Indemnities In New Zealand Business Contracts: Meaning And Risk Management

If you've ever been handed a contract and felt your eyes immediately jump to the "indemnity" section, you're not alone. Indemnities can look like a wall of legal wording, but they're actually a simple (and powerful) risk allocation tool.

For small businesses, indemnities can be a big deal because they often decide who pays when something goes wrong - and "something going wrong" can include anything from a customer claim, to IP infringement, to a data breach, to property damage on a job site.

In this guide, we'll break down indemnities in plain English, explain how they work in New Zealand business contracts, and run through practical ways you can manage the risk before you sign.

What Is An Indemnity (And Why Do They Matter In Business)?

An indemnity is a promise in a contract that one party will cover certain losses, costs or claims suffered by the other party.

In practice, an indemnity is often used to shift risk. One party says, "If X happens, I'll pay for it."

That's why indemnities matter so much for small businesses. They can:

• Move a big financial risk onto you (sometimes more than you expect).
• Determine who pays legal costs if a third party makes a claim.
• Create obligations even when no one has done anything "wrong" (depending on how it's drafted).
• Override your commercial assumptions about what your price covers and what insurance will pick up.

Indemnities are common in:

• supply agreements (stock, equipment, raw materials)
• service agreements (consulting, trades, digital services)
• software/SaaS contracts
• commercial leases
• construction and subcontracting arrangements
• business sale transactions

And importantly, indemnities don't just matter if you're the "big" party. If you're a small supplier dealing with a larger customer, indemnities are one of the most common ways risk gets pushed down the chain.

How Do Indemnities Work In A New Zealand Contract?

Even though an indemnity is "just a clause", it can be one of the most expensive sentences you ever agree to.

Here's how indemnities typically work in a New Zealand business contract:

They Can Cover Different Types Of Loss

Indemnities often cover things like:

• loss (including economic loss)
• damage to property
• personal injury
• legal costs (including solicitor-client costs)
• claims made by third parties (like customers or regulators)
• fines and penalties (sometimes included, but recovery can be restricted as a matter of law and public policy, so it's important to get advice on your specific clause)

What counts as "loss" depends heavily on drafting. If the definition is broad, you could be covering more than you priced for.

They Often Apply Before Fault Is Finally Determined

Unlike a typical "you breached the contract, so you owe me damages" claim, an indemnity can require you to respond when there's an allegation, claim, demand, or liability - not necessarily only after a court has made final findings about fault.

This is why some indemnities are drafted to include a duty to "indemnify and keep indemnified" the other party on demand (often subject to any claim notification and conduct requirements in the contract).

They Can Change Who Carries Insurance Risk

Indemnities frequently interact with insurance, but not always in the way you'd expect.

If you agree to indemnify someone, you're promising you'll pay. Your insurance might help, but only if:

• your policy covers that type of claim, and
• you've complied with the policy terms (including notification requirements), and
• there aren't exclusions that apply (for example, contractual liability exclusions).

That's why it's risky to assume "insurance will cover it" without checking your policy wording first (and ideally negotiating the contract so it matches what you're insured for).

Common Indemnities Small Businesses See (And What They Really Mean)

Most indemnities you'll see in NZ business contracts fall into a few recurring categories. Once you can recognise them, it's much easier to spot what's fair and what needs negotiating.

1. Third-Party Claims Indemnity

This is one of the most common forms:

• Example: You indemnify the other party for any claims made by third parties arising out of your services or products.

Why it matters: third-party claims are often the most expensive disputes (because they can involve lawyers, insurers, and multiple parties arguing about responsibility).

Risk to watch: "arising out of" is very broad. If you can, it's usually better to narrow it to claims "to the extent caused by" your breach or negligence.

2. Intellectual Property (IP) Infringement Indemnity

If you're providing branding, content, software, designs, or any materials, you may be asked to indemnify for IP infringement.

• Example: You indemnify the customer if your deliverables infringe someone else's copyright or trade mark.

This can be reasonable - but only if you actually control the IP you're supplying and you're not being asked to indemnify for things outside your control (like customer-supplied materials).

If your business deals in brand assets, it's also worth checking you've properly locked down ownership and permissions in your own contracts with creators and contractors. Where relevant, you might also consider whether you need an IP Assignment in place so you truly own what you think you own.

3. Negligence Or Misconduct Indemnity

You'll often see indemnities linked to negligence, fraud, or wilful misconduct.

These are commonly more acceptable because they're tied to wrongdoing. Still, you should check:

• how "negligence" is defined (if at all), and
• whether the indemnity is limited "to the extent" you caused the issue.

4. Compliance/Regulatory Indemnity

Some contracts include an indemnity that says you'll cover losses if you fail to comply with laws.

This can look harmless, but it can become wide-ranging quickly - especially if the clause is drafted to cover any non-compliance, even if the other party also contributed.

Depending on your business, this may touch areas like consumer law (for example obligations under the Fair Trading Act 1986 in trade around misleading conduct, and the Consumer Guarantees Act 1993 where goods or services are supplied to a "consumer" and the CGA hasn't been validly contracted out) or privacy law under the Privacy Act 2020 if personal information is involved.

