When to Use a Hold Harmless Agreement?
- A hold harmless agreement is usually a clause inserted into a contract of some sort, such as a lease. According to the terms of the clause, one party agrees to assume liability for claims rising from some joint effort, venture or property in common. The contract in which the agreement occurs probably provides some general context, but specificity as to specific types of claims (even if it is any and all claims, liabilities, damages, etc.) can be an important part of such an agreement's enforceability. To many lawyers, this means that the first party agrees not to sue or lay claim against the second party for any acts by the second party that have a harmful effect on the first party. But, at least one California decision directly refutes this interpretation.
- In 2007, the California Court of Appeal decided a case on an entirely contrary interpretation of "hold harmless" than was just described above. Under this ruling, a contracting party cannot waive or give away its right to ever sue the other (second) party to the contract for any possible action it takes that produces a negative consequence to the first party. Instead, to hold harmless means to assume liability for nonparty claims, that is, if a person not a party to the contract sues over an act related to the terms related to the contract. If the first party is sued, according to the terms of contract, it cannot then turn and sue the second party for liability, since it has contracted to hold harmless the second party. If the second party is sued and found liable, the "indemnify" part of the agreement (if applicable) would require the first party to compensate the second for its costs and losses.
- It's important to understand, however, that the California decision is only directly applicable to actions in that state's courts. Federal cases, or those in other states, may draw on that decision for guidance, but might not. As a general rule of thumb, however, unless there's a clear precedent in your jurisdiction for how to use the terms "indemnify" and "hold harmless" it's a good idea to be as specific as possible as to what is agreed to by the parties. If one party seeks to prevent a suit against it by the other for its own direct actions, a "hold harmless" agreement might not be the best way to accomplish this.