Indemnity Clause Example: Drafting Clear, Enforceable Terms for New Zealand Businesses

An indemnity clause can shift serious financial risk from one party to another, so the wording matters more than many founders realise. The common mistake is copying a broad indemnity clause example from overseas, accepting a supplier’s standard wording without reading the carve-outs, or using language so vague that no one is sure what losses are actually covered. Another regular issue is treating an indemnity like a general statement about liability, when it can operate much more aggressively than an ordinary damages claim.

If you are reviewing a contract before you sign, this guide explains what an indemnity clause example really means in a New Zealand business context, what to look for in the wording, where founders often get caught, and how to draft clearer, more enforceable terms. The aim is not to make every indemnity as wide as possible. It is to make the allocation of risk clear, commercially sensible, and less likely to create an ugly dispute later.

Overview

An indemnity is a contractual promise that one party will cover certain losses, costs, or claims suffered by the other. In practice, it can dramatically affect who pays when something goes wrong, especially in supply, services, technology, distribution, and contractor agreements.

A useful indemnity clause example should clearly define the trigger event, the kinds of loss covered, any limits or exclusions, and the process for handling third party claims. Clear drafting reduces the chance of argument and helps both sides price the risk properly before they sign.

• Identify exactly what event triggers the indemnity.
• Specify whose losses are covered and whether third party claims are included.
• Define the types of loss covered, such as direct loss, legal costs, remediation costs, or regulatory penalties where appropriate.
• Check whether the indemnity is capped, uncapped, or tied to the contract value.
• Look for carve-outs, including losses caused by the other party’s negligence, misconduct, or breach.
• Set out notice, control of defence, settlement, and cooperation steps for claims.
• Make sure the clause works with the rest of the contract, especially liability limits, warranties, insurance obligations, and termination rights.

What Indemnity Clause Example Means For New Zealand Businesses

An indemnity clause example is only useful if it reflects the actual risks in your deal and the way New Zealand contracts are interpreted. A clause that looks standard can still expose your business to open-ended liability if it is drafted too broadly or sits awkwardly with the rest of the agreement.

At a basic level, an indemnity says one party will compensate the other for certain defined losses. That sounds simple, but the legal effect can be stronger than a normal claim for breach of contract. In some cases, an indemnity may let the beneficiary recover losses without needing to prove all the same things they would in an ordinary damages claim, depending on the wording and the surrounding contract.

That is why businesses should read indemnities slowly, especially before they accept the provider’s standard terms or send out a contract template to customers or contractors.

How an indemnity differs from ordinary liability

Ordinary liability usually follows a breach of contract, negligence, or another recognised legal wrong. An indemnity is different because the parties agree in advance that one side will bear specified losses if a particular event occurs.

For example, a software provider might indemnify a customer against third party claims that the software infringes intellectual property rights. A cleaning contractor might indemnify a client for property damage caused by the contractor’s staff. A distributor might indemnify a manufacturer for claims arising from the distributor’s unauthorised marketing statements.

Each of those examples allocates a specific risk to the party best placed to control it. That is the commercial purpose of a well-drafted indemnity.

Where indemnities commonly appear

New Zealand businesses often see indemnity wording in:

• service agreements
• supply and distribution contracts
• software and SaaS terms
• contractor agreements
• confidentiality and intellectual property arrangements
• leases and property-related commercial documents
• share sale and business sale agreements

The subject matter changes, but the drafting questions are similar. What risk is being covered, who controls that risk, and how far does the promise extend?

A practical indemnity clause example

A simple indemnity clause example might read like this:

"The Supplier indemnifies the Customer against any direct loss, liability, damage, cost, and reasonable legal expense suffered or incurred by the Customer arising from any third party claim that the Services infringe that third party’s intellectual property rights in New Zealand, except to the extent the claim arises from materials supplied by the Customer or use of the Services outside the agreed scope."

This example works better than a vague one because it identifies:

• the party giving the indemnity, being the Supplier
• the party protected, being the Customer
• the trigger, being a third party intellectual property claim
• the types of loss covered
• the carve-outs, where the customer caused or contributed to the problem

Even so, this clause may still need more detail. The parties may want to deal with claim notification timeframes, control of the defence, settlement approval, a liability cap, or an obligation for the supplier to modify or replace the services.

