Letter of Undertaking (LOU) in New Zealand

If you run a small business, there’s a good chance you’ll come across a letter of undertaking at some point - especially when you’re negotiating a deal quickly, trying to resolve a dispute, or needing written assurance that something will be done.

A letter of undertaking (often shortened to an LOU) can be a practical business tool. But it can also become a headache if it’s vague, signed by the wrong person, or accidentally creates a binding commitment you didn’t intend to make.

Below, we’ll break down what a letter of undertaking is in New Zealand, when it’s commonly used in business, and how to draft one in a way that actually protects you.

What Is A Letter Of Undertaking?

A letter of undertaking is a written promise (or assurance) that a person or business will do (or not do) certain things.

It usually sits somewhere between an informal email promise and a fully negotiated agreement. In practice, it’s often used when:

you need something in writing quickly;
you want clarity about what will happen next;
a third party (like a landlord, bank, supplier, or regulator) wants a firm commitment; or
there’s a dispute and one party needs reassurance that the other party will follow through.

Importantly, an LOU may be legally binding depending on how it’s written and the circumstances around it.

That’s why it’s worth treating an LOU as a legal document - even if it’s “only” a letter. If you’re unsure whether a particular LOU will bind you, it can help to sanity-check it against the usual principles of what makes a contract legally binding.

Is A Letter Of Undertaking The Same As A Contract?

Not always - but it can operate like one.

A contract usually involves:

an offer and acceptance;
clear terms;
an intention to create legal relations; and
consideration (something of value exchanged), unless it’s structured as a deed.

A letter of undertaking sometimes contains all of those elements (even unintentionally). Other times, it’s more of a statement of intent or reassurance.

From a business perspective, the safest mindset is: assume the other party may try to enforce it if things go sideways.

Is A Letter Of Undertaking A Deed?

Generally, no. A deed is a specific type of legal instrument with its own formality requirements. However, in some situations an undertaking may be set out in the form of a deed (for example, where there may not be consideration), and this usually involves more formal execution requirements.

If you need something more formal, or you’re settling a dispute, you may be better off with a deed-style document such as a Deed of Settlement rather than an informal undertaking.

When Do Small Businesses Use A Letter Of Undertaking?

In day-to-day commercial life, LOUs pop up in more situations than you might expect. Here are common examples we see for New Zealand businesses.

1) Resolving A Dispute Without Going “Full Legal”

Imagine a customer complaint, a late delivery issue, or a quality dispute with a supplier. The parties may not want to draft a full settlement agreement immediately, but they do want something in writing that says:

what will be done to fix the issue;
when it will be done; and
what happens once it’s done (for example, the matter is considered resolved).

This is where an LOU is often used as a “bridge” document - but you still need to be careful. If the dispute is serious (or money is involved), it’s often safer to move straight to a proper settlement document.

2) Confirming A Temporary Arrangement While Contracts Are Finalised

Small businesses often need to start moving before the full paperwork is signed. For example:

you’re starting work for a new client, but the full scope is still being refined;
a supplier needs you to confirm you’ll pay on certain terms;
a landlord agrees to a temporary arrangement while the lease is negotiated.

A letter of undertaking can confirm the interim position.

That said, if you’re effectively documenting an ongoing commercial relationship, you may be better protected by a tailored Service Agreement (or customer contract) rather than relying on a short letter that may leave key terms unclear.

3) Lease And Property Commitments

In a leasing context, a business might give an undertaking to:

complete certain fit-out works by a deadline;
repair damage at the end of a tenancy;
remove signage or reinstate premises; or
provide a bond, guarantee, or other security by a set date.

Because commercial leases can be high-stakes (and expensive to get wrong), it’s important that any undertaking matches your actual lease obligations and doesn’t add unexpected extra commitments.

4) Finance, Credit, And Supplier Accounts

When you’re applying for trade credit or finance, you might be asked to provide a written undertaking about things like:

how you’ll use funds;
providing financial information by set dates;
not taking on additional debt without consent; or
maintaining insurance.

