What an indemnity is, and the myth around it
An indemnity is a contractual promise by one party to compensate another for specified losses, costs, or liabilities - a way of shifting a defined risk. The common assumption is that an indemnity automatically beats a damages claim: it bypasses the remoteness rules, avoids the duty to mitigate, and sits outside the liability cap. Recent cases show those assumptions are wrong unless you draft for them.
When properly drafted, an indemnity can operate as a debt claim - the indemnifier simply owes the money once the trigger event occurs, with no need to prove foreseeability or mitigation. But English courts will not imply those benefits. As Wood v Capita Insurance Services Ltd [2017] UKSC 24 confirmed, what the contract says determines what you recover - not what seems fair or what you intended.
Why it matters: the same facts, six times the recovery
Learning Curve (NE) Group Ltd v Lewis [2025] EWHC 1889 (Comm) makes the point starkly. On the same underlying facts, the buyer's breach-of-warranty claim was worth GBP 5,211,625, while the contract's narrowly-drafted indemnity would have yielded only GBP 783,325. The buyer recovered the larger sum by electing the warranty claim. Over six times the recovery, decided by drafting alone.
An indemnity is a risk-allocation tool. Drafted well, it gives the indemnified party more certain, fuller recovery; drafted badly, it is narrower than an ordinary damages claim. The difference is in the words.
Debt or damages - the question that decides everything
The fundamental question is whether the indemnity creates a primary debt obligation or a secondary damages claim. Where it is a debt - typically a promise to pay a specified sum on a specified event - the rules on causation, remoteness, and mitigation do not apply, and the indemnified party recovers pound for pound. Where it covers general, unspecified losses, a court may treat it as a damages claim, with all the usual limits.
This is not automatic; it flows from the language. Each guide below takes one part of the problem: debt versus damages, causal language and remoteness, liability caps, notice and conditions precedent, trigger wording, and how to draft an indemnity that does what you intend.
When indemnities are worth using
Indemnities earn their place where ordinary damages would be inadequate or uncertain: third-party claims (IP infringement, product liability, employment), tax liabilities in M&A, regulatory fines that might not be recoverable as damages, and specific known or disclosed risks the parties want to allocate. In each, the value is a more certain, fuller recovery than a damages claim would give - but only if the indemnity is drafted to deliver it.
For the indemnifying party, the mirror image is the danger: exposure can be open-ended unless expressly capped, with no mitigation defence. So both sides have a stake in precise drafting.
How to read an indemnity
Treat the indemnity as a risk transfer and test it against the words. Is it a debt (pay a sum on an event) or a general indemnity (a damages claim in disguise)? Does the causal language quietly import a remoteness test? Does the liability cap include or exclude it? Is notice a condition precedent you can realistically meet? And does the trigger actually cover the event you fear? Across all of these, the cases say the same thing: courts enforce what you wrote.
The time to get an indemnity right is before signing - not after you are explaining why your carefully-negotiated protection does not reach the loss you actually suffered.
Use at the desk
Practical checklist
- Treat an indemnity as a risk transfer and test its advantages against the wording - none are automatic.
- Decide whether it is a debt (pay a sum on an event) or a general indemnity that a court may treat as damages.
- Check whether the causal language imports a remoteness test (see the causation guide).
- Confirm whether the liability cap includes or excludes the indemnity - state it expressly.
- Check notice requirements and whether they are conditions precedent you can realistically meet.
- Make the trigger cover the event you actually fear - courts will not extend it (Wood v Capita [2017] UKSC 24).
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
Product demo
Use the guide for context. Use Veqtor for the Word documents.
Watch Claude compare negotiation drafts and create a separate Word document with proposed tracked changes.
See Veqtor work with Word redlines