Indemnity Clauses In NZ Commercial Contracts: How To Cap Your Risk

If you’re running a small business, there’s a good chance you’ve been asked to sign a contract with an indemnity in it - maybe in a supplier agreement, a services contract, a lease, or a set of terms and conditions.

Indemnity clauses can be useful. They can also be a quiet “risk bomb” if they’re drafted too broadly (or if you agree to someone else’s standard terms without negotiating).

This guide breaks down indemnity clauses in commercial contracts in plain English, with practical ways to cap and control your risk before you sign.

Note: This article is general information only. Indemnities are highly dependent on context (industry, bargaining power, insurance, and what you’re actually doing). If you’re not sure, it’s worth getting tailored advice before committing.

What Is An Indemnity Clause (And Why Does It Matter In Commercial Contracts)?

An indemnity clause is a contract term where one party promises to cover the other party’s losses in certain circumstances.

In practice, it usually means:

• If something goes wrong and the other party suffers a loss, you reimburse them (or they reimburse you),
• even if the loss is caused by a third party (like a customer, subcontractor, or regulator), and
• sometimes even if the loss is not entirely your fault (depending on wording).

This is why indemnity clauses in commercial contracts matter so much: they can shift the financial burden of disputes and claims - and the amounts can be significant.

Indemnities vs Limitation Of Liability (They’re Not The Same)

Small businesses often focus on the “limitation of liability” clause and miss the indemnity. That’s risky, because an indemnity can effectively override or side-step a liability cap if the contract isn’t drafted carefully.

Think of it like this:

• Limitation of liability: “If we’re liable, our liability is capped.”
• Indemnity: “If you suffer certain losses, we’ll pay you back for them.”

To keep your risk under control, the indemnity and the limitation of liability need to work together (not against each other).

Where You’ll Commonly See Indemnity Clauses

Indemnity clauses in commercial contracts pop up everywhere, including:

• customer service agreements (especially B2B services)
• supply and distribution deals
• construction and trade contracts (including subcontracting)
• leases (including repair and damage obligations)
• software / SaaS agreements (especially privacy and IP risks)
• marketing and agency arrangements

If you’re using standard terms, it’s worth checking how your indemnity sits alongside your broader Business Terms and whether the risk allocation still makes sense for what you actually do day-to-day.

What Makes Indemnity Clauses “High Risk” For Small Businesses?

Not every indemnity is a problem. The issue is when the drafting creates obligations that are:

• too broad (covers losses you can’t control),
• uncapped (no maximum dollar amount),
• one-sided (you indemnify them, but they don’t indemnify you), or
• disconnected from insurance (you’re taking on risks your policy won’t cover).

Red Flags To Watch For In An Indemnity Clause

Here are common red flags we see in Australian commercial contracts:

• “All loss” or “any loss” language: this can include indirect or unexpected costs.
• Indemnity for “consequential loss”: this can blow out exposure (lost profits, lost opportunity, business interruption claims) - and what counts as “consequential” can be context-specific unless the contract defines it clearly.
• No link to breach/negligence: you might be indemnifying them even if you did nothing wrong.
• Indemnity for their own acts/omissions: wording that effectively protects them from their own mistakes.
• Indemnity for regulatory penalties: this can be tricky (and may not be insurable or appropriate to shift, depending on the type of penalty and the circumstances).
• No control of defence: they can run the dispute/claim however they like and send you the bill.

Why Broad Indemnities Are Especially Dangerous When You’re Scaling

When you’re small, one dispute can be a major cashflow shock. When you’re growing, broad indemnities can become a recurring risk because your contracts multiply (more customers, more suppliers, more projects).

And if you ever plan to sell the business, uncapped or unusual indemnity exposures can come up during due diligence and affect your sale terms. This is one of those “legal foundations” issues that’s worth cleaning up early rather than later.

How To Cap Risk: Practical Ways To Negotiate Indemnity Clauses

If you’re trying to keep your risk under control (without killing the deal), the best approach is usually to negotiate a few key “guardrails”.

Here are practical levers you can use to cap indemnity risk in commercial contracts.

1) Limit The Indemnity To Specific, Realistic Scenarios

Start by asking: What is the indemnity actually meant to protect against?

