Can I Refuse To Sign An Unlimited Indemnity?

Can you refuse to sign an unlimited indemnity? Yes, you can. You don't have to accept a contract just because it's been put in front of you, and it's completely reasonable to push back if the risk feels out of proportion to the job.

An indemnity can be a normal part of doing business. The problem is when it's drafted so broadly that your business could be on the hook for losses you didn't cause, losses you couldn't control, or amounts far beyond your fees.

If you're staring at a clause that says you indemnify the other party for all losses, claims, costs and expenses, it's worth slowing down before you sign. A few carefully worded changes to the indemnity clause can make the contract much more balanced.

Can I Refuse To Sign An Unlimited Indemnity?

Yes, you can refuse to sign an unlimited indemnity, and you can ask for it to be narrowed before you agree to the contract.

In New Zealand, commercial parties generally have freedom to negotiate their contracts. That means the other party can ask for an indemnity, but you can also say no, ask questions, or propose a fairer version.

This is especially common where you're a supplier, consultant, contractor, agency, SaaS provider or service business. Your customer may send over their standard terms or customer contract, and those terms may be designed to shift as much risk as possible onto you.

That doesn't mean the clause is always reasonable for your deal.

An unlimited indemnity can expose your business to liability that isn't linked to:

• the fees you're being paid
• your actual fault or negligence
• your insurance cover
• the type of work you're doing
• losses you could reasonably have prevented

Your first response doesn't need to be aggressive. You might say something like: We can accept responsibility for losses caused by our breach, negligence or wilful misconduct, but we can't accept unlimited liability for all losses regardless of cause. Can we amend the indemnity so it's tied to fault and capped?

That gives the other party something practical to work with, rather than simply rejecting the clause outright.

What Does An Indemnity Clause Actually Do?

An indemnity clause usually requires one party to compensate the other party for certain losses, claims, damages, costs or expenses.

It can operate differently from an ordinary claim for breach of contract. Depending on how it's drafted, an indemnity may make it easier for the other party to recover particular losses from you, sometimes without needing to prove the same things they would need to prove in a normal damages claim.

For example, a customer contract might say you indemnify the customer for:

• claims from third parties arising from your services
• your breach of confidentiality obligations
• your infringement of someone else's intellectual property rights
• privacy breaches caused by your systems or staff
• your negligence or wilful misconduct

Some of these may be reasonable. If you use unlicensed images in a marketing campaign and the customer receives an IP infringement claim, it's understandable that the customer wants protection.

The concern is when the wording goes much further. A broad clause might cover all losses connected with the contract, whether or not you caused them. It might also cover indirect losses, lost profits, internal management time, legal costs on a full indemnity basis, and claims caused by the customer's own conduct.

For a small business, that can turn a normal commercial contract into a much bigger financial risk than expected.

The wording matters. Small differences such as caused by, arising from, relating to and in connection with can change how wide the indemnity is. That's why broad indemnities are worth reviewing carefully, even if the rest of the contract looks fairly standard.

Why Is An Uncapped Liability Clause Risky?

An uncapped liability clause is risky because your exposure may be much higher than the value of the contract, even if you're only being paid a modest amount.

Say Aroha runs a small web design studio in Wellington. She agrees to build a new website for a customer for $8,000 plus GST. The customer's contract says Aroha indemnifies the customer for all losses, claims, costs and expenses arising in connection with the services, with no cap.

A contractor Aroha uses accidentally uploads a licensed stock image without the correct licence. The rights holder sends the customer a claim. The customer also says the website launch delay caused lost sales and demands $95,000, plus its legal costs.

If Aroha signed an uncapped indemnity, she may have to deal with a claim many times larger than her project fee. Whether the customer ultimately recovers that amount will depend on the contract and facts, but the practical problem is immediate: time, stress, legal costs, insurance issues and pressure to settle.

A cap can change the commercial picture. For example, if the liability cap is the fees paid under the contract, Aroha's exposure may be limited to $8,000. If the cap is two times the fees, it may be $16,000. Some contracts use a fixed dollar cap or link the cap to available insurance.

There are times when a customer will expect certain risks to sit outside the cap, such as fraud, wilful misconduct, IP infringement, privacy breaches or confidentiality breaches. That can be negotiable too. You can often accept a higher cap for specific serious risks, while keeping ordinary contract risk capped.

What Fallback Positions Can I Negotiate?

You can usually negotiate several fallback positions or a contract amendment if the other party won't delete the indemnity completely.

The best option depends on the deal, your bargaining power, the value of the contract and the risks involved. Still, these are practical positions that often work better than a simple yes or no.

Make The Indemnity Fault Based

Ask for the indemnity to apply only to losses caused by your breach, negligence, wilful misconduct or fraud. This helps avoid being responsible for losses caused by the customer, another supplier or external events.

Limit It To Direct Losses

Try to exclude indirect, consequential or special losses, and loss of profit, revenue, goodwill or opportunity. These categories can be argued about, so the wording should be clear.

Add A Liability Cap

A common cap is the fees paid or payable under the contract. For higher risk work, the cap might be a multiple of fees or a fixed amount that matches your insurance cover.

Carve Out The Other Party's Fault

The indemnity should reduce or disappear to the extent the loss was caused by the other party's acts, omissions, breach, negligence or failure to follow your reasonable instructions.

Control Third Party Claims

If you're indemnifying someone for third party claims, ask for notice of the claim, the right to manage the defence, and a rule that they can't settle without your consent.

Keep The Risk Insurable

Check whether your professional indemnity, public liability, cyber or other insurance would respond. If your insurance excludes the risk, accepting the indemnity may leave your business exposed.

