What is a Hold Harmless Agreement?
A hold harmless agreement is a provision in a contract in which one party assumes responsibility for losses or damage incurred by another party arising from a certain action. In most cases, hold harmless agreements are contained in contracts and generally require the first party to indemnify (compensate for loss or harm) the second party for any losses suffered. In Washington State, hold harmless agreements are most commonly found in construction contracts.
In Washington State, hold harmless agreements among the parties involved in a construction project are typically enforceable, so long as the wording of the agreements is clear, unambiguous, and valid. Generally speaking , such agreements assign responsibility for any resulting claim from a project to the party primarily at fault and assigning no liability to the other party.
Washington State courts will enforce indemnity provisions in contracts unless the terms of the agreements are unconscionable or ambiguous. Washington courts look to the "four corners of the contract" to determine if an indemnity provision should be enforced.
Because hold harmless agreements require one party to bear responsibility for losses caused by another party, they can be contentious when one party attempts to hold another accountable for the negligence or fault of third parties in court.
Mandatory Provisions in Washington State
Given the prevalence of hold harmless agreements in Washington, it is surprising that the enforceability of such contracts is not more clearly established as a matter of law. See Camenisch v. Evans, 3 Wn. App. 648, 654, 477 P.2d 645 (1970) ("Before determining the effect of specific portions of the agreement, we shall first briefly consider the nature of ‘hold-harmless’ provisions.").
In Washington, parties are free to enter in a hold harmless agreement under Washington law. Jones & Jones Inc., 158 Wn. at 191 (holding that such agreements fall under a general license to contract). However, the quarry of parties relying on such an agreement is that Washington courts have not clearly defined the requirements in order to make such a contract enforceable.
In Washington, the extent of the enforcement of a hold harmless agreement depends on the intent of the parties. In Netolicky v. Pacific Northwest Bell, it was established that a hold harmless agreement "will be enforced if the intention of the parties so requires." 10 Wash. App. 45, 46, 516 P.2d 1206, 1207 (1973). In determining the intent of the parties, courts "look at the nature of the relationship between the parties and the meaning of the words actually used in the contract." Borrell v. Department of Transp., 85 Wn. App. 406, 411, 932 P.2d 662, 664 (1997). The focus of the court "is upon the terms of the contract and the nature of the particular transaction involved." Jones & Jones Inc., 158 Wn. at 194 (quoting Sunstream Jet Express, Inc. v. International Flight Servs., 99 Wash. 2d 329, 661 P.2d 937 (1983)). The true test for determining the intent of the parties is to determine the purpose of the harmful conduct and then seek to find whether there was an intent by the parties to exonerate a party from liability for that harmful conduct. Id. at 194-95.
At first glance, it may appear that the policy implications of holding a party responsible for its negligence would preclude such exculpatory contracts as a matter of public policy. However, Washington courts have held that such contracts are enforceable. See e.g., Jones & Jones Inc., 158 Wn. at 191 ("Courts generally enforce exculpatory clauses in contracts when exculpation is the subject of the contract."). The reason Washington courts will enforce such contracts is that the parties are free to allocate the risk and liability in this manner. Guile v. Stromme, 124 Wash. 2d 245, 777 P.2d 1, 4 (1989).
Essential Elements of a Hold Harmless Agreement
To be considered enforceable under Washington law, a hold harmless agreement generally needs to be:
Parties. Parties to a hold harmless agreement must be clearly identified within the document to ensure that all parties are sufficiently bound by its terms. In the case of multiple parties being held to a hold harmless agreement, the agreement should be clear as to the extent and content of obligation for each party.
Scope. A hold harmless agreement should be specific about what kind of loss or damages are to be covered. It should also be clear as to whether the losses and damages must be caused directly by the indemnifying party or whether indirect losses are also covered.
Duration. A hold harmless agreement should also state the duration of the obligations contained in the document. Will the indemnification lapse with the completion of a project? In the case of construction contractor agreements, indemnification typically starts at the time of contract execution and lapses with the completion of all work called for in the contract.
Limits on liability. Indemnification obligations can sometimes be limited in hold harmless agreements. Such limitations should be clearly stated in the agreement. For example: Indemnification applies only to the extent that loss or damages is caused directly or indirectly by negligence or error or omission of a party.
Common Applications in Washington State
In Washington State, hold harmless agreements are commonly used in a variety of industries and situations where one party is assuming the potential legal and financial risks from another. One of the top uses in Washington is in real estate transactions in the form of construction hold harmless agreements or indemnification clauses. Builders and contractors with the help of their Real Estate Attorneys often draft construction hold harmless agreements to avoid liability for problems that occur after new homes are built and sold, like foundation cracking or electrical issues. Even though most builders and developers carry general liability insurance, they want to make it clear that the buyer of the property cannot come back against them if something goes wrong after the sale.
