Indemnity clauses are commonplace in contracts today and corporate domestic and international law firms and lawyers, particularly dispute resolution law firms all over India and Ahmedabad, engaging in corporate and commercial contract drafting often deal with such clauses in the course of their work. Essentially, a promise to indemnify implies that one party would be held accountable for the payment of certain charges and expenses incurred by the other party; contractual indemnity clauses are used by the parties to personalise the aspect of risk allocation. An indemnification clause is a frequently used aspect of corporate and commercial contracts because it helps to manage the risks involved in business transactions by providing protection against the results of an act, a breach of contract, or the negligence of another party. The general guideline is to look for an indemnity that will shield a party from obligations caused by the actions of another party to the maximum extent possible.

This concept is envisaged under section 124 of the Indian Contract Act, 1872 wherein a "contract of indemnity" is defined as an agreement whereby one party promises to protect the other party against loss, either by preventing or compensating for it, brought on by the action of the promisor or any other person. When one party (the indemnifier) pledges to shield another party (the indemnity holder) from any loss, cost, expense, damage, or other legal repercussions brought on by the behaviour of the indemnifier or any third party, a claim for indemnity or indemnification emerges. To transfer or allocate the risk or expense from one party to another, An indemnity clause is inserted into a contract. By requiring one party to cover the costs spent by the other party in specific situations, it can be claimed that the two parties are engaging in business transactions. However, it is pertinent to note that an indemnity, as envisaged by commercial contracts, differs somewhat from a common law understanding of indemnity.

When it comes to drafting contracts incorporating an indemnity clause, such clauses are typically written broadly to encompass third parties and situations other than the typical breach situations deemed actionable under common law. In certain cases, the indemnification clauses even attempt to apply when neither party has broken the terms of the agreement. The guarantee whereby one party indemnifies another party for the conduct, omission, or violation of a third party is a very good example of indemnification. In these situations, problems arise wherein indemnities become unforeseen burdensome duties that the common law would not otherwise or usually impose.

It is typical for a party to demand indemnities from other partners if they have the most commercial clout and negotiation power over a project, especially if it is large or dangerous. Such indemnity provisions are frequently written to the fullest extent imaginable. However, it should also be noted that there are more effective methods for allocating risk than adopting broad-based indemnities. Therefore it is important to outline and define the scope of such clauses in the initial stages of drafting. The risk of the indemnity not being held to cover losses they intended to cover exists when an indemnity clause is written ambiguously. The possibility of the indemnifier being forced to pay for losses they had not anticipated arises from ambiguity. In commercial negotiations, it's crucial to define precisely what is desired to be accomplished economically and to limit and record the intended scope of the indemnification being discssued.