What is a Hold Harmless Agreement?
A hold harmless agreement is a mutual release of all claims that one party might assert against the other. It is essentially a contract between the parties that, in exchange for an inference of "non-liability," each party agrees to drop any claims it may have against the opposing party. For example, it is common to see hold harmless agreements where one party has agreed to indemnify another in a written contract regarding development of certain property. This means that if a claim is later brought against the indemnitee (the party indemnifying another), that indemnitor is required to provide for the defense of that claim for the indemnified party .
Indemnity brings with it an implied covenant of good faith and fair dealing to the indemnitor – in other words, the indemnifying party must evaluate the claims to be brought against the indemnified party fairly without regards to the indemnifying party’s interests. Enforcing compensation agreements can be difficult and complicated as it requires (1) the party claiming to be entitled to compensation to show that they are indeed entitled under the agreement, and (2) the party that is allegedly in breach must provide a defense for the claims and defense costs are usually paid by the ultimate liable party.
The Legal Framework in Oregon
Although the Oregon legislature has not expressly yet defined or set forth the parameters for hold harmless agreements, such contracts have been recognized as valid and enforceable and governed by general principles of contract law. In order to establish an enforceable hold harmless agreement, the parties must merely show that the agreement was voluntarily made and supported by consideration. Curtis v. Anderson (In re Gorder), 384 B.R. 593, 598-99 (Bankr. Or. 2008). And "[w]here an agreement is signed by a party liable to indemnify another party for damage resulting from that party’s own future negligence, the agreement must contain specific language regarding the liability and consequence of the waiving of such liability." Or. Uniform Jury Instruction 52.11 (emphasis added); Stearns v. Shelton, 159 Or. App. 627, 634 (1999). The Oregon Supreme Court has stated that indemnification of a negligent party "is a severe burden on the indemnitee, its officers, employees, and other agents – especially if the indemnitee has a suit filed against him," but is nonetheless commonly allowed. If a hold harmless agreement indemnifies the indemnitee for its own affirmative acts of negligence, the agreement is valid so long as specifically setting forth that the indemnitee is being held harmless in exchange for entering into the contract containing such an indemnity clause. Curtis, 384 B.R. at 598-99. In Curtis, the court acknowledged that the broad language of the hold harmless agreement was enforceable despite its failure to specifically state that the indemnitee was being held harmless for its own negligence because the agreement was within Curtis’ ability to consent and "both parties were sophisticated business entities with equal bargaining positions." Id. at 598. The court further noted that Curtis could have "negotiated the terms of the proposed lease to either exclude certain provisions or to specifically allocate risk of liability." Id. Although Oregon courts have not addressed the effect of an unconscionable clause in a hold harmless agreement, such provisions are disfavored under Oregon law. "The unconscionability doctrine is generally thought to be applied to contracts that are ‘one of adhesion’ — contracts that are a standard form, offered on a ‘take-it-or-leave-it’ basis to consumers of goods and services, like a supplier’s printed form for sale of its goods, standard form purchase agreements, and the like. It is in this context that the substantive element of unconscionability has been recognized." Farris v. Sun Ore, Inc., 88 Or. App. 66, 72 (1987).
Different Types of Hold Harmless Agreements
An Oregon hold harmless agreement can be one of many types: unilateral, reciprocal, and third-party. Knowing which holds what effect is essential for proper execution and enforcement.
A unilateral hold harmless agreement is a one-way street. One party—the obligor—takes on an obligation to hold another party—the obligee—harmless. While doing so, however, the obligor does not relieve the obligee of liability for its own negligent acts. Unilateral hold harmless agreements are commonly used in Oregon. For example, a contract with a restaurant may require the restaurant to hold harmless its patrons for damages resulting from its food or service, but not if those damages resulted from the negligence of the restaurant.
A reciprocal hold harmless agreement is their opposite. It is a two-way street. Two parties commit to hold each other harmless for any damages that may result from mutual negligence.
Most Oregon reciprocal hold harmless agreements are between contracting parties. For example, the general contractor will commit to hold its subcontractors harmless for damages arising from the general contractor’s services, and vice-versa. They must also do so pursuant to statute or regulation if the contractor is on public works.
