Hold Harmless Agreements Explained
A hold harmless agreement is a contractual agreement in which one party assumes the liability of another. That is to say, the party taking on the risk specifically agrees to undertake the financial exposure and thereby "holds harmless" the other party.
The Texas Supreme Court has specifically defined the term "indemnify" to mean "in its broadest sense, the main purpose for which an indemnity is given." Accordingly, the Texas Supreme Court has held that a party who "assumes the risk" or the "exposure to risk" assumes the indemnity. As always, the contract terms control the agreement, and how the agreement is written will control the scope of the assumption. Accordingly, some hold harmless agreements are very narrow in scope (i.e., only referring to the use of certain equipment and/or certain monetary limits), while others are broader in generalities (i.e., defending all suits). If you do not agree, then do not sign the agreement.
The present trend requires hold harmless agreements. Ten years ago, these agreements were not needed so often. Now, however , the oilfield requires indemnification agreements for anything that can and might happen at the well site. The agreements are generally used to transfer liability from one party to another. A common example is the master service agreement. Many companies require their contract laborers to sign a configuration form as well as a hold harmless agreement. These are two separate agreements where the driller seeks to protect itself from any claims. One example is the person falling on its own rig, or the mud engineer getting sued for a bad batch of mud, or the mud engineer getting sued for a formation loss. We see these agreements in the context of sales agreements, pad sites, vendor agreements, and other contracts.
The primary purpose for most hold harmless agreements is to prevent future disputes or litigation. Many people will avoid future arguments or other issues by signing a hold harmless agreement where the contract terms are balanced. The reason these agreements are often required is because there have been existing problems where a company or individual was sued for the damages and then had to defend itself in court. If the parties can agree upfront about their respective liabilities, the assumption of liabilities will be easier to apply in the future. It should be easy to assess the risk, and balance the risk, prior to any incident or trial.
Hold Harmless Agreements and their Legal Standing in Texas
The legal validity of hold harmless agreements in Texas depends on several factors, including the language of the agreement itself and whether or not the claim for damages was within the contemplation of the parties at the time the contract was signed. Where a hold harmless agreement is clear and explicit in liability shifting, Texas law provides that courts will enforce it according to its terms. However, Texas law does not permit indemnification for any damages arising from the negligent acts or omissions of the indemnitee—at least not unless clear and explicit language provides that the indemnitee is indemnified for its own negligence or fault. As stated by the Northern District: Texas law does not favor indemnity contracts. (Citation omitted.) "A party may be indemnified by another against the consequences of its own negligence only if such intention is unmistakably indicated in the agreement." (Citation omitted.) A provision that the indemnitor will indemnify the indemnitee from all claims arising out of the negligence of either party is not clear or specific enough to impose liability upon the indemnitor for the indemnitee’s own negligence. (Citations omitted.) In a case involving a construction contractor and a subcontractor, the Dallas Court of Appeals took it a step further, acknowledging that Texas law prohibits indemnification for one’s own negligence, "absent express language." Id. The Northern District Court further held that language providing that a party would indemnify the other party "against any and all loss, damage, cost, expense, or liability" was insufficient to pass the legal tests necessary to shift liability for such damages. Latipac v. Evolution Claims Servs., 2005 WL 1353347 (N.D. Tex. June 3, 2005).
Varieties of Hold Harmless Agreements
There are different categories of indemnity agreements (a/k/a hold harmless agreements). The most common form is a unilateral indemnity agreement. A unilateral indemnity agreement means that one party to the contract must indemnify and hold harmless the other party. In the construction industry, you usually see a one-sided indemnity agreement in the general contractor/subcontractor setting where the subcontractor must indemnify and hold harmless the general contractor.
A reciprocal indemnity agreement means that both parties to a contract must indemnify and hold harmless the other. It is not all that uncommon to see reciprocal indemnity agreements in a construction contract.
Reciprocal indemnity agreements can appear in the typical form found in a general contractor/subcontractor contract. However, reciprocal indemnity agreements can also be found in a general contractor/general contractor situation where two or more general contractors work on the same project. Another situation where you will find a reciprocal indemnity agreement is in a joint venture agreement where two or more parties are joining together to do a project.