How New Zealand context affects drafting

New Zealand contract law generally allows commercial parties to allocate risk by agreement, but courts will still look closely at the wording used. If the clause is ambiguous, overly broad, inconsistent with another part of the contract, or unfairly surprising in context, disputes become more likely.

Statutory obligations may also affect the practical operation of your contract. Depending on the transaction, laws such as the Contract and Commercial Law Act 2017, the Fair Trading Act 1986, the Consumer Guarantees Act 1993, the Privacy Act 2020, or sector-specific rules may matter. An indemnity does not automatically erase those obligations. It mainly decides who carries the financial consequences between the contracting parties.

For SMEs, that means a copied overseas clause can create false confidence. The safer approach is to draft for the actual New Zealand deal in front of you.

Legal Issues To Check Before You Sign

The safest time to fix an indemnity is before you sign, not after a claim lands on your desk. The main legal question is whether the clause clearly allocates a defined business risk without creating wider exposure than either party intended.

1. What exactly triggers the indemnity?

The trigger should be precise. If the clause says the indemnity applies to losses arising "in connection with" the agreement, that may be far broader than necessary.

Better drafting ties the indemnity to identifiable events, such as:

• breach of confidentiality
• intellectual property infringement claims
• property damage caused by a contractor
• misuse of personal information
• death, injury, or loss caused by negligent acts in performing the services

The broader the trigger, the harder it becomes to predict exposure or price the contract properly.

2. What losses are covered?

Do not assume the meaning is obvious. A clause should state whether it covers only direct losses or also includes indirect loss, lost profits, legal costs, investigation costs, remediation expenses, or settlement amounts.

This is where founders often get caught. One sentence may seem harmless until you realise it potentially covers every downstream consequence of a problem, even losses that are difficult to measure or control.

If you want clarity, the contract should spell out the categories of recoverable loss in a way that matches the commercial deal.

3. Is the indemnity capped or uncapped?

An uncapped indemnity can create disproportionate risk, especially in lower-value contracts. Many SMEs accept an uncapped indemnity in standard terms without realising they have taken on liability far beyond the fees they will ever earn under the agreement.

Common approaches include:

• a financial cap linked to the contract value or fees paid in a defined period
• a higher cap for certain serious risks, such as confidentiality or privacy breaches
• an uncapped indemnity only for very specific matters, such as fraud or deliberate misconduct

There is no single right answer, but the cap should reflect the seriousness of the risk and the party’s ability to control it.

4. Are there sensible carve-outs?

An indemnity should not usually cover losses caused by the beneficiary’s own acts or omissions. If the other party contributed to the problem, changed your product, ignored your instructions, or made unauthorised statements, the clause should say how that affects liability.

Useful carve-outs often address:

• the other party’s negligence or wilful misconduct
• breach of the contract by the other party
• modifications made without approval
• use outside agreed specifications
• materials, data, or instructions supplied by the other party

5. Who controls third party claims?

If the indemnity covers third party claims, procedure matters. Without a process, one party may settle too quickly, fail to defend properly, or incur costs the indemnifying party thinks were avoidable.

The contract should usually deal with:

• how quickly notice must be given
• what information must be provided
• who controls the defence
• whether the other party must cooperate
• whether settlements require written consent

This part is easy to overlook before you sign, but it often decides how expensive a claim becomes.

6. Does it fit with the rest of the contract?

An indemnity should never be read in isolation. Check how it interacts with limitation of liability clauses, warranties, termination rights, insurance obligations, confidentiality terms, privacy provisions, and dispute resolution wording.

For example, a contract may contain a general liability cap and then state that indemnity claims are excluded from that cap. If you miss that sentence, your apparent protection may disappear. Another common issue is where the warranty regime overlaps with the indemnity, creating confusion about which remedy applies.

7. Is the risk insurable?

If you are agreeing to give an indemnity, ask whether your existing insurance actually covers it. Public liability, professional indemnity, cyber, statutory liability, and product liability policies all have limits and exclusions.

A clause that looks manageable on paper may become dangerous if the insured position does not match the contract. Before you sign a major agreement, confirm the risk allocation aligns with your insurance programme and the reality of your business operations.

Common Mistakes With Indemnity Clause Example

The biggest mistake is treating an indemnity clause example as a plug-and-play paragraph. Good indemnities are tailored to the deal, the industry, and the specific risk each party can control.

Copying generic wording from another contract

A founder might lift a clause from an old software agreement and drop it into a manufacturing contract or contractor arrangement. The language may mention intellectual property claims, but ignore property damage, health and safety risks, delivery failures, or misuse of confidential information.