Good indemnities are usually narrow and linked to clear categories, such as:

• third party claims caused by your breach of contract
• personal injury or property damage caused by your negligence
• IP infringement relating to materials you supplied (where you can genuinely stand behind ownership/rights)
• privacy breaches caused by your systems or actions (where you’re handling customer data)

If the indemnity reads like “you indemnify us for everything connected to the agreement”, it’s worth pushing back and narrowing it.

2) Tie The Indemnity To Fault (Breach, Negligence, Or Misconduct)

A common negotiation point is to ensure the indemnity only applies where the loss arises from:

• your breach of contract,
• your negligence, or
• your unlawful or wilful misconduct.

This helps avoid “strict liability” outcomes where you pay even though the other party contributed to the problem.

3) Exclude Consequential Loss (Or Define It Properly)

“Consequential loss” is one of those terms that can cause confusion and disputes.

If you’re agreeing to an indemnity, you’ll often want to exclude consequential loss from the indemnity (and from liability generally), or at least define it clearly so both sides understand what’s in/out.

If you’re drafting your own contract, it can help to align the indemnity with a broader limitation of liability strategy so your risk controls aren’t working at cross purposes.

4) Put A Dollar Cap On The Indemnity (And Make Sure It Actually Applies)

One of the most effective ways to cap risk is to set a clear maximum amount payable under the indemnity.

Common cap options include:

• fees paid under the contract (e.g. “total fees paid in the last 12 months”)
• a multiple of fees (e.g. “1x or 2x the fees”)
• insurance limit (e.g. “up to the amount recoverable under our insurance policy”)
• a fixed amount (e.g. $50,000 or $250,000 depending on the project)

Important: some contracts have a liability cap clause, but the indemnity is drafted as “uncapped” or “separate”. Don’t assume a general cap automatically limits the indemnity - it depends on how the clauses are written.

5) Add A “Duty To Mitigate” And A Notification Requirement

Reasonable indemnity clauses often require the party claiming under the indemnity to:

• notify you promptly of a claim, and
• take reasonable steps to minimise the loss (mitigate).

This is practical risk control. If you only find out about a claim months later (after costs have piled up), you’re in a much weaker position to manage it.

6) Control The Defence Of Third Party Claims

If the indemnity covers third party claims (a common scenario), you’ll often want clauses that say:

• you can take over the defence and settlement (with reasonable consultation), and
• the other party can’t admit liability or settle without your consent.

This can stop a situation where the other party “over-settles” or racks up legal costs and simply invoices you.

7) Make The Indemnity Mutual Where Appropriate

In a fair commercial deal, each party should generally carry risk for what they control.

So if you’re indemnifying them for losses caused by your breach, it may be reasonable for them to indemnify you for losses caused by their breach as well (especially if they control key inputs or compliance obligations).

This is common in collaboration-style deals, including joint projects or shared responsibilities. If you’re entering a more complex arrangement, having a clear Collaboration Agreement can help set balanced risk allocation from the start.

How Indemnity Clauses Interact With Australian Law (What You Can’t Ignore)

Even in “commercial” agreements, you can’t draft in a vacuum. In Australia, the enforceability and impact of indemnity clauses can be affected by several legal frameworks.

Australian Consumer Law (Misleading Or Unfair Conduct Issues)

The Australian Consumer Law (ACL) is relevant if contracting behaviour involves misleading or deceptive conduct, false representations, or unfair practices.

While the ACL isn’t “about indemnities” specifically, it can become relevant if one party is pressured into signing something based on inaccurate representations, or if contract terms are presented in a way that’s misleading.

In practical terms: make sure the indemnity reflects the real commercial understanding of the deal, not just buried wording in a template.

Unfair Contract Terms (Standard Form Contracts)

If you’re dealing on a standard form contract, the ACL’s unfair contract terms regime may apply (particularly for many small business contracts, depending on the parties and the contract value).

Indemnities can be a red flag here if they create a significant imbalance, go beyond what’s reasonably necessary to protect legitimate interests, and would cause detriment if relied on. Even if the regime applies, it doesn’t mean every indemnity is “unfair” - but it is a strong reason to keep indemnities targeted and proportionate.

Contract Interpretation Still Applies (Drafting Clarity Matters)

General contract law principles still matter in the background - particularly around interpretation and remedies.

This is one reason “indemnify and keep indemnified against any and all losses” can be dangerous: the broader and less precise the drafting, the more room there is for dispute over meaning (and the more leverage the counterparty may have).