Negotiating an indemnity agreement in the construction context is extremely important. Contractors have a lot of leverage in the negotiation because they are typically the ones handing out the contract form with the indemnity agreement already in it. Subcontractors need to be aware of this open contracting practice and be prepared to negotiate if they want to avoid an indemnity agreement.
The Components of a Hold Harmless Agreement in Texas
It is important to draft hold harmless agreements with intentionality so that they will be enforceable in Texas. Otherwise the protection they are intended to provide may not extend to third parties. This section describes the elements of an effective Texas hold harmless agreement.
The Parties
For hold harmless agreements to define the limits of liability that will be protected, they must define the "parties" who are involved. These are typically upwardly tiered parties, such as the owner, the general contractor, and the subcontractors.
In Texas, the applicability of hold harmless "shall not apply to the extent of the negligence of the indemnitee." (See Tex. Civ. Prac. & Rem. Code § 130.001). Since this is a statutory claim, it will supersede an agreement if the agreement attempts to waive this right.
The Scope of Protection
Another critical element of the hold harmless agreement is the scope that it protects. If it is only intended to cover foreseeable claims, it will only cover foreseeable claims. If it covers injuries that arise outside of the project, the agreement will extend only as far as it is intended.
Limitations
Finally, it is important for parties to specify the limitations of their liability in their hold harmless agreements – both as to the type of damages and the amount of damages. For instance, if the indemnified party is only entitled to attorney fees, it must specify they may not be entitled to consequential or punitive damages, and accordingly limit their recovery.
Creating a Hold Harmless Agreement in the State of Texas
Unlike other states which require formalities in creating enforceable hold harmless agreements, Texas courts permit such agreements to be informal. Further, most unlawful contractual provisions are severable, leaving the valid portions to stand even when one or more of the clauses is unenforceable or against public policy.
A hold harmless agreement must be conscionable, however, which means that there must be consideration. A promissory note, money, or a promise to forbear on a legal right is sufficient consideration to render a hold harmless agreement enforceable. Even a mere waiver of the time needed to sue, or of some legal procedure, is sufficient. In the case of promises to pay amounts due from a debtor to a creditor, consideration exists when the promise is unilateral and made by the rendering of a material benefit by one to the other, in reliance on the agreement.
Where a debtor becomes a surety in connection with a loan agreement, the debtor’s obligation and liability for repayment of the debt and interest constitutes consideration for the debtor’s hold harmless agreement. In such a situation, the borrower and lender are presumed to have intended that the surety agreement would be secured by the same property as the loan, although such did not occur. Or, if an equity loan secures the prior first lien mortgage, the equity loan agreement is enough consideration to allow the homeowner to enter a hold harmless contract in favor of the Lender on the equity loan.
Some hold harmless agreements are one-sided. They release one party from liability arising from another’s negligence, without releasing the free party from its own negligence. In some cases, however, an agreement to indemnify one’s damaged property owner for loss or damage caused by fire or other casualty is valid in Texas. Such an indemnity is not prohibited even though the property owner’s insurer would be without a cause of action against the negligent party, or even though the property owner’s insurer would be indemnified by contract against negligent acts of third parties .
Further, a hold harmless agreement may be valid in Texas even though the precise claims, demands, or causes of action against which it is intended to indemnify are not specified in the contract. In a case where a contractor agreed to pay "all expenses and damages occasioned by the work," including injury or death arising from "bodies or other property," the court upheld the indemnification agreement even though the contract did not specify which claims would be covered.
An indemnity agreement may be enforced even though it has no expiration date. For example, in a case where the buyer of a home agreed to indemnify the seller for all claims arising from vacancies, unoccupancies, unknown encumbrances, or changes in zoning laws, the court upheld the agreement as enforceable despite it lacking an expiration date.
