loss and lost profit, and does the exclusion apply to the indemnity?
- Who controls the defence and any settlement?
- Does the indemnity expire?
- Have you told your broker about the contract?
The same questions apply when you are the buyer. For share sale contracts, see our article on warranties and indemnities in a share purchase agreement. If you are asked to indemnify a director personally, note the limits in section 172 of the Companies Act on directors’ indemnities.
Frequently asked questions
Is an indemnity different from a limitation of liability clause?
Yes. A limitation clause caps or excludes what you owe for a breach. An indemnity is a promise to pay a defined loss. Check whether the cap applies to the indemnity, because many customer drafts carve indemnities out of the cap.
Can we ask the customer to give us an indemnity too?
Yes. A mutual indemnity for each side’s breach, or for claims arising from materials the customer supplies, is common and reasonable to request.
Does insurance cover an indemnity we give in a contract?
Not always. Policies often exclude liability that exists only because of a contract promise. Ask your broker to read the clause and confirm in writing what is covered.
What if the customer will not negotiate?
Weigh the contract value against the exposure. You can ask for a lower-risk compromise, such as a cap only on the indemnity, price the risk into the fee, or decline the work. Do not sign planning to argue later that the clause is unreasonable.
Does an indemnity need to be in writing?
An indemnity can arise from a contract made in other forms, but a promise to answer for another person’s debt or default (a guarantee) must be in writing and signed. Put every indemnity in the signed contract so the terms are certain.
Need help with an indemnity clause?
If your company, or you as a director or shareholder, is dealing with an indemnity or liability clause in a customer or supplier contract, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133 or +65 9018 0072. We will help you understand the documents and deadlines. Where your matter needs a lawyer, we will refer you to a firm on our panel of Singapore law firms that regularly handles commercial contracts. Raffles Corporate Services is a corporate services provider, not a law firm, and this article is general information, not legal advice.
The Raffles Corporate Services Editorial Team, Raffles Corporate Services