Key Takeaways

  • Indemnity clauses in NDAs allocate responsibility for third-party claims resulting from a breach of confidentiality.
  • Negotiating indemnities requires careful balance to avoid unlimited or disproportionate liability.
  • Third-party confidential information should be managed with clear indemnity and disclosure rules.
  • Limiting liability and exclusions help mitigate financial and legal exposure in confidentiality agreements.
  • Intellectual property clauses clarify ownership and prevent implied licenses from forming.Confidentiality agreement indemnity is a clause in this type of contract that applies to third-party claims; for example, if you sign a confidentiality agreement that protects information provided by one company that belongs to a third party, you would be protected from third-party claims of breach of contract.

What Is Confidential Information?

An NDA defines confidential information using three basic methods: general description, specific description, and specific marking of the information in question.

General descriptions allow you to protect categories of information, such as sales strategies, procurement details, marketing information, customer lists, manufacturing protocols, and investor data. Although this strategy prevents you from having to update the NDA in the future, it does carry legal risk.

Specific descriptions are most appropriate in NDAs that govern short-term, project-based relationships, in which the information requiring protection is not expected to expand or change over the course of the engagement.

The marking strategy designates specific information as confidential and is useful in making sure that no private information is inadvertently disclosed. However, marking every confidential item as such creates a practical and administrative burden.

What Are Confidentiality Agreements?

Also called non-disclosure agreements (NDA), confidentiality agreements are legally binding contracts that identify information that one or both parties want to keep confidential and prohibiting this information from being publicly or privately disclosed.

Confidentiality agreements typically:

  • Limit disclosure of confidential information to those who need to know
  • Limit discussion of this information to the specific, relevant transaction at hand
  • Require both parties to reasonably secure the information

These contracts usually refer to the disclosing party and the receiving party. Confidentiality agreements are most commonly used in employment but can also exist among independent contractors, suppliers, vendors, investors, and other business partners and associates.

Employers use confidentiality agreements so they can optimize their business by freely sharing information with employees while protecting this data from disclosure to competitors. Examples of confidential business information include strategic plans, processes, marketing strategies, client lists, knowledge, technologies, and proprietary relationships.

Most confidentiality agreements keep the receiving party from disclosing the information during the term of the contract and for some time after it ends.

What Clauses Should Confidentiality Agreements Include?

The confidentiality agreement should outline each party's specific obligations associated with the information in question. Clauses cover these obligations such as those governing:

  • The disclosure of third-party confidential information
  • The level of care expected of the receiving party when handling confidential information.
  • Indemnity in third-party disclosure
  • Liability limitations in the case of a breach of contract
  • Damages for breach of contract, including loss of profit and revenue

An exclusions clause indicates information that is not considered confidential and may cover items the receiving party was already aware of, received from a third party, developed independently, and/or have entered the public domain.

Understanding Indemnity Clauses in Confidentiality Agreements

Indemnity clauses in confidentiality agreements (NDAs) assign financial responsibility when one party’s breach causes harm to another—particularly in the case of third-party confidential information. A confidentiality agreement indemnity typically requires the disclosing party to be reimbursed for losses, damages, or legal fees stemming from a breach by the receiving party.

These clauses are especially important when:

  • The disclosed information originates from a third party.
  • There’s a heightened risk of reputational or financial harm.
  • The receiving party might disclose confidential data in a way that triggers legal claims.

Key considerations when drafting indemnity clauses:

  • Scope of indemnity: Define clearly whether it applies only to direct losses or includes indirect and consequential damages.
  • Trigger events: Indemnities may activate on breach alone, or only after actual third-party claims arise.
  • Cap on liability: Limiting the indemnity to a fixed amount or the value of the contract is common to reduce risk.
  • Exclusions: Carveouts may apply where disclosure is legally required or was already public.

The goal is to ensure indemnities are reasonable and do not unintentionally create open-ended liabilities.

How Can Businesses Manage Confidentiality of Third-Party Information?

If businesses must share confidential information that belongs to a third-party, several management options are available:

  • A customer agreement that includes an NDA with indemnification, which has the advantage of exempting the third party from negotiations but keeps you liable to the third party since the customer is already indemnified
  • A three-way agreement between the customer, the company, and the third party; however, you must ensure that no joint liability develops as a result of this contract.
  • A separate NDA between the customer and the third party, which means you would not be liable to the third party and need not indemnify the customer

In situations where you do not want to involve the third party in discussions with your client, you should use the first option; otherwise, it's best to involve the third party and avoid liability. You must also ensure that the customer can stand behind the indemnification.

Negotiating Indemnities and Liability Limitations

Negotiating a confidentiality agreement indemnity requires balancing protection with fairness. Overly broad indemnities can deter counterparties from signing, while weak clauses leave your business exposed.

Best practices during negotiation:

  • Clarify indemnification triggers: Parties should understand when indemnity kicks in—on breach, claim, or loss.
  • Include liability limitations: Many NDAs limit indemnity to actual damages and exclude indirect or consequential losses.
  • Ensure mutuality (if appropriate): In some cases, both parties should indemnify each other, especially in reciprocal NDAs.
  • Consider insurance requirements: High-risk disclosures may warrant insurance coverage to support indemnification obligations.

Also, consider the enforceability of indemnities under applicable law, as some jurisdictions may view certain indemnity provisions as unenforceable or overly punitive.

How Is Intellectual Property Managed in Confidentiality Agreements?

With an NDA, each party retains the intellectual property (IP) ownership and rights of its own confidential information. This type of agreement does not provide a license or other rights to the other party's confidential information.

You may further protect your interests by including specific language to this effect, such as indicating that the confidential information disclosed occurs without implied or expressed warranty or representation.

Common Pitfalls in NDA Indemnity Clauses

Several common mistakes can undermine the effectiveness of a confidentiality agreement indemnity clause:

  1. Vague language: If the indemnity provision is too broad or imprecise, it may be unenforceable or subject to interpretation.
  2. Omitting exclusions: Not specifying exceptions (e.g., for legally required disclosures or public knowledge) can lead to unfair liability.
  3. Failing to align with related clauses: The indemnity section should be consistent with other NDA clauses, such as liability caps and dispute resolution.
  4. Ignoring dispute resolution mechanisms: An NDA should specify how indemnity disputes will be handled—via arbitration, litigation, or negotiation.

To avoid these pitfalls, businesses should tailor indemnity clauses to the context and nature of the confidential information, ensuring both parties understand the scope of their responsibilities.

Frequently Asked Questions

1. What is the purpose of an indemnity clause in a confidentiality agreement? It protects one party by requiring the other to compensate for losses resulting from a breach, especially when third-party confidential information is involved.

2. Is an indemnity clause the same as a liability clause? No. An indemnity clause ensures reimbursement for damages, while a liability clause defines what types of damages are recoverable and may cap exposure.

3. Do all NDAs require an indemnity clause? Not necessarily. Some parties may omit indemnities if the risk is low, or if the agreement includes strong liability limitations.

4. Can indemnity clauses be negotiated? Yes. Most indemnity terms are negotiable, including scope, cap, exclusions, and trigger events.

5. What happens if there is no indemnity clause? Without one, the injured party must rely solely on general breach of contract remedies, which may not cover all types of losses or legal costs.

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