Understanding Hold Harmless Release Agreements
What is a Hold Harmless Release Agreement?
Hold harmless release agreements are legally enforceable contracts obligating one entity to indemnify another. These agreements excuse the conduct of one party of liability under specified circumstances. In some contexts, they may be referred to as "hold harmless agreements" or "hold harmless clauses." The language in these documents may be adjusted to suit specific needs, but the fundamental elements of a hold harmless agreement are the same regardless of the context.
Essentially, a hold harmless release agreement allocates risk between two parties. An entity that indemnifies another assumes the liability, although states, counties or municipalities typically cannot indemnify private citizens.
One or both parties may be relatively equal in power in some hold harmless release agreements , and their negotiation may be less contentious. An example of such is a provision in a commercial lease compelling a tenant to indemnify a property owner against a third-party lawsuit arising from an accident on the leased property. A court would likely find the clause enforceable.
Other contexts in which a hold harmless provision may be included include employment contracts, sales agreements, construction contracts or other contractual agreements. In each example, the indemnification must be reasonable. An agreement may not attempt to indemnify a party for its own acts of negligence during the performance of a task or provision of a service.
A hold harmless agreement may be unenforceable if an affected party is not given sufficient notice of the provision. Courts may not enforce such agreements if they are so one-sided that they effectively relieve the other party of any legal consequences from its actions.
Key Components of a Hold Harmless Agreement
While there is no single "standard" for a hold harmless release agreement, its primary purpose is to shift potential liability from one party to another. Consequently, hold harmless agreements usually contain indemnification clauses, limitations of liability, and identify the parties to the agreement.
The indemnification clause of a hold harmless agreement is a contract provision in which one party agrees to protect the other from financial loss or legal liability resulting from a designated set of circumstances. Since indemnity is commonly broken down into five categories, i.e.:
• express or implied,
• contractual or tortious,
• non-fundamental or fundamental,
• primary or secondary, and
• active or passive,
it is important to keep in mind that indemnifiers can be "partially or wholly responsible" for the underlying litigation.
The limitation of liability section of a hold harmless agreement can be critical if you plan to indemnify another party from legal action. Limitations of liability clauses can serve to limit the extent of legal responsibility that an indemnifier may have for another party. However, limitation of liability clauses can be risky because in order for them to be enforced, they must be reasonable. Because opinions differ, it is always advisable to seek legal counsel before signing a hold harmless agreement containing a limitation of liability clause.
When drafting a hold harmless agreement, the parties to the agreement must always be clearly identified. A hold harmless agreement that leverages an isolated relationship can be effective if you sign a release as a social host in exchange for bar certification in a hold harmless agreement. However, if you are issuing a hold harmless agreement on behalf of a business that issues a surety bond, be cognizant of the purpose, effect, and terms of the release you are entering into.
Types of Hold Harmless Agreements
The simplest form of a hold harmless agreement is one that obligates only one of the parties to keep the other party "whole." This is sometimes referred to as a unilateral agreement. However, hold harmless agreements can also be mutual, requiring both parties to assume some responsibility for any resulting loss.
Unilateral Agreements
Unilateral agreements are often used in transactions between sophisticated business-to-business individuals or businesses, such as manufacturers and retailers. In this context, the entity in a stronger bargaining position is seeking to limit its liability in the event something goes wrong with a product it sells to the other party. The entity in the transactional relationship requiring the hold harmless agreement may be in the stronger position by virtue of its exclusive relationship with the other. For example, if Party A enters into a supply agreement with Party B, what Party A is selling is so valuable or so unique that it has leverage in requiring in its contract with Party B, a hold harmless obligation in favor of Party A. The consequence of the unilateral nature of the agreement is that the party in the weaker position cannot bring a claim of negligence against the other party.
Mutual Agreements
In a mutual agreement both parties agree to accept some liability in the event a claim of negligence is brought against either party. Two parties can benefit mutually from a hold harmless provision. For example, where the two parties share the costs of insurance, having such a provision in the agreement would allow each party to receive the benefit of the insurance they pay for. Another example is where two parties are in a joint venture together. In the joint venture context the parties rely upon one another for certain aspects of their business plan. In that context if one of the parties were to bring a claim for negligence against the other, a mutual hold harmless agreement would insure that neither party could bring a claim against the other, but would instead bear the consequences of its negligence. In other words, the parties are maintaining a "no fault" balance for the limited purpose of that relationship.
The extent to which a hold harmless provision will protect either or both parties depends on the language of the hold harmless provision. As long as the provision in the agreement is not contrary to public policy (which we’ll address more states in subsequent sections) addresses only the claims brought directly between the parties, a mutual hold harmless agreement will prevent either party from bringing a claim of negligence against the other.