As an extension of this principle, a deed has been upheld in which the buyers agreed to indemnify the sellers for any liabilities that arose out of the use of the residence by the buyers or their agents, notwithstanding anything in the agreement to the contrary.
If a hold harmless agreement is void, the parties still can be liable to each other on traditional contract principles. If the conduct giving rise to liability under the agreement includes negligence on both sides, then the injured party may recover only for the proportion of the negligence attributable to the approved party.
The language in a hold harmless agreement should be clear and concise. Without a clear statement, it can be difficult to understand the rights and responsibilities of the parties. For example, an effective hold harmless agreement will leave no question concerning responsibility for higher than expected utility costs after a sale of real estate.
If the drafting is one-sided, however, the drafter will undoubtedly get the result he expected. To ensure an enforceable hold harmless agreement, carefully read all provisions in light of public policy, examine the factual situation to which the agreement will be applied, and determine if the agreement is conscionable.
Common Issues with Hold Harmless Agreements in Texas
Many regrettable disputes can be avoided through clear and unambiguous drafting. What is "unambiguous" often has a legal element, meaning there is a point at which a lawyer has to come in and explain the situation. Still, proper hold harmless language can make it far less likely that a hold harmless agreement has to be litigated. For instance, many parties use "hold harmless" language essentially as boilerplate or as a placeholder with the intention of specifying what exactly is being held harmless at some later date. This is a mistake. A hold harmless agreement should not be considered a preliminary document with the intent to add language later on or to clarify certain points at a later date. Language that is not sufficiently clear could raise problems down the line and can even render an agreement unenforceable.
Another common issue involves vague language. A general hold harmless agreement might be intended to cover claims, losses, damages, liabilities, suits, expenses and the like. While it may read like that, there could easily be a missing claim or damage that could affect how the parties act. As an example, a party might say he or she is holding someone harmless from "losses." But what kind of losses? Are they economic? Reputational? Physical? When a loss is incurred, the failure to reference any one of these could create a problem with the hold harmless agreement. Even though these types of language mistakes are easily avoidable, they come up often. It’s also important to remember that certain types of language can be unenforceable in Texas. Since hold harmless agreements are typically for indemnification, any clauses that render a party liable for its own negligence (for example) may be considered void in some instances.
Time to Seek Legal Counsel
While understanding the nuances of hold harmless agreements and the Texas DTPA is important, there are some times when it is essential to consult legal counsel who is familiar with both of these entities. Those interested in entering into a business deal always have the opportunity to negotiate, and it is possible that the contracting party that prepares the initial agreement (typically the land developer or contractor) may not be willing to budge on certain aspects of the initial agreement. In this situation, some negotiation assistance may be needed in order to get avoid the specific type of liability that these agreements are intended to prevent. There are also times in which the interpretation of the agreement may need to be addressed by a third party. When such a dispute occurs, an attorney can help either with negotiation or litigation, if deemed necessary. When negotiating or drafting a hold harmless agreement, it is important to ensure that you receive the level of protection you need, and that the document truly reflects what you are trying to avoid.
Final Remarks: Protecting Yourself Legally in Texas
As we have seen, parties to a contract and numerous commercial transactions in Texas often use a variety of methods to minimize their potential liability, and one of the most ubiquitous methods they employ is the hold harmless agreement. Such agreements are entered into by the parties not only with the hope to avoid a protracted legal dispute, but also to create a process which will more expeditiously resolve potential legal matters. Because these agreements play such a prominent role in many legal dealings, it is critical that all parties involved understand how they may become liable to a contracting party, and also how they can utilize a well-written agreement to avoid the onus to compensate one of the other parties to the agreement . Truthfully, however, an agreement is only as good as its weakest point. In other words, the benefit of any hold harmless agreement lies in the drafting of the agreement itself. For this reason, working with a skillful and experienced Texas attorney to draft and maintain this kind of agreement is of paramount importance. Regardless of the nature or size of your business, regardless of how many contexts in which you might sign a hold harmless, and regardless of your field or industry, a Texas lawyer who understands how hold harmless agreements work can be a valuable resource in helping you craft a large variety of these agreements.