The Meaning of a Hold Harmless Agreement
In its most basic form, a hold harmless agreement is a contract between parties, typically the parties to an agreement, that protects one party from the legal risk of liability. Generally, this means that each party within the transaction, including any insurance, will assume the costs of the liabilities associated with any misinterpretations or fault in the transaction. In the simplest of terms, these agreements are classified as either a general or mutual contractual contract, also known as a waiver or indemnity agreement, that prevents one party from being legally liable for their act or omission should a third party claim damages.
In most instances, a hold harmless agreement will involve a third party seeking to collect on damages that result in a court order under supplementary proceedings. Under that order, the third party can seek compensation from all parties involved , however; the hold harmless agreement will prevent one party from collecting damages from the other party. For example, say two parties are entering an agreement to buy and sell insurance on behalf of a large corporation. During the negotiation process, it becomes clear that the purchase of the company by one party will ultimately put the sale of the insurance in jeopardy. Rather than risk losing the sale, the two parties enter into a hold harmless agreement, whereby any damage to one party under the contract agreement, will be limited by the terms outlined in the hold harmless agreement.
Like other states, the use of hold harmless agreements is common in Illinois. In fact, these agreements are most commonly found in contracts that cover services, real estate agreements, construction contracts and insurance contracts.
The Legal Nature of Hold Harmless Agreements Under Illinois Law
The legal framework of illegality in hold harmless agreement in Illinois is governed by the Illinois Trusts and Trustees Act, 760 ILCS 1005/1. The Act states that if a trustee contains a clause to relieve the trustee from personal liability, the agreement will be void and the trustee will be personally liable in the event the trustee commits a breach of trust.
Such an agreement would be void if a trustee commits the following, therefore assuming liability:
- conversion of trust property;
- unauthorized delegation of trustee’s power;
- failure to take steps to prevent loss or preserve trust property;
- retention of a trust asset for an unreasonable amount of time after knowing that the trustee is not complying with the law;
- failure to make a proper distribution of income, principal, or both;
- improper delegation of a trustee’s duties;
- unreasonable delay in distributing property to beneficiaries;
- negligence in properly protecting trust property;
- failing to follow the laws pertaining to investments of trust assets; or
- failure to give notice of certain facts about the trust to certain individuals required to be given notice.
Although no Illinois state court cases have addressed the issue of hold harmless agreements, case law shows that the clauses are valid when one of two conditions are met. First, the agreement must conform to the public policy of Illinois. Second, the clause must be reasonable in scope and duration. If one of these requirements is not met, the court can refuse to enforce a certain type of clause.
In the commercial real estate context, the Illinois Court of Appeals has adopted the public policy requirement for tenant hold harmless clauses. It has ruled that hold harmless clauses should not be enforced if the contract provision offends public policy, particularly if a party attempts to indemnify itself against its own negligence. However, the court ruled that the landlord’s hold harmless clause, which included third parties (any officers, employees, and agents), was enforceable because it did not offend Illinois public policy.
The hold harmless agreement was part of the lease and covered any "damages or injuries caused by the negligent or intentional act of others or in accident or theft." The Court held that the parties were free to negotiate the terms of their contract and that the landlord prepared the agreement and that the tenant was free to object if they did not agree with the clause. Therefore, the clause was enforceable.
The Illinois Supreme Court has also upheld similar hold harmless clauses. The Court held that the indemnification was enforceable because it did not attempt to disclaim the landlord’s own negligence. The Court simply held the parties to their lease agreement.
The Court has held that parties are free to negotiate what parties assume liability for within an independent contractor context, and the agreement will be enforced if the agreement does not violate public policy. Any indemnification involving liability for one’s own negligence will be strictly scrutinized by the Court.
Why You Should Have a Hold Harmless Agreement
Importance of a Hold Harmless Agreement in Illinois
The need for a hold harmless agreement could arise in many different scenarios. In a typical business transaction, there could be an agreement in which one party will be indemnified or held harmless for a certain type of loss. More often than not, the reason the parties enter into a contract is to manage the risk of a legal liability through a release or waiver of liability. A release is a common joint and several liability mechanism that many parties enter into prior to transacting with one another. For example, a promoter may require a release from all parties entering a music festival site to run the operation for a given period of time. Not just the landowner, but also the local health department, vendors, and public safety officials may be released of liability. Without this release, if someone were to injure themselves on site, they could seek damages from each party involved, or attempt to obtain a judgment against each entity. Even if the health department were to have no liability, they would still have to incur the legal expense to defend their position. In those scenarios, having the joint and several indemnity agreement in place will provide peace of mind, even if no harm occurs.
Another example of where an indemnification or hold harmless agreement may be necessary is in construction contracts or project management, where the contractor or project manager will be held liable to the property owner for the work product of his employees, both regular and subcontractor alike.
