What is a Hold Harmless Provision?
A Hold Harmless Agreement is basically a way to indemnify somebody if something happens. It’s a promise to protect someone from certain risks or liabilities. It also can work the other way, too, where a person actually agrees to accept the risks of something happening. When signing a hold harmless agreement you are basically signing a legal document that says something like, "if you get sued by somebody (or if you’re injured), it’s not my fault and I’m not liable." As far as liability goes, it keeps one party from being responsible for the actions of another party.
Essentially, it’s an agreement that keeps a person or entity from losing money because of someone else’s behavior . It is used a lot in business transactions between partners (a partnership agreement) or business owners (an operating agreement) but it’s also very commonly used in real estate transactions, especially with contractors and subcontractors. In the case of contractors and subcontractors, they often put it in their contracts or subcontracts, where they agree to waive their rights to any claim on the property. It’s essentially a way for someone to agree that any damages to the property that occur during the course of their work, will be their own responsibility, not the property owner or another contractor’s.
Applicable Law in Arizona
In Arizona, Hold Harmless Agreements are generally governed by contract law. Contracts are enforceable if the terms are reasonably fair and from an agreement between two parties. If one party does not agree to the terms, or cannot legally enter into the agreement such as with a minor age party, the contract will likely be invalidated by a court of law. The main requirement for any contract to be enforceable is the parties must exchange something of value.
Unfair contracts may be unenforceable depending on the language included in the agreement. For example, the A.R.S. does not allow unenforceable clauses regarding the responsibility of negligence and liability. Any clauses that violate the law cannot be applied to any parties. Therefore, their use in the Hold Harmless Agreement may lead the court to strike the invalidated clause and apply Arizona law.
The A.R.S. § 12-2504 states that:
A. A promise or agreement made by a construction design professional, environmental professional or independent test, inspection or monitoring consultant or an employee, partner or officer of the construction design professional, environmental professional or independent test, inspection or monitoring consultant, purporting to indemnify, defend or hold harmless the owner, contractor or developer from any damages arising out of, relating to, or resulting from any of the following is against public policy and is unenforceable:
- That portion of a promise, agreement or understanding contained within the contract that indemnifies, defends or holds harmless the owner, contractor or developer from liability for damages arising out of, relating to or resulting from the negligence or other fault of the owner, contractor, developer or an independent test, inspection or monitoring consultant or the employees, agents, subcontractors or independent contractors of the owner, contractor, developer or independent test, inspection or monitoring consultant.
- Fines, penalties or damages imposed on the owner or developer pursuant to any statutory or regulatory provision.
- Liquidated damages for delay in performance or breach of contract.
Essential Components of an Arizona Hold Harmless Agreement
An enforceable Arizona hold harmless agreement must clearly identify the parties involved, specify the responsibilities and liabilities being held harmless, and provide a clear reference to the contract which is creating the liability. The specific nature and extent of liability being determined depends largely on the type of transaction and practice area. As is the case with any Arizona contract, the essential elements for a valid contract apply to a hold harmless agreement. The basic requirements that are universally required for all Arizona contracts are that there must be an offer, acceptance, adequate consideration, sufficient specification of terms to create a binding legal obligation to perform, and both parties must have capacity to contract. In addition to these basic requirements, the essential elements specific to all Arizona hold harmless agreements include the following:
- (1) The agreement must be in writing.
- (2) It must be signed by both parties (including an authorized agent for a legal entity).
- (3) The scope of the hold harmless agreement must be well-defined and must allow for the application of the indemnity provisions to all relevant contracts, contracts and obligations, as well as any known or unknown risks.
- (4) The indemnity provision cannot include liabilities arising from or connected with willful misconduct or unlawful, reckless, or intentional actions of the indemnifying party.
Types of Hold Harmless Provisions
Hold harmless agreements can take on many forms and can be a one-way or two-way-safeguard. When there is a single hold harmless clause in a contract, it is generally interpreted in a way that permits one party to shield another from losses arising out of the other’s negligence or fault. There are, however, different types of hold harmless agreements, including:
A Unilateral Hold Harmless Agreement: This only protects the person who indemnifies the other from liability and does not protect the indemnifier against itself. An example would be an indemnity by a general contractor in favor of the owner.
A Mutual Hold Harmless Agreement: This protects both parties from each other’s negligence or fault, or shields both parties from liability for certain claims that arise in the future. For example, an agreement between an architect and owner may provide that either party will indemnify the other for any loss, liability, expense, or damage caused by their own negligence, while limiting or excluding indemnification for indirect or consequential damages. The application of indemnification duties to claims that can be attributable to either or both parties will often turn on relevant code or statutory references that will define the circumstances of indemnity.
A Reciprocal or "Mutual" Hold Harmless Agreement: This spirit of buy out mutual hold harmless agreements is often to obtain consent to the release of liens.
A Reasonable and Appropriate Limitations of Liability Provision: It is common for construction contracts to
In practice, however, hold harmless provisions are usually of two kinds. There are those that impose liability for damages suffered by a third party or arising out of claims of third parties. For example, the indemnifying party will indemnify the indemnified party against claims asserted by a third party by covering losses or paying judgments. In such cases, the damages claimed are usually determinable and subject to mathematical calculation.
