Understanding liability and risk transfer is paramount for any organisation managing contracts. A critical instrument that facilitates this mutual understanding is the hold harmless or indemnity agreement. Encountering a hold harmless clause or document is incredibly common in both the public and private sectors.
What Is a hold harmless or indemnity agreement?
A hold harmless agreement – also known as an indemnity agreement – is a contract in which one party (the indemnitor) agrees to protect the other (the indemnitee) from certain damages or liabilities. Organisations can use these agreements to manage risks associated with various contract obligations and deliverables. Hold harmless agreements can be unilateral contracts (one party is protected) or bilateral contracts (both parties are protected).
Examples of hold harmless agreements
Here’s a detailed look at some examples where hold harmless agreements would apply.
- Construction projects: One party (typically a subcontractor) agrees not to hold another party (such as a general contractor or owner) responsible for the project’s losses, negligence or accidents.
- Real estate: Commonly used in leases, home construction, and other real estate transactions, it releases a party from responsibility or damages associated with building or maintaining property. Events (such as injuries) that occur during leases see the landlord held harmless from liability.
- High-risk activities: These protect the company that’s facilitating the high-risk activity from liability for damages or injuries resulting from that risky activity. Examples would be skydiving, rock climbing etc.
Essential elements of a hold harmless agreement
A hold harmless agreement must begin by clearly identifying all parties involved in the agreement, including the aforementioned indemnitor and indemnitee. Next, parties should unambiguously clarify the specific events, activities and situations covered by the contract. Taking this further, parties should specify the extent of liabilities or damages from which the indemnitor will protect the indemnitee.
Important: It’s necessary to clearly define hold harmless or indemnity in the context of the specific contract. This should include specifics about covering expenses such as settlements, damages or legal fees. To that end, parties should outline insurance or coverage policies required by the agreement (if applicable).
Parties should also include terms and conditions regarding contract termination, obligations, renewal and more. Additionally, they should specify which jurisdiction’s laws will govern the hold harmless agreement and how disputes will be resolved. Finally, all parties must approve and sign the agreement, including the date of contract execution.
Practical advice and considerations for hold harmless agreements
Below are some practical considerations and advice for organisations managing hold harmless agreements.
Clarity and scope
Hold harmless agreements should use unambiguous and concise language to help avoid potential disputes and misinterpretations. To that end, contract management software can be used to standardise clause language, analyse positive, negative or neutral sentiment on both sides of a contract, and auto-redline for optimal language. Organisations should consider all potential risks, including those that may not be immediately apparent.
Legal and insurance review
Organisations should leverage in-house or outside counsel to ensure the hold harmless agreement is legally enforceable. Furthermore, insurance policies should be reviewed to determine applicable coverage or associated limitations. If necessary, organisations should purchase additional coverage to protect against harmful contract risks.
Negotiation and drafting
Organisations should consider including bilateral, mutual indemnification clauses to protect both parties from liabilities. Sufficient financial capabilities or insurance specifications should back promises of indemnity.
We recommend contract management software’s centralised contract data for terms, insurance specifications, clauses, key dates, financial information and budgets. Additionally, organisations should consider a central negotiation portal in CLM (contract lifecycle management) software to quickly iron out these specifics via in-system chats, email alerts, full audit trails and version tracking.
Limitations and potential drawbacks
Parties should be aware that some jurisdictions may not fully enforce insufficiently clear hold harmless agreements. Additionally, hold harmless agreements may be voided if they are found to be the result of fraudulent or coercive behaviour on the part of either party. Furthermore, some insurance policies may exclude coverage for damages associated with business contract obligations.
The best way to manage hold harmless agreements
The best way to manage hold harmless agreements, by far, is with contract management software. Organisations can streamline handling hold harmless agreements by automating tasks, facilitating better collaboration and decreasing risks.
Here’s how contract management software helps with hold harmless agreements:
Pre-approved templates and clauses: CLM software allows for the easy creation and management of pre-approved indemnity agreement templates and hold harmless clauses for consistency, clarity, and compliance.
Negotiation features: Automated version control, full audit trails, clear communication channels and auto-redlining can make the hold harmless agreement negotiation process easier and more seamless.
Intelligent workflow automation: Workflow tasks and steps associated with indemnities can be configured to route agreements from creation to approval and renewal.
Secure contract repository: Organisations can leverage saved searches, search history, ‘Did you mean…?’ functionality, and advanced filters in a central repository for all contracts, including hold harmless agreements.
Generative AI: Advanced generative AI can create hold harmless and other clauses, proactively map risk, and showcase contract sentiment for both the indemnitor and the indemnitee.
Contract management software from Four
At Four we’re committed to delivering high-quality, reliable software that meets the real-world demands. Our contract management software – Contract Insight – is robust, user-friendly and versatile, ensuring your organisation can face future challenges and opportunities. To see how you can better manage hold harmless agreements and countless others, book a free demo of Contract Insight from Four today.
Contact John O’Brien, CEO at Four Business Solutions – global business consultants and software integrators specialising in business process improvement.
*Legal Disclaimer: This article is not legal advice. The content of this article is for general informational and educational purposes only. Readers should contact their solicitor for legal advice regarding any particular legal matter.