The Different Forms of Hold Harmless Agreements
There are several different types of hold harmless agreements used in Illinois. One type is a unilateral hold harmless agreement. This type offers protection to one party only. For example if I’m a general contractor and I’m hiring Electrical Company LLC, to go and install electrical systems at the project, a unilateral agreement may provide "Electrical Company LLC agrees to indemnify and hold harmless General Contractor for any damages resulting from the electrical systems design and installation because Electrical Company LLC is the exclusively the one performing all of the work." Another type is a reciprocal or mutual hold harmless agreement, which extends the same consideration both ways to both parties. This is common for contractors as they try to agree to hold each other harmless. You may see a clause like "Contractor and Client here by indemnifies each other for any claims or damages arising from this project." Lastly you see a broad form which is relatively one-sided in favor of the party that is paid to indemnify and hold harmless someone else for future lawsuit or accidents. Broad form indemnity is void in contracts with residential owners.
Preparing a Hold Harmless Agreement in Illinois
When drafting a hold harmless agreement, it is important to include all the facts and information necessary to fully define the scope of the indemnification. If there is any ambiguity in the terms of the indemnity, that ambiguity could cost either party money and could come back to haunt them if a lawsuit is brought. In order for a hold harmless agreement to be enforceable in Illinois, Illinois courts have held that the agreement must be in writing and contain explicit indemnity language, making it clear that the parties are in fact indemnifying each other. The use of the phrase "to save harmless" must be expressly stated in the indemnity language in the hold harmless agreement. In some cases an agreement may not even need to be called a hold harmless agreement , and if the essential ingredients of an indemnity or hold harmless provision are present in another type of contract, such as a lease agreement, it will be found to be enforceable. If you are interested in pursuing your claim against a negligent party under an agreement, it is highly recommended that you seek the assistance of a knowledgeable hold harmless agreement attorney in Chicago who can help review the validity and enforceability of your claim before you pursue the matter further. The hold harmless agreement may be between an owner and a contractor, or between two owners, or two contractors. These agreements are frequently included in commercial or residential lease agreements, licensing agreements, supply agreements and construction agreements.
Limitations and Pitfalls
Even though hold harmless agreements are extremely useful, there can be some times when they are not enforceable. For example, let’s say you sign a residential lease that states you cannot be sued for any reason and that all the landlord’s and your claims are bartered and released. If I’m not allowed to sue the landlord for negligence or breach of contract rights, what other options do I have? None. I have to sue them in order to force them to correct their mistakes because my hands are tied from trying to event the situation.
Similar concerns could arise if the agreement is unclear or conflicts with other contractual provisions or obligations of the parties. If the agreement includes indemnification for parties or employees whose actions are not caused by the indemnifying party, then it might be unenforceable. It is important to make sure that the indemnity provisions are very specific as to what is being indemnified, except for intentional acts, and that it doesn’t attempt to include claims that are not caused by the indemnifying party.
Another potential issue could be that one party to the hold harmless agreement may not be protected when the party the agreement is between is sued. A common situation is where A agrees to indemnify B should he be sued. But when A goes to his insurance company to tender the defense, which the hold harmless agreement states is part of the defense, the insurance carrier refuses to defend. Now A takes care of himself. Should A now try to recover from B? Or have they lost the indemnification because a court may see otherwise and that A wasn’t really harmed since he paid for his own defense? In this situation it is always best to specifically state that all indemnification claims can be passed directly onto the insurance company or that the insurance company has an obligation to defend whether or not the carrier thinks they should.
Get Professional Assistance
Hold harmless agreements are an integral part of many contracts, which is why the guidance of an experienced Illinois business transactions attorney can prove invaluable. Any issues with the agreement can lead to lawsuits for damages, and a skilled lawyer can ensure your position is well represented in the agreement and any resulting litigation. When looking for an attorney to assist you with a hold harmless agreement, the American Bar Association advises you to search for someone who has the right experience and education to help with your particular case. You can ask others in your industry if they have experience with drafting and reviewing hold harmless agreements. It’s also important that the attorney you choose is familiar with your industry and its practices , as many industries have their own standards and laws that could affect a hold harmless agreement. It’s also important that the attorney have a strong understanding of contract law, particularly as it relates to business. Ask how long the attorney has been practicing and what kind of experience they have with drafting and reviewing contracts. It can be advantageous to find an attorney who has strong connections within your industry, so if you frequently have contracts with the same parties or if you’re a general contractor that works for the same entities on a regular basis, this could be an important factor. It’s typically best to meet with your potential to lawyer to find out more about how they do business, what they can do for your needs and what guidance they can provide throughout the process.