5. Indemnities In Commercial Leases

If you lease premises, you may see indemnities relating to:

• damage to the premises
• injury occurring on-site
• your fit-out works and contractors
• your use of the property and compliance with permitted use clauses

These are worth careful attention because a lease risk can be large and long-term. If you're signing (or renewing) a lease, having it reviewed early can save a lot of pain later - a Commercial Lease Review can help you understand what liabilities you're actually taking on.

How To Negotiate Indemnities: Practical Ways To Reduce Your Risk

Indemnities aren't automatically "bad". The goal is to make sure they match what's fair for the deal you're doing, and what your business can realistically carry.

Here are practical ways to negotiate indemnities without turning the contract process into a battle.

Limit The Indemnity To What You Control

A good starting point is: you shouldn't be indemnifying the other party for risks you can't manage.

For example, if the customer provides specifications, content, images or instructions, your indemnity should ideally exclude losses caused by:

• customer-supplied materials
• customer directions (where you've warned them)
• unauthorised modifications by the other party

Add "To The Extent Caused By" Wording

If an indemnity reads like it makes you responsible for everything connected to a project (even where you weren't at fault), consider pushing for "to the extent caused by" your breach, negligence, or wrongful act.

This helps avoid the situation where you're paying for someone else's mistake.

Cap The Indemnity Amount (Or Link It To Insurance)

One of the most effective risk controls is a cap.

Common approaches include capping indemnity liability to:

• fees paid under the contract (e.g. the last 12 months? fees)
• a fixed dollar amount
• the amount recoverable under your insurance

Capping can be especially important if you're a service provider with limited margins - an uncapped indemnity could wipe out years of profit from a single claim.

Require Proper Claim Procedures

Indemnities can turn into a blank cheque if there are no rules about how a claim is handled.

You can often negotiate for:

• prompt notice of any claim
• the right to control or participate in the defence/settlement
• a requirement that the other party takes reasonable steps to mitigate (reduce) the loss

This is especially relevant in third-party claims and IP disputes, where decisions made early (like admissions of liability or settlement offers) can massively increase the cost.

Check How The Indemnity Interacts With Limitation Of Liability Clauses

Many contracts have a general limitation of liability clause, but then say something like: "The limitation does not apply to indemnities."

That carve-out can make the indemnity the real source of exposure, even when everything else looks capped.

If your contract includes a broad indemnity, you'll often want to check the limitation of liability position at the same time, so the overall risk allocation makes sense.

Make Sure Your Pricing Matches The Risk You're Taking On

This sounds obvious, but it's a common small business trap: you quote a fixed fee based on time and materials, then the contract shifts major liability onto you via indemnities.

If you're being asked to accept a higher-risk indemnity, you may need to:

• adjust your pricing, or
• adjust your scope, or
• adjust the indemnity wording.

Otherwise, you're effectively providing an insurance-like promise without being paid for it.

What If You're Asked To Give An Indemnity You Can't Accept?

Sometimes you'll be asked to give an indemnity that's genuinely not workable - for example, a clause that's unlimited, applies regardless of fault, and covers broad categories like "any loss arising out of the agreement".

If you're in that situation, you do have options.

Propose A More Balanced Clause

Indemnities are negotiable more often than people expect. Many contracts start with aggressive drafting and assume you'll negotiate.

As a starting point, you can propose a clause that is:

• limited to loss caused by your breach/negligence
• capped to a sensible amount
• subject to claim-handling procedures
• excluding indirect or consequential loss

Move The Risk Into Insurance Requirements Instead

Sometimes a counter-offer that works better is: rather than you indemnifying for everything, you agree to maintain certain insurance (public liability, professional indemnity, cyber, etc.).

This can feel more "real" because it matches an actual policy, rather than an open-ended promise.

Use The Right Agreement Structure So Obligations Are Clear

Indemnities are often messy when the underlying contract is unclear about scope, deliverables, and responsibilities.

If you're providing ongoing services, a well-structured Service Agreement (with a clear scope, responsibilities and risk allocation) can help stop indemnities being used as a catch-all for every possible issue.

And if you're supplying goods or services online, make sure your terms are clear about what you do and don't promise - proper Business Terms can help set boundaries around your obligations from day one.

Get Tailored Advice Before You Sign

Indemnities can be highly context-specific. A clause that's reasonable in one deal can be completely inappropriate in another (for example, a high-value construction job vs a small monthly marketing retainer).

If you're unsure, it's worth getting the contract reviewed and negotiated so you're not accidentally taking on risks that don't match your business model.

Key Takeaways

• Indemnities are contractual promises to cover losses or claims, and they're often the clauses that decide who pays when something goes wrong.
• Indemnities can be broader than standard breach-of-contract liability, and they can sometimes apply before fault is finally determined.
• Common indemnities in NZ business contracts include third-party claims, IP infringement, negligence/misconduct, regulatory compliance, and commercial lease indemnities.
• You can often manage indemnity risk by narrowing the wording ("to the extent caused by"), adding exclusions for things outside your control, setting claim-handling rules, and negotiating a sensible cap.
• Always check how indemnities interact with your limitation of liability clause and your insurance coverage - don't assume your policy automatically picks up every contractual promise.
• If an indemnity feels too risky, you can negotiate a more balanced clause, adjust pricing/scope, or get legal advice before signing.

Disclaimer: This article is general information only and doesn't take into account your specific situation. It isn't legal advice. If you'd like advice for your business, get in touch with a lawyer.

If you'd like help reviewing or negotiating indemnities in your business contracts, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.