The moment you are most likely to meet these clauses is when a counterparty sends you a contract to sign: a supplier's terms, a client's services agreement, a lease, or the sale agreement for a business you are buying or selling. Somewhere past the middle of the document you will find a heading like "Warranties and Indemnities" and two blocks of dense text that look interchangeable. They are not.
A warranty clause is a promise that certain statements are true or that a standard will be met. An indemnity clause is a promise to cover defined losses if a particular event happens. Together they allocate risk between the parties: who wears the cost of a late delivery, a defective product, a third party's IP claim, or a data breach. This article walks through each clause, the drafting choices behind it, and the traps that create liability you did not price for. It also covers the rights customers keep under the Australian Consumer Law no matter what the contract says.
The clauses that divide the risk
The clauses below appear, in some form, in most commercial contracts. What matters is not the label on the clause but the effect of its words.
What the supplier is promising
This is the warranty clause. It is usually written as a list of statements starting with "The Supplier warrants that" or "Each party represents and warrants that". Common promises in small business contracts include:
- Authority: the person signing has the power to bind the business.
- Compliance: the goods, services or business comply with relevant laws.
- Quality and fitness: goods meet specifications and are fit for the purpose the buyer made known.
- Intellectual property: the work does not infringe anyone else's rights.
- Data handling: personal information will be collected and used lawfully and kept secure.
The drafting choice that matters most here is whether a warranty promises a process or an outcome. "Services will be provided with due care and skill" commits you to a professional standard of work. "The campaign will increase revenue by 20 per cent" commits you to a result you may not control. If you do not intend to guarantee an outcome, do not let the wording drift into one. This is how marketing agencies, software developers and consultants end up liable for results that were never within their control.
The other thing to understand is what happens when a warranty is breached. The usual remedy is damages, and the party claiming must prove the warranty was breached, that it suffered loss, and that the loss was caused by the breach and is not too remote. That proof burden is a real filter. It is also why contracts sometimes distinguish conditions from warranties: breach of a condition may let the innocent party terminate the contract, while breach of a warranty is usually remedied by damages alone.
Who pays when a third party sues
This is the indemnity clause. Instead of promising a fact, it promises to cover particular losses if a specified event happens. It works a bit like "you break it, you pay for it", but only for the scenarios the clause describes. Indemnities commonly cover:
- IP infringement claims: the supplier covers claims that its deliverables infringe a third party's rights.
- Property damage and personal injury: a party covers loss caused by its own people, equipment or premises.
- Breach of law: a party covers losses the other side suffers because it broke a law.
- Employee claims: a party covers claims brought by its own staff or contractors.
- Data breach: a party covers losses tied to unauthorised access, misuse or disclosure of data.
- Tax liabilities: in a sale of business, one party takes responsibility for taxes or charges connected to the transaction or to the period before completion.
The practical difference from a warranty is the proof burden. Depending on how the clause is drafted, an indemnity can oblige one party to pay without the other side having to prove breach, loss and causation the way a damages claim requires. That is why indemnities are among the most negotiated clauses in a contract: they can move significant money from one side to the other, sometimes far beyond the value of the deal.
The words matter because Australian courts construe indemnity clauses strictly, reading them in the context of the contract as a whole, and resolve any remaining ambiguity against the party seeking to rely on the clause: see BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [2007] NSWCA 173, applying Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424. A clause covering "any loss, damage, cost or expense" can capture far more than the drafter intended, including losses the parties never discussed. A clause that is too specific can fail to cover the very claim it was meant to catch. Either way, the party who drafted it often discovers the gap only when a dispute begins.
There are also limits on what an indemnity can do. Whether a liability can be shifted at all depends on the wording, the rest of the contract, and the law. Some penalties, fines and liabilities imposed by statute cannot simply be passed on, and public policy can limit indemnities that would excuse deliberate wrongdoing.
The rights customers keep no matter what you write
If your business sells to consumers, the Australian Consumer Law (the ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth), gives customers automatic consumer guarantees. Under s 64 of the ACL, any term that purports to exclude, restrict or modify a consumer guarantee is void. A clause that says "no refunds" or "12 month warranty only" cannot override those rights, no matter how clearly it is drafted.
The guarantees cover acceptable quality, fitness for purpose and matching description for goods, and reasonable care and skill for services. If a product has a minor problem the consumer is entitled to a free repair. If it has a major problem they can choose a replacement or a refund. The ACCC makes clear that these rights apply for a period that is reasonable having regard to the type of product and its price, not for a fixed term, and they can outlast an express warranty: a product can fail after the "warranty period" and still be covered.
