Vendor Agreement Indemnity Clauses: How Indian Buyers Should Read Them

An indemnity is a promise to make good a loss. In a vendor or supply agreement it decides who pays when something goes wrong with a third party — a customer injured by a defective product, a claim that the vendor's goods infringe someone's patent, a labour authority penalising the use of contract workers. Section 124 of the Indian Contract Act defines a contract of indemnity narrowly; most commercial indemnities are drafted more widely and are enforced according to their terms, so the wording matters.

1. Scope: what is covered

• Third-party claims only, or also your own direct losses? A third-party-only indemnity is narrower; “all losses arising out of any breach” turns the indemnity into a second, uncapped damages claim.
• Triggers: breach of warranty, negligence, violation of law, IP infringement, injury or property damage caused by the products or the vendor's personnel.
• Whether costs of defence and settlement are included.

2. Caps and exclusions

Check whether the liability cap applies to indemnities. Buyers usually want IP, injury and statutory-compliance indemnities outside the cap; vendors want everything capped. Also read the consequential-loss exclusion — if it excludes “loss of profit” and the main risk is a recall that destroys a season's sales, the indemnity may be hollow.

3. Procedure

Section 125 of the Contract Act gives the indemnified party certain rights in suits, but a clear procedure avoids argument:

1. Prompt written notice of the claim (failure to notify should reduce the indemnity only to the extent the delay causes prejudice).
2. Who controls the defence, and the right of the other side to participate at its own cost.
3. No settlement without consent (not to be unreasonably withheld).
4. Cooperation and access to documents.

4. Insurance

An indemnity is only as good as the vendor's balance sheet. For higher-risk supplies ask for product liability, public liability or professional indemnity insurance with stated limits, your company named where appropriate, and certificates provided on request and at renewal.

5. Statutory compliance

Vendors who send people to your premises raise contract-labour, wage and social-security questions; under the labour codes in force from 21 November 2025, principal employers have continuing obligations. The agreement should require the vendor to comply with labour, environmental, tax and other laws, provide proof (registrations, challans, returns), and indemnify you for penalties caused by its non-compliance. For GST, require valid tax invoices and timely return filing so your input tax credit is not lost — and keep the right to withhold the GST portion until the invoice appears in your GSTR-2B (see our GSTR-2B routine).

6. Warranties, set-off and survival

• Warranty period and remedies (repair, replace or refund) with a time for each.
• A right to set off amounts due to you against amounts you owe the vendor.
• Survival of indemnities after termination and a period for bringing claims. The Limitation Act generally allows three years for contract claims; the clock for an indemnity claim may start when the loss is suffered, but parties often agree a specific window.

7. Sub-contracting

Require consent for sub-contracting and flow-down of the same obligations, so the indemnity covers work done by the vendor's sub-contractors.

Quick checklist

• Third-party claims covered; your own losses dealt with separately.
• Cap and carve-outs agreed explicitly for each indemnity.
• Notice, defence control and consent-to-settle procedure.
• Insurance with certificates.
• Statutory-compliance indemnity with proof of compliance.
• GST invoice and 2B condition before paying tax amounts.

The Vendor (indemnity) sheet in the free workbook has these ten points with status and risk columns.

Worked example: the recall

A packaged-food brand buys pouches from a converter. A batch delaminates and the brand withdraws stock from distributors. The supply agreement has a product-defect indemnity but excludes “loss of profit and consequential loss” and caps all liability at three months' purchases. The brand's real losses — retrieval logistics, destroyed product, retailer penalties — exceed the cap, and some are argued to be consequential. Had the indemnity defined recall costs as direct losses, carved product-defect claims out of the cap (or set a higher cap) and required product liability insurance, the outcome would have been very different.

Common mistakes

• An indemnity that is broad but sits under a low general cap.
• Consequential loss excluded without defining what it means.
• No insurance requirement for a high-risk supply.
• No proof-of-compliance obligation for contract labour on your premises.
• Claims procedure missing, so the vendor argues late notice.