Another common use in Washington is in the construction industry. General contractors often require subcontractors to sign hold harmless agreements, with the theory that all the subcontractors will work together to hold one another accountable if someone misses part of the job. The idea in this scenario is that the subcontractor signing the agreement will agree with the general contractor that only the subcontractor that truly caused the problem with the project will be responsible for it, thereby shifting the cost from the general contractor to the offending subcontractor.
Employers in the Washington insurance industry often use indemnity agreements with agents. Insurance agents selling policies may be in double trouble if they give bad advice about coverage and then have a client make a claim that they should have been covered for. To protect themselves for the bad advice the agents have given, they often require their customers to sign indemnity agreements making the customer responsible for their own bad claims decisions.
Washington courts sometimes use hold harmless agreements in enforcing "enforcement" provisions in contracts. This is particularly useful to titleholders of real property who are obligated to maintain property, but wish to protect themselves from liability for faulty maintenance.
Limitations and Other Considerations
Despite their common usage, hold harmless agreements can have limitations and should not be viewed as an adequate substitute for insurance. Examples of some of the limitations are set forth below:
- Invalidity. A hold harmless agreement must comply with Washington law and may be invalid if it purports to hold a party harmless for its own negligence.
- Other parties. An agreement to indemnify a party from whom services are being purchased typically does not inure to the benefit of other persons involved in the same transaction. For example, purported indemnification of a general contractor by a subcontractor does not constitute indemnification of the owner of a project who is not a party to the subcontract. Put another way, such an agreement does not provide coverage under general liability policies issued to a project owner, nor does it provide coverage under excess liability policies issued to a project owner.
- Cost. The cost of indemnifying another party under a hold harmless agreement may be higher than expected. For example , the cost of defending an indemnity action and possible losses may exceed the cost of the services that are the subject of the agreement or of providing insurance for the services and might be significantly higher.
- Default of insurance. A hold harmless agreement will not save project owners from the problems caused by uninsured subcontractors.
- Inability to collect from other party. Insurers may refuse to pay a claim involving a hold harmless agreement where general liability policies exclude claims arising out of construction contracts. Even where coverage is available under general liability policies, indemnitors may not be financially able to pay the claims or may be uncooperative.
- Liens. Hold harmless agreements between a project owner and a general contractor or between a general contractor and a subcontractor will not prevent material suppliers and materialmen from claiming liens against a project. If materials suppliers are being paid directly, they may not even be aware of an agreement between a project owner and a general contractor.
How to Draft a Hold Harmless Agreement in Washington State
As with any contract, it’s wise to think through the purpose and intent before designing the scope of an agreement and addressing any potential concerns. The following tips are for practical use by individuals or businesses in Washington State when entering into a hold harmless agreement.
• Follow the golden rule. Is your goal to get the job done – or to get someone else to take the blame? When drafting a hold harmless clause, consider whether you would be just as willing to "hold harmless" the other party if the tables were turned.
• Clarity is king. Being honest and direct about what you want will help both parties understand their responsibilities as well as potential liability. Although neither party will ever appreciate being on the line for damages, at least they will know what they are getting into, and can act accordingly.
• Similarities are significant. The nature of the like-kind situation may not make a big difference in the scope of the provision, but it may help to consider whether your business typically tracks the belongings of each customer. If not, a less broad provision is in order.
• You don’t always get what you pay for. Generally a product warranty covers damage done to the item itself. However, holding a seller responsible for damage or loss of the buyer’s property is more burdensome to the seller and may essentially provide the buyer with a free warranty for his or her personal items. Think carefully about what you are asking a seller to take on.
• Not your standard fare. It is unlikely a restaurateur expects to be responsible for a customer’s own knife injury during a meal; likewise it would not follow that a contractor would be responsible for injuries resulting from a customer’s machinery. If it is within the reasonable contemplation of the parties, however, it may be appropriate to include an explicit release of liability.
• Causal factors. If a customer chooses not to follow instructions in order to complete a do-it-yourself project, and performance is off as a result, the contractor should not have to bear the blame. Similarly, if the customer is the cause of their own injury, the waiver should reflect this. The scope of the release of liability should address the role of the customer in creating the situation giving rise to the damage being claimed.
Seeking Legal Help
Hold harmless agreements must comply with the laws of the state in which the contract was signed. In Washington State, parties to contracts enter into them under RCW 62A.1-101 et seq., the Uniform Commercial Code (UCC). In most cases, the UCC does not apply to personal releases. A personal release is a document executed by a preserving agency showing that no claim has been made and/or no bill is owed for the medical care provided by any group practice or officer, employee, member, or agent of a group practice, public hospital , or university. However, a personal release executed by a treating provider is not a hold harmless agreement. A release does not impose mutual duties on the parties as it relates to safeguarding the other from financial obligation for liability. At times, insurance holds the parties harmless for either intentional or negligent acts or omissions. Mutual hold harmless agreements are best used when both parties are insured. As with all agreements between the parties – it’s always best to see the advice of counsel.