A balanced clause isn't about avoiding responsibility. It's about accepting responsibility for the risks your business can properly manage.

How Should I Review A Supplier Or Customer Contract Before Signing?

You should review the contract by finding the indemnity, checking how it interacts with the liability cap, and testing the clause against real serious scenarios.

Start with the indemnity clause, but don't stop there. In many contracts, the real risk comes from how several clauses work together.

Use this checklist before you sign:

• Find every indemnity. There may be more than one, including in schedules, data protection terms, IP clauses and service levels.
• Check who benefits. Some indemnities protect the customer, its related companies, directors, employees, contractors and customers.
• Look for fault wording. Is the indemnity linked to your breach or negligence, or does it apply more broadly?
• Check the liability cap. Does the cap apply to indemnities, or are indemnities carved out and therefore uncapped?
• Review excluded losses. Does the contract exclude indirect losses, lost profits and consequential loss?
• Check legal costs. Are you paying reasonable legal costs, or all costs on a full indemnity basis?
• Compare the risk to the price. A $5,000 project shouldn't usually carry unlimited enterprise level risk.
• Check your insurance. Ask your broker what is and isn't covered before you rely on a policy.

If the contract is a standard form small trade contract, the unfair contract terms rules in the Fair Trading Act 1986 may also be relevant. These rules can apply where both parties are in trade, the contract is a standard form small trade contract, and the trading relationship is less than $250,000 per year when the relationship first arises. The Commerce Commission can take action about unfair terms, but you shouldn't rely on that after the event as your negotiation strategy.

If the services involve personal information, also check the Privacy Act 2020 obligations. A privacy indemnity should be tied to the breach and should sit alongside clear rules for security, notification and cooperation.

Can A Limitation Of Liability Clause Protect Me?

Yes, a limitation of liability clause can protect you, but only if it's drafted so it actually applies to the indemnity and the main risks in the contract.

A common mistake is assuming a liability cap protects everything. Many contracts say the cap applies generally, then carve out indemnities from the cap. If indemnities are excluded, your biggest risk may still be unlimited.

A useful limitation clause often covers:

• an overall cap on liability
• exclusions for indirect and consequential losses
• a time limit for bringing claims
• rules about mitigation, meaning the other party must take reasonable steps to reduce its loss
• specific carve outs for risks that shouldn't be capped, or should have a higher cap

If you're preparing your own fallback wording for discussion, this outline can help. It's not a finished clause, and a lawyer should tailor it before you use it.

1. Scope Of Liability. Say the clause applies to all claims connected with the contract, including contract, tort, statute and indemnity claims.
2. Financial Cap. Insert the dollar cap, fees based cap or insurance based cap you can accept.
3. Excluded Losses. List losses neither party can recover, such as lost profits, lost revenue and indirect or consequential losses.
4. Carve Outs. Identify any risks outside the cap, such as fraud, wilful misconduct, confidentiality breaches, IP infringement or privacy breaches.
5. Shared Fault. Say liability is reduced to the extent the other party caused or contributed to the loss.
6. Claim Process. Set notice, cooperation and control rules for third party claims.
7. Time Limit. State when claims must be made, subject to any laws that can't be contracted out of.

Also watch for the Consumer Guarantees Act 1993 if your contract touches on goods or services. Businesses can sometimes contract out of the Act for business to business supplies if the wording is clear and it's fair and reasonable to do so. That should be handled carefully, because a poorly drafted clause can create confusion rather than protection.

When Should I Get Contract Review Support?

You should get contract review support before signing if the indemnity is uncapped, one sided, hard to understand or linked to risks your business can't control.

It can be tempting to sign first and deal with issues later, especially when a new customer is ready to start. The problem is that once the contract is signed, your leverage is usually much lower.

Consider getting help if:

• the contract value is significant for your business
• the indemnity covers all losses connected with the contract
• indemnities are excluded from the liability cap
• you handle customer data, payment data or commercially sensitive information
• the customer requires you to indemnify its related companies or end customers
• the contract includes service credits, penalties or broad audit rights as well as the indemnity
• your insurer hasn't confirmed cover for the risk

You have a few options. A free template or AI drafted clause can help you understand the structure, but it may miss how the clause interacts with the rest of the contract. A fixed fee online legal service can be useful when you want a practical contract review and mark ups before you negotiate. A traditional firm billing by the hour may suit larger or highly specialised deals where the negotiation is likely to be detailed.

Whichever option you choose, ask for clear comments you can use in negotiation. The most useful review usually gives you:

• the key risks in plain English
• suggested mark ups to the indemnity and liability clauses
• fallback positions if the other party says no
• a view on what is market standard for the type of deal
• questions to ask your insurer or broker

Good contract negotiation isn't about winning every point. It's about knowing which risks you can accept, which ones need to be capped, and which ones are too big for the deal.

Key Takeaways

• You can refuse to sign an unlimited indemnity and ask for narrower, fairer wording.
• The biggest risks usually appear when indemnities are uncapped or carved out from the limitation of liability clause.
• A practical fallback is to tie the indemnity to your breach, negligence or wilful misconduct, and add a sensible financial cap.
• Check the whole contract, not just the indemnity. Insurance, privacy, IP, excluded losses and claim procedures all matter.
• New Zealand rules such as the Fair Trading Act 1986, Privacy Act 2020 and Consumer Guarantees Act 1993 may affect how the contract should be drafted.
• Getting a contract reviewed before signing can help you negotiate from a calm, informed position.

If you'd like help with reviewing a supplier or customer contract, negotiating an indemnity clause, or tailoring a limitation of liability clause, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.