When to Utilize a Hold Harmless Agreement
While specific instances where a HRA is desired will vary, there are three common situations where a HRA will often be necessary. These include: When commencing a construction project. Regardless of whether you are hiring a contractor or are a contractor, having a HRA is a good idea to limit potential liability. When holding an event. This is often a must in order to limit liability of the event planner. In a partnership. When entering into a partnership, one party may want to limit their liability for actions of the other party.
Legal Issues and Enforceability
When drafting a hold harmless release agreement it is important to keep in mind what the law in the state or states you will be working in will look favorably upon. Some states will only enforce releases against known claims and releases that are unambiguous: 1) a release of prior wage claims is insufficient to protect a company from future wage claims, 2) a general release that is supposed to be limited to future wage claims will be deemed a general release of employment claims if it does not explicitly refer to employment claims, and 3) a release will be deemed to be for known claims only if it is specific enough to put the releasing party on notice that she is waiving all known claims.
Many states will not enforce a hold harmless release agreement against workers’ compensation claims. Delaware stores in Pennsylvania, for example, have been deemed to have engaged in a violation of Pennsylvania’s Workers’ Compensation Act because they utilize an employment application that contains a provision whereby the applicant agrees to indemnify the employer for any fines due to the failure to maintain sufficient workers’ compensation insurance coverage. Similarly , where a Delaware pharmacy had students sign student/intern agreements which included hold harmless and indemnification provisions, the student/intern agreements were found to violate the NLRB Rules and Regulations because they restrained the students from exercising their rights under the NLRA.
Therefore, it is important to note, that while some states have laws that deem hold harmless release agreements to be void and inoperable (and even criminal) other states have laws which indicate that those agreements are enforceable if reasonable compensation has been provided to the employee in exchange for signing the release.
Some states may even specifically note in their statutes whether hold harmless release agreements are enforceable at all. For example, under Georgia law, an employer and employee shall have the right to contract and enforce a contract "insulating the employer against injured workers’ claims from the negligence of the employer." Under Louisiana statute, a contract "indemnifying an employer or principal against loss proximately resulting from the fault of the employer or principal is deemed against public policy and is void and unenforceable.
Hold Harmless Agreement Drafting Tips
When drafting a hold harmless release agreement it is important to consult with a legal professional versed in creating contracts of this kind. Without the help of an attorney, your chances of overlooking an important aspect of the agreement are significantly increased. A legally binding hold harmless agreement should always use clear and understandable language. If the agreement is hard to read or is confusing in any way, it could later be deemed invalid and unenforceable by a court of law. Be as thorough as you can when completing the agreement, identifying the specific risks and risks that may assumed by the indemnifying party. Be specific enough that there would not be an opportunity to assign liability in other areas where it should not exist.
What Common Mistakes to Avoid
The first mistake is assuming you are protected by a hold harmless release agreement. While you may be protected against liability arising from one part of your project, others may exist. If you provided inadequate plans for a residential home, for instance, you might still be liable for a site-specific defect unrelated to your design. In some circumstances, the contract or the law may be ambiguous, raising questions regarding which claims are subject to indemnification. But even if the law is clear, an indemnitor may still be able to avoid liability by proving that a claim did not arise out of a specific circumstance, such as negligence. You could end up with a liability exposure you thought was covered in your indemnity contract. The second mistake is being too consumed by financial considerations. While it is wise to estimate the economic value of your indemnification, they play a relatively minor role in hold harmless release agreements. Questions of scope and form can often be more important than the money involved. If the indemnity agreement grants coverage for claims you were not anticipating, then the cost could be quite a bit higher. Worse, if the indemnity is not sufficient, you could still be exposed to significant liabilities. Writing your indemnity agreement so it accounts for defects you do not expect can help you realize substantial savings. The third mistake is using a release agreement as a substitute for strong operational practices. If you do not have adequate insurance and do not exercise adequate care in fulfilling your own obligations, no amount of contractual indemnity will excuse you from liability. The best mechanism for enforcing risk management is adequate insurance, which is the only limit on potential damages that can be recovered against you.
Hold Harmless Agreements vs. Waivers
Some contracts, commonly known as waivers, provide that one or both of the parties, oftentimes the participant in a sporting event, agrees to voluntarily relinquish a known right. A waiver, essentially, acts as a bar to the participant bringing a future lawsuit, and therefore, acts as a form of assumption of risk. Waivers are subject to a strict body of law that governs their enforceability. Hold harmless release agreements differ in that they essentially transfer risk from one party onto the other. In this regard, waivers are a subset of hold harmless release agreements .
Whether a waiver or a hold harmless release, such agreements must be carefully drafted and require certain elements or conditions in order for them to be legally binding. Regardless of the type of agreement, whether it is a waiver or a hold harmless release agreement, the waiver or the hold harmless provision are unenforceable unless they contain all of the requisite elements. In general, both agreements are disfavored by the courts and treated with a certain amount of judicial hostility. Accordingly, the enforcement of either agreement has many variables and should be approached with caution.