These can be perfectly reasonable in context - but once they’re in writing, they can become a compliance obligation you’ll need to track.

5) Privacy And Data Handling Promises

If your business collects customer information, uses mailing lists, operates online, or shares data with suppliers, you may be asked to provide written assurances about how you handle data.

In New Zealand, the Privacy Act 2020 is a key piece of law that governs how personal information is collected, stored, used, and disclosed.

Sometimes, a counterparty will ask for an undertaking that you comply with privacy obligations (or that you’ll notify them of a data breach). This can tie into (or be supported by) your Privacy Policy.

Is A Letter Of Undertaking Legally Binding In New Zealand?

An LOU can be legally binding if it has the features of an enforceable agreement.

Courts and tribunals generally look at substance over labels - meaning calling something a “letter of undertaking” doesn’t automatically make it informal or unenforceable.

Key Factors That Influence Enforceability

While every situation is different, the following factors often matter:

Intention: Does the wording (and the surrounding context) suggest you intended to create a legal obligation?
Clarity: Are the obligations clear enough to be enforced (what, when, how)?
Consideration: Is there an exchange of value, or is it structured as a deed if needed?
Certainty and completeness: Are essential terms included, or is it too vague?
Authority: Was it signed by someone with authority to bind the business?

Sometimes businesses get caught out when an LOU is written “casually”, but includes firm promises, strict deadlines, and consequences - which makes it look very much like a contract.

What If You Want The Undertaking To Be Non-Binding?

If your goal is to provide reassurance without creating a binding legal obligation, you need to be explicit - and you need to be consistent.

For example, you might include wording such as “this letter is provided as a statement of current intention only and is not intended to be legally binding”. But even then, non-binding language isn’t always a magic shield if the rest of the document reads like a contract.

If the stakes are meaningful (money, reputation, ongoing work), it’s usually better to get the structure right from the start rather than relying on “non-binding” labels.

What Should A Letter Of Undertaking Include?

A good letter of undertaking should be short enough to be practical, but detailed enough to avoid disputes later.

As a starting point, most LOUs for small businesses include the following sections.

1) Parties And Background

Full legal names of the parties (company name, NZBN if relevant, address).
A short background paragraph explaining the context for the undertaking.

Tip: This is where you want to prevent misunderstandings about why the letter exists.

2) The Undertaking (The Actual Promise)

This is the core of the letter. Be precise.

What exactly will you do (or not do)?
What is the deadline?
Are there any conditions that must be met first?
What does “completion” look like (for example, written confirmation, delivery, payment received)?

If there are multiple steps, a numbered list helps a lot.

3) Timeframes And Method Of Performance

Many LOUs fail because they say things like “as soon as possible” or “in due course”. That’s a recipe for disagreement.

Instead, use:

specific dates;
specific business days; and
clear methods (for example, “payment will be made by bank transfer to [account]”).

If your undertaking needs flexibility (for example, supply chain delays), you can include a mechanism for extensions or variations - and link it to how changes are documented (for example, in writing signed by both parties). In some cases, a more formal Deed of Variation may be appropriate if you’re changing existing contractual obligations.

4) Limitations, Assumptions, And Carve-Outs

This is where you protect your business from accidentally promising too much.

Depending on the context, you might clarify:

what is not included in the undertaking;
any assumptions you’re relying on (for example, access to the site, customer cooperation, delivery of materials);
who bears third-party costs;
any cap on your responsibility (where appropriate).

Be careful with limitation language - it should align with any existing agreements and consumer law obligations (including the Fair Trading Act 1986 and the Consumer Guarantees Act 1993 where they apply).

5) What Happens If The Undertaking Isn’t Met?

This can feel awkward to include, but it’s often the difference between a useful document and a meaningless one.

Options include:

a right for the other party to terminate an interim arrangement;
an obligation to pay costs or rectify;
an escalation process (for example, negotiation meeting within 5 business days); or
referring the dispute to mediation.

