The contract arrives after the good news. You have won the work, everyone is pleased, and there is a PDF attached called Supplier Terms v4. It is eleven pages, it is clearly the client's standard document, and the deal is worth £3,000 a month. Nobody in that position spends £900 on a solicitor to review it, and most freelancers and small agencies sign it that afternoon.
In those eleven pages there are two clauses that matter more than everything else put together. One is the limitation of liability. The other is the indemnity. They look similar, they sit near each other, and they do entirely different things — and the difference is the difference between a bad month and a business-ending one.
A cap and an indemnity are not the same animal
A limitation of liability clause puts a ceiling on what you can be made to pay if you get something wrong. In supplier contracts it is usually expressed as the fees paid in the preceding twelve months, or a fixed sum. It is defensive, and it is doing the job you want it to do.
An indemnity is a promise to reimburse the other party for specified losses. It is not a cap on anything — it is an obligation to pay, and it behaves differently from an ordinary claim for breach of contract in ways that consistently favour the person you gave it to.
An indemnity is typically a primary obligation, so the client can call on it without first proving a breach in the usual way. The duty to mitigate loss is weaker or absent. Rules on remoteness of damage — which normally stop a claim recovering losses nobody could have foreseen — often do not apply in the same way. It usually survives termination of the contract. And, crucially, it is frequently drafted to sit outside the liability cap.
That last point is the whole game. Read a set of client terms carefully and you will often find a cap of "the fees paid in the previous 12 months" followed by "the limitations in clause 11 shall not apply to the indemnities given under clause 13". Your liability looks capped at £36,000. It is not capped at all.
A cap of twelve months' fees means nothing if the indemnity sits outside it. That single carve-out is the most consequential sentence in most small-supplier contracts, and it takes ten seconds to look for.
The bit your insurance may not cover
Here is the part that surprises people who have carefully bought professional indemnity cover.
PI policies commonly exclude liability that the insured has assumed under a contract, where that liability would not have existed at common law. The insurer's logic is straightforward: they priced a policy covering your professional negligence, not whatever obligations you chose to sign up to afterwards.
So an indemnity that goes further than the law would have taken you — promising to cover the client for losses caused by something that was not actually your negligence, or agreeing to pay the client's costs of a third-party claim regardless of fault — can be precisely the liability your policy declines. You are then personally exposed, or the company is, on an obligation you accepted for free at the point of signature.
This is worth a specific conversation with your broker rather than an assumption. Ask directly: does my policy respond to contractual indemnities, and if so within what limits? The answer shapes what you should be willing to sign, which puts it in the same category of unglamorous groundwork as the contract clause worth adding to every quote.
Putting real numbers on it
Illustrative, but recognisable to anyone who has run an agency.
A four-person design agency signs a client's standard terms for a £36,000-a-year retainer. Clause 11 caps liability at fees paid in the preceding twelve months. Clause 13 contains an indemnity, expressly excluded from the cap, under which the agency indemnifies the client against all losses, costs and expenses arising from any claim that materials supplied infringe a third party's intellectual property rights.
Eighteen months in, a stock photograph used in a campaign turns out to have been licensed for editorial use only. The rights holder writes to the client. The client's legal costs come to £14,000, they settle the licensing claim for £22,000, and they reprint materials at £9,000. Total £45,000 — above the £36,000 cap, and outside it anyway because of the carve-out.
Had the indemnity sat inside the cap, the exposure would have been £36,000 at absolute worst. Had it been limited to claims arising from the agency's own breach, and had the agency been able to show the licence was bought in good faith from a reputable library, the argument would have been about fault rather than about an unconditional promise to pay. Instead the wording made it arithmetic.
Note the size of the sums against the size of the contract. That is the pattern: liability in these clauses scales with the client's loss, not with your fee.
Your fallback protection is thinner than you think
For business-to-business contracts, the Unfair Contract Terms Act 1977 offers some protection, but less than most owners hope. Where one party deals on the other's written standard terms, clauses excluding or restricting liability are subject to a reasonableness test, and liability for death or personal injury caused by negligence cannot be excluded at all. That is real, and it occasionally rescues someone.
But it is designed principally to control clauses that limit liability, not clauses that create it. An indemnity you freely gave, in a negotiated commercial contract between two businesses, is not the natural target of the Act. Relying on a court later deciding your own promise was unreasonable is not a strategy — it is a very expensive hope. Consumer contracts are a separate regime again under the Consumer Rights Act 2015, so terms drafted for business clients should not be reused for consumers without thought.
The four asks that usually get accepted
Small suppliers assume none of this is negotiable. In practice, procurement teams expect a supplier to come back on liability, and reasonable requests are routinely accepted because rejecting them costs the client a supplier over drafting.