That creates two problems. The indemnity may miss the real risk, and it may include irrelevant wording that causes confusion later.

Using catch-all language

Phrases like "any and all loss arising out of or in connection with the agreement" sound protective, but they often create more argument, not less. The other party may push back hard in negotiations, and if a dispute arises, the breadth of the wording becomes the fight.

Specific drafting is usually stronger than dramatic drafting. Narrowly defined indemnities are easier to understand, defend, and enforce.

Ignoring reciprocal risk

Many agreements only focus on risks one side wants covered. In reality, some contracts call for mutual indemnities. For example, each party may need to indemnify the other for breaches of confidentiality, privacy obligations, or misuse of the other’s intellectual property.

If the contract only protects one side, ask whether that reflects the real allocation of control and responsibility.

Forgetting statutory and compliance issues

An indemnity is not a magic fix for legal compliance. If your business collects customer data, makes advertising claims, or supplies services subject to statutory standards, the main risk may start with compliance failures rather than the indemnity wording itself.

For example:

• a privacy-related indemnity should line up with how personal information is actually collected, stored, and shared
• a marketing indemnity should reflect obligations under the Fair Trading Act if one party is making representations on the other’s behalf
• a services indemnity should be considered alongside any guarantees or non-excludable rights that may apply

The contract should support compliant business practices, not try to paper over them.

Leaving legal costs undefined

Parties often assume legal costs will be recoverable, then discover the clause is unclear. If legal fees matter, say so. It is common to refer to reasonable legal costs or full costs connected with investigating, defending, and settling covered claims, but the wording should be deliberate.

Without clarity, this part can become an avoidable argument after the event.

Accepting uncapped indemnities in supplier terms

Small businesses regularly accept supplier or platform terms on a take-it-or-leave-it basis. The indemnity may require your business to cover all claims arising from your use of the service, your content, your data, your employees, and your customers, with no meaningful cap.

Before you accept the provider’s standard terms, compare the indemnity against:

• the fees you are paying
• the value you expect from the contract
• the level of control you actually have over the relevant risk
• the insurance you hold

If the exposure is out of proportion, it may be worth negotiating even if the rest of the contract looks standard.

Relying on verbal assurances

A supplier may say, "We never enforce that clause" or "It is only there for major issues." That kind of reassurance is not enough. If the written contract gives them a broad indemnity, that is what matters when the relationship sours or ownership changes.

Before you rely on a verbal promise, get the wording changed in the document itself.

FAQs

Is an indemnity clause always enforceable in New Zealand?

Not automatically. Enforceability depends on the wording, the context, the rest of the contract, and any relevant legal limits. Clear, specific clauses in commercial agreements are more likely to work as intended than vague or inconsistent ones.

What is a fair indemnity clause for a small business?

A fair clause usually covers a defined risk the indemnifying party can control, includes sensible carve-outs, and has a proportionate cap where appropriate. Fairness depends on the deal, bargaining power, industry risk, and insurance position.

Should an indemnity include indirect or consequential loss?

Usually, that needs careful thought rather than automatic inclusion. Many businesses try to exclude indirect or consequential loss unless there is a strong reason to include it for a specific risk.

Can an indemnity override a limitation of liability clause?

Sometimes, yes, if the contract says indemnity claims are excluded from the liability cap or subject to a different cap. Always read the indemnity alongside the limitation of liability provisions before you sign.

Do I need a lawyer to draft or review an indemnity clause example?

For low-risk, low-value contracts, a simple tailored clause may be enough. For major customer contracts, supplier terms, technology deals, privacy-heavy arrangements, or any agreement with uncapped liability, a contract review is usually worthwhile.

Key Takeaways

• An indemnity clause example is only helpful if it is tailored to the actual commercial risk in your contract.
• Clear drafting should identify the trigger event, the parties covered, the kinds of loss included, and any claim procedure.
• Before you sign, check caps, carve-outs, third party claim handling, and how the indemnity interacts with the rest of the agreement.
• Broad generic wording can create open-ended exposure that is out of proportion to the value of the deal.
• New Zealand businesses should make sure indemnities align with insurance, compliance obligations, and the realities of how the business operates.
• Written wording matters more than verbal assurances, especially in supplier and platform terms.

If you want help with contract drafting, liability caps, carve-outs, and supplier agreement negotiations, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.