Be cautious about including penalties or overly aggressive consequences without advice - they can create enforceability problems or commercial blowback.

6) Governing Law And Jurisdiction

If you’re operating in New Zealand, you’ll typically state the undertaking is governed by New Zealand law.

7) Signature And Authority

An undertaking is only as strong as the signature on it.

Make sure the person signing has authority to bind the business (for example, a director or properly authorised manager).
Use the correct entity name (especially if you operate through multiple companies).

Sometimes, the other party may ask for a witness, or it may be required if the undertaking is being executed as a deed. Whether witnessing is necessary (and how it can be done) depends on the document and how it’s signed. If you’re unsure, it’s worth checking who can witness a signature in New Zealand, and whether electronic witnessing of documents is appropriate for your situation.

How To Draft A Letter Of Undertaking (Step-By-Step)

If you need to draft a letter of undertaking for your business, here’s a practical process you can follow.

Step 1: Be Clear On Your Goal (And What You’re Not Agreeing To)

Before you start writing, ask yourself:

What outcome do we need from this letter?
Is it interim (until a contract is signed) or final (to conclude a matter)?
What risks are we trying to manage?

This matters because an LOU that tries to do “everything” often ends up being unclear and risky.

Step 2: Write The Undertaking In Plain English

Use simple, operational wording. Your future self should be able to read it and immediately know what needs to happen.

For example:

“We will pay the outstanding invoice of $X (incl GST) by [date].”
“We will remove all stock and rubbish from the premises by 5pm on [date].”
“We will provide the requested documents by email to [address] by [date].”

If your obligations depend on something else happening first, spell that out as a condition.

Step 3: Sanity-Check For Accidental Commitments

This is where many LOUs go wrong. Read it again and look for:

open-ended promises (“ensure satisfaction”, “guarantee outcomes”);
undefined terms (“reasonable”, “promptly”, “all necessary steps”);
commitments that conflict with your existing agreements; and
commitments that your team can’t realistically deliver.

If you’re unsure, getting a quick legal review can save you from signing something you’ll regret later. For example, if the undertaking is tied to a broader commercial deal, a Contract Review can help make sure it lines up with your other documents and your real-world operations.

Step 4: Confirm Who Should Sign It

From a risk perspective, you want the signature to be:

valid (signed by the correct entity); and
authorised (signed by someone who can bind that entity).

If your business is a company, consider what execution method you’ll use (for example, signing in accordance with your constitution and the Companies Act 1993) and whether any internal approvals are needed.

Step 5: Decide What Document You Actually Need

Sometimes an LOU is the right tool. Sometimes it isn’t.

For example:

If you’re documenting an early-stage commercial deal, a Heads Of Agreement may fit better.
If you’re finalising ongoing service terms, a proper service agreement is often safer.
If you’re settling a dispute with releases and confidentiality, a deed of settlement may be the better fit.

Choosing the right document upfront can save you the pain of trying to “patch” a letter later.

Key Takeaways

A letter of undertaking is a written promise that a person or business will do (or not do) certain things - and in New Zealand it can be legally binding depending on how it’s drafted and used.
Small businesses commonly use LOUs for disputes, interim arrangements, leasing and property issues, credit and supplier commitments, and privacy/data handling assurances.
A strong LOU clearly identifies the parties, sets out specific obligations and deadlines, and includes practical limitations and assumptions to avoid overpromising.
Signature authority matters - if the wrong person signs (or the wrong entity is named), enforceability and risk can become a real issue.
If the matter is significant, consider whether you need a more suitable document (like a heads of agreement, service agreement, or deed) and get a legal review before you sign.

This article is general information only and does not constitute legal advice. If you’d like help drafting or reviewing a letter of undertaking (or working out whether it should be a different document entirely), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.

Letter Of Undertaking (LOU) In New Zealand: Meaning, Uses And Drafting