Bring the indemnity inside the cap. The single highest-value change. If that is refused outright, ask for a separate, higher cap on the indemnity — a defined number is infinitely better than unlimited.
Narrow what triggers it. "Arising from any claim" should become "arising from a third-party claim to the extent caused by the supplier's breach of this agreement or negligence". Those words move it from unconditional to fault-based.
Set the cap at a number, not just at fees. "The greater of the fees paid in the preceding twelve months or £100,000" protects the client on a small contract and protects you on a big one. It reads as fair because it is.
Exclude indirect and consequential loss, and make it mutual. Loss of profit, loss of anticipated savings, loss of goodwill. And ask for the same protections to run both ways — mutuality is hard to argue against and often gets the whole clause redrafted more sensibly.
Ask by email, in a friendly, specific list. "Happy with everything else — could we bring clause 13 inside the clause 11 cap and add a fault qualifier?" reads as professional. Sending back a marked-up document with fifty changes reads as difficult.
The ten-minute review that would have caught it
You do not need a lawyer for every contract, but you do need a routine. Search the document for "indemnif" and read every hit. Find the liability cap, note the figure, and then check whether anything is carved out of it — look for "shall not apply to". Check whether liability is capped per claim or in aggregate, because per-claim caps on a long retainer are barely caps at all. Confirm which country's law and courts govern it. Look at how the client can terminate, and whether you are paid for work in progress if they do.
That is ten minutes. On anything above a threshold you set for yourself — a year's fees, or whatever number would genuinely hurt — pay for an hour of a commercial solicitor's time and treat it as a cost of the contract rather than an overhead. The economics are not close: an hour's fee against an uncapped obligation is not a difficult trade.
The instinct to sign quickly comes from a good place. You have won the work and you do not want to look like hard work before you have started. But the client's legal team wrote those terms to protect the client, which is their job, and nobody in that process is looking after you. Reading two clauses properly is the cheapest risk management available to a small business — rather more useful, in the end, than the NDA everybody insists on signing, and every bit as much a part of pricing the work properly as setting the retainer figure itself.
Common questions
What is the difference between an indemnity and a liability cap?
A liability cap limits what you can be made to pay if you breach the contract, usually to a figure such as the fees paid in the previous twelve months. An indemnity is a positive promise to reimburse the other party for specified losses, and it behaves more favourably for them: it is generally a primary obligation, the usual rules on remoteness and mitigation apply differently, and it typically survives termination. Critically, indemnities are often expressly carved out of the liability cap, so a contract that appears to cap your exposure at twelve months' fees may leave you exposed without limit under a clause two pages later.
Does professional indemnity insurance cover contractual indemnities?
Often not. Professional indemnity policies commonly exclude liability assumed under a contract where that liability would not have arisen at common law, because the insurer priced cover for your professional negligence rather than for obligations you agreed to afterwards. An indemnity that goes beyond fault — promising to cover a client's losses regardless of whether you were negligent — can therefore be exactly the liability your policy declines to meet. Ask your broker directly whether the policy responds to contractual indemnities and within what limits, and get the answer in writing before you sign terms containing one.
Can I negotiate a large client's standard terms as a small supplier?
Usually yes, and far more often than small suppliers expect. Procurement teams anticipate that suppliers will come back on liability, and reasonable, specific requests are routinely accepted rather than lose a supplier over drafting. The approach matters more than the leverage: a short friendly email agreeing to everything else and asking for two named changes lands very differently from a marked-up document with fifty amendments. Ask to bring the indemnity inside the cap, add a fault qualifier, set the cap at the greater of fees or a fixed sum, and make the protections mutual.
What is a reasonable liability cap for a small supplier?
There is no fixed answer, but the structure matters as much as the number. A cap expressed as the greater of the fees paid in the preceding twelve months or a stated figure works in both directions: it gives a client on a small contract meaningful recourse while protecting you on a large one. Make sure it is an aggregate cap across all claims rather than a cap per claim, because per-claim caps on a long-running retainer offer very little real protection. Then check nothing is carved out of it — an indemnity sitting outside the cap makes the whole negotiation over the number irrelevant.
Does the Unfair Contract Terms Act protect me from an indemnity I signed?
Only partially. For business-to-business contracts, where one party deals on the other's written standard terms, clauses excluding or restricting liability are subject to a reasonableness test, and liability for death or personal injury caused by negligence cannot be excluded at all. But the Act is aimed principally at terms that limit liability, not at indemnities that create it, and an indemnity freely given in a commercial negotiation between two businesses is not its natural target. Relying on a court later finding your own promise unreasonable is an expensive hope rather than a plan. Consumer contracts fall under a separate regime.