The other kind of hold harmless provision is where the damages are predominantly consequential in the sense that they arise out of the relationship between the parties and are not clearly attributable to the fault of one party. The damages are mostly those relating to lost profits, loss of enjoyment, emotional distress, personal injuries or costs of avoiding threatened injury. In these cases, the damages are more diffused and difficult to quantify. In such situations, the imposition of liability is stricter the more marginal the nature of the resulting injury. Absent the parties’ clear and precise expression of an intention to impose a duty to indemnify the liability for such harms will generally be limited in the absence of an express statutory basis for indemnification.
Pros and Cons
The main benefit of a Hold Harmless Agreement is that it provides some modest protection to the party being held harmless and further allows the party to pay for its own indemnity insurance for the risk. If there is an incident for which you paid for your own indemnity insurance, and the agreement is enforceable, you may be able to avoid liability. The problem here is that the indemnity insurance is likely much more expensive than the liability worth ($250,000 vs. $5,000,000). Here are some examples where Hold Harmless Agreements are often used:
• Blasting Contracts
• Maintenance Agreements
• Purchase Orders
• Supply Contracts
• Construction Contracts
• Vendor Agreements
• Loan/Lease Agreements
• Service Contracts
One downside is that Hold Harmless Agreements should typically not be placed on insurance contracts. The reason for this is twofold. First, the insurance policy itself requires that the insurance company provide coverage to the named insured(s) for any action that causes injury or damage. To attempt to carve out one or all of the named insured’s’ liability would be against the purpose of the insurance itself and would make it difficult for the parties to know what is and is not covered.
Second, insurance contracts typically have an "other insurance" clause that reduces the coverage of the present policy, if there is coverage in any other policy for the same occurrence. Thus, while you may have a claim under an indemnification provision in a Hold Harmless Agreement , the amount of that liability may be reduced by the amount of coverage under the insurance policy which provides the Hold Harmless Agreement.
Essentially, Hold Harmless Agreements can shift the risk of loss from one party to the other, but cannot prevent it from happening in the first place. For this reason, Hold Harmless Agreements are typically unenforceable in certain high risk industries. One scenario is where there is an unknown danger or defect that leads to harm that would reasonably be expected to be covered by the liability insurance. In this scenario, you are essentially paying for insurance you may not use, by indemnifying the other party. Another scenario would be where the party providing the service, or using the site, determines that there is an unsafe condition at the site that must be fixed before proceeding with the work. In that scenario, you would not be held liable for the unsafe condition. A third scenario is where there is a defect in the design, blueprints, or plans for the project that was used to pursue the contract. In this case, the fault would remain with the architect or designer, or possibly the owner who gave the plans to the contractor to fix. Their own indemnification in the Hold Harmless Agreement may be denied, because the liability is not truly financial, but rather is a design flaw. Finally, if the other party’s acts cause the damages, even while on site, they may still be barred from utilizing the Hold Harmless Agreement to avoid liability due to their active negligence.
Drafting a Hold Harmless Agreement in Arizona
Like any contract, hold harmless agreements in Arizona should be clear, concise, and unambiguous. They should list with specificity the exact activities or situations that are being held harmless. In particular, provisions found in releases and waivers of liability are often found in hold harmless agreements.
A good provision requires that the indemnifying party take on the duty of defending the indemnified party from a claim. Thus, it is critical to ensure that the indemnifying party is required to defend the indemnified party and not just indemnify them for losses. For example, the agreement might state: "Indemnifying Party shall defend, indemnify and hold harmless the Indemnified Party from any and all claims, including litigation expenses, arising from or related to [particular activity]. This indemnification and hold harmless provision shall apply to the indemnified party’s own negligence."
In addition, the agreement should include an effective conflict of interest waiver. The provision might state something like: "The parties waive any conflict of interest contained within each parties’ representation, including but not limited to a future adverse action against the other party."
Finally, a proper hold harmless agreement will also state that any claims will be subject to Arizona law, and that only Arizona courts will have jurisdiction over any lawsuits arising under the agreement.
Enforcement and Disputes
While the concept of Hold Harmless agreements may be relatively straightforward, their enforcement in an actual court of law often is anything but. The first and foremost hiccup to enforcement of Hold Harmless agreements pertains to whether the Hold Harmless agreement is contained within a lease or other contract. In various litigation throughout Section and the U.S. Courts of Appeals have held that a Hold Harmless agreement must be contained within a contract, such as a lease, to be enforced in a state or federal court. Given the fact that the real estate industry has moved to individual leases, this raises a number of questions as to how Hold Harmless agreements will be handled in future litigation. If a Hold Harmless agreement is contained in a lease or other written contract, the enforcement issues are far more straight forward. In this instance, the contractual provision generally will be enforced to its face. The exceptions to this general rule are somewhat involved and we will save them for a future blog entry.
Seeking Out Legal Counsel
Due to the myriad of potential protections and pitfalls for those entering into or signing a Hold Harmless Agreement in Arizona, consultation with experienced attorneys is essential to ensure that the resulting document is as comprehensive and protective as possible. This is especially true considering all Hold Harmless Agreements carry with them certain terms that can dramatically alter the risk to the parties involved; and such risks are magnified substantially when one of the terms of the Hold Harmless Agreement appears to contravene a statute or other law, when the payments referred to in the agreement will be covered by an insurance policy or in a case that concerns personal injury matters . An experienced Bar professional can assist the parties in understanding how to best draft or negotiate a Hold Harmless Agreement that presents the appropriate scope of risk between the parties, and which appropriately fulfills the Purpose for the agreement and suits the needs of the parties involved.