Privacy Act 1988 (If Your Indemnity Touches Customer Data)

If your contract includes an indemnity for privacy breaches, you should check your actual privacy obligations under the Privacy Act 1988 (Cth).

For example, if you collect customer information or handle personal data for a client, your contract may require you to indemnify them for privacy complaints, investigations, or data breaches.

In that situation, your risk control shouldn’t be limited to the indemnity clause alone. You’ll also want your operational practices and documents to line up - including a fit-for-purpose Privacy Policy if you’re collecting information online or through your systems.

When “Everything Is On You” Drafting Is A Problem

Some indemnities try to shift liability in ways that are commercially unrealistic - such as making one party responsible for all outcomes regardless of cause.

Depending on the context, extreme risk shifting can be limited by statutory regimes, public policy, or other contract principles - and even where it’s technically enforceable, it can still be a bad business decision if it exposes you to losses that are:

• not priced into your fees,
• not within your control, or
• not insurable.

If the other party insists on heavy risk transfer, it may be a sign you need to re-price the deal, adjust the scope, or walk away.

Indemnities In Real-World Deals: Suppliers, Clients, Contractors, And Leases

Indemnity clauses can look different depending on what kind of business deal you’re doing. Here are a few common commercial situations where we see indemnities cause problems (and how to approach them).

Supplier And Distribution Relationships

If you supply products (or distribute someone else’s products), indemnities often relate to:

• product defects or recalls
• compliance with product standards and labelling
• consumer claims
• IP infringement (branding, packaging, designs)

In these deals, it’s important to ensure the indemnity matches who controls the risk. For example, if the manufacturer controls the design and production, it may be more appropriate for them to indemnify you for manufacturing defects - while you indemnify them for issues caused by your marketing or storage.

Service Providers And Client Contracts

For service-based businesses, indemnities are commonly linked to:

• professional negligence allegations
• third party claims arising from your deliverables
• breach of confidentiality
• privacy and cyber incidents

If you’re providing ongoing services, make sure your core Service Agreement clearly defines scope, deliverables, and what you’re responsible for - because indemnity risk often expands when scope is vague.

Subcontracting And Labour Hire

Indemnities in subcontractor arrangements can be particularly tricky because claims can come from the head contractor, the principal, and third parties on site.

Common issues include:

• you indemnify the head contractor for everything, even if their site management caused the issue
• you indemnify for “all acts and omissions” of everyone you engage (including where you don’t control them day-to-day)
• the indemnity doesn’t match your insurance (or requires cover you don’t have)

If you regularly engage subcontractors, a tailored Sub-Contractor Agreement can help you flow down the right obligations (and avoid you being the only party left holding the bag).

Commercial Leases And Property Deals

Commercial leases can include indemnities for damage, outgoings, fit-outs, and third party claims on the premises.

Because lease terms are often non-negotiable (or feel that way), it’s especially important to understand exactly what you’re agreeing to - and whether it’s consistent with your insurance and how you operate day-to-day.

If you’re signing a lease, it’s often worth getting a Commercial Lease Review so you can spot any indemnities that expose you to unusual or unlimited liability.

Key Takeaways

• Indemnity clauses in commercial contracts can shift significant financial risk to your business, so it’s worth reviewing them carefully before you sign.
• High-risk indemnity clauses are usually broad, uncapped, one-sided, or not linked to fault (meaning you may pay even when you didn’t cause the issue).
• You can cap risk by narrowing what the indemnity covers, linking it to breach or negligence, excluding (or clearly defining) consequential loss, and adding a clear dollar cap.
• Practical guardrails like notification requirements, a duty to mitigate, and control of third party claim defence can prevent costs from escalating.
• Indemnities should align with your insurance coverage and your other contract protections, especially your limitation of liability clauses.
• If the contract is a standard form small business contract, consider whether Australia’s unfair contract terms regime is relevant - and avoid indemnities that are disproportionate to the actual risk.
• If your indemnity touches privacy or customer data, make sure your contract position matches your obligations under the Privacy Act 1988 and your internal processes.

If you’d like help reviewing or negotiating an indemnity clause (or putting the right commercial contracts in place so you’re protected from day one), you can reach us at 02 8096 7510 or team@sprintlaw.com.au for a free, no-obligations chat.