That creates two drafting traps. First, statements on invoices, in terms and conditions, or in advertising that suggest consumer rights end when a warranty expires can themselves breach the ACL's rules against false or misleading representations. Second, if you give customers a document that evidences a warranty against defects, it must comply with prescribed requirements on its form and content under s 102 of the ACL. A warranty that does not comply is a contravention, separate from any dispute about the goods themselves.
Where liability stops: the cap and the exclusions
Every contract with meaningful warranties and indemnities should also have a limitation of liability clause. It does two things. It sets a maximum amount payable, usually called the cap, often tied to the fees paid or the value of the contract. And it excludes certain losses, typically indirect or consequential loss such as lost profits, business interruption and reputational damage.
The trap is that indemnities are frequently carved out of the cap. A standard form contract might cap liability at the contract value but then say the cap does not apply to the indemnity. Read together, the contract is capped on paper and unlimited in practice for whatever the indemnity covers. To see how this lands, take a $100,000 supply contract where the cap equals the contract value but the IP infringement indemnity sits outside it. A third party claim over the supplied goods can expose the supplier to the full claim amount plus legal costs, whatever the cap says. When you review a contract, check each indemnity against three things: whether it is inside or outside the cap, whether the exclusions of consequential loss also apply to indemnity claims, and whether any time limits for claims cover indemnities as well as warranties.
How long the promises stay alive
Warranties and indemnities do not necessarily survive the end of the contract. In a sale of business, the warranties the seller gives about the business are usually kept alive by a survival clause for a defined period, commonly 12 to 24 months, after completion. Tax and IP indemnities often run longer. In a services contract, the survival clause determines how long after the work ends a client can raise a warranty claim.
The trap here is silence. If the contract says nothing about survival, you may be left arguing about whether a claim made after the contract ended is covered at all. The survival clause often sits alongside a notice requirement: the party claiming must notify the other side of a potential claim within a set time, or the claim is lost.
Optional clauses worth asking for
Some clauses only earn their place in particular deals, but they are worth knowing so you can ask for them when the situation fits:
- Insurance obligations: require the other side to maintain specific cover, name you as an insured where possible, and tie indemnity exposure to the insurance actually in place.
- Flow-down clauses: in subcontracts, pass the warranties and indemnities you owe your client down to the subcontractor, so you are not left holding liability for their mistakes.
- Notice and mitigation duties: require the party claiming under a warranty or indemnity to notify promptly and take reasonable steps to reduce the loss.
- Disclosure schedules: in a sale of business, list the exceptions to the seller's warranties, such as known compliance gaps, so the seller is not warranting absolute perfection.
- Exclusive remedy clauses: state that the warranty and indemnity regime is the only remedy for defined failures, so the parties do not also fall back on general damages claims that the rest of the contract was designed to limit.
How an Artificer Legal lawyer reviews these clauses
A practitioner would start by mapping who controls each risk: who is best placed to prevent the problem, who can insure against it, and who is being paid to take it. The review then works through the clauses in a sensible order. First the warranties, to strip out accidental outcome promises. Then the indemnities, to check each trigger and whether fault and causation are required. Then the cap, the exclusions, the survival periods and the insurance obligations, to make sure the clauses line up as one system.
The common failure we see is not a single badly drafted clause but several clauses that contradict each other: an indemnity that bypasses the cap, a survival period that expires before a claim can realistically be made, or warranty wording that promises results no one can control. For a business signing a contract, the value of a lawyer is the review itself, done before a dispute, while you still have leverage to renegotiate. For a business drafting its own terms, the value is a template that allocates risk the way the business actually operates, rather than the way a standard form happened to be written.
The carve-out that turns a capped contract into an uncapped one
If there is a single drafting choice that most often decides who wins a dispute, it is whether the indemnity sits inside or outside the liability cap. It is easy to miss because it is one phrase in one clause. But it converts a contract that looks limited into one with unlimited exposure for whatever the indemnity covers. When you review any contract, trace each indemnity to the cap and the exclusions before you sign.
The rest follows from that. Warranties are promises about facts and standards, remedied by damages. Indemnities are promises to pay for defined losses, construed strictly and worth negotiating word by word. The ACL keeps consumer guarantees beyond the reach of contract terms, so warranty wording must match what the law already gives customers. Read the warranties, the indemnities, the cap, the survival periods and the insurance together, because that is how a court will read them.