Third-party hold harmless agreements provide a variation of the unilateral type. Two parties—the "indemnitee" and the "indemnitor"—enter into a "hold harmless arrangement." And, even though the indemnitor agrees to hold the indemnitee harmless in the event of third-party actions, if the "hold harmless arrangement" is properly set out, it will also apply in the event that the indemnitee initiates an action against the indemnitor.
Third-party hold harmless agreements are often seen in health care laws and regulations that govern over the medical practice act, such that a person must perform a procedure under the supervision of a doctor or physician, and without any other form of contract that would otherwise hold him or her liable for the damages incurred in the event of a potential medical malpractice suit.
Drafting a Hold Harmless Agreement in Oregon
Drafting an effective hold harmless agreement in Oregon requires careful consideration of the circumstances involved and the best ways to protect all parties’ interests. Though many contracts already contain indemnification language, this may not be enough to satisfy all relevant concerns of both sides. Addressing specific issues helps anticipate questions or disputes that could affect relationships moving forward. Focus on relevant facts such as: Using clear language that focuses on the specific event or circumstance the hold harmless agreement is intended to address prevents ambiguity that could lead to misunderstandings between the parties. Even if the language is ultimately in line with the parties’ intentions, any confusion over meaning could result in mistakes. An agreement that allows for funds to be held in escrow until the satisfactory completion of services should specify when and where the funds will be provided. Including a timeline can help eliminate disputes focused on missed deadlines or expectations not being met. Establishing relevant timeframes also helps avoid unintended gaps. If the parties agree that a dispute is not to be referred to arbitration for 90 days after a claim is first made but the arbitration is scheduled for the day before the 90 days have elapsed, the resulting arbitration award may be unenforceable. These kinds of pitfalls should be avoided with a well-written hold harmless agreement. While ensuring that all parties feel protected is important, the reciprocal nature of many hold harmless agreements may lead to one-sided drafts that benefit only one party.
Advantages and Disadvantages
One of the reasons that contracting parties use hold harmless agreements is to shift risk of loss to an indemnitor amidst uncertainty where it is difficult to forecast who will be at fault or what the exposure will be. While it is generally advantageous to the indemnified party to have its contractual other agree to be "completely responsible" for a claim (or claims), this is not without risk of liability to the indemnitor. A hold harmless obligation can be used by the indemnifier to trigger indemnity rights that it otherwise would not have. For example, if the parties agree to indemnify a vendor against all liabilities arising out of the product, or to hold harmless the vendor for all claims relating to the product , this may allow the provider to seek indemnity from the vendor if a court finds both the provider and vendor liable for product defects. A hold harmless provision will eliminate the vendor’s ability to non-suit the provider if the liabilities arise out of the vendor’s products. This is especially true where the indemnity provision does not discuss the underlying liability and simply requires indemnification of any claim relating to the subject of the contract (the product).
Some variation of the express duty of an indemnitor to "defend" an indemnified party -regardless of who is responsible for the complaint- may be expressly added in order to place the primary duty and financial obligation on the indemnitor for all claims, thus negating the indemnified party’s duty to defend if the indemnified party is sued by a third party. The remedy of the indemnified party is capturable in the indemnified party’s right to have the indemnitor pay for all costs, attorneys’ fees, judgments, liabilities, damages, losses, settlements, or other expenses that the indemnified party incurs.
The drafting of a hold harmless agreement should be approached cautiously. Since an indemnity agreement can shift the risks of liability away, the indemnitor faces a potential liability that it otherwise would not have.
Enforcing Hold Harmless Agreements and Limitations
Enforcement of hold harmless agreements is generally encouraged by Oregon courts, provided they have been entered into knowingly and fairly. The case of Powel v. Clark County School Dist., 61 Or App. 382, 657 P.2d 217 (1983), cited in Evans & Sutherland Computer Corp. v. Provino, 116 Or App. 397, 706 P.2d 622 (1985), highlights this principle and sets out the standard of review for these contracts. Case law supports the idea that the intention of the parties is central to enforcing the contract fairly, and if the contract still serves this purpose it should be upheld. As stated in Evans & Sutherland, "no limitations or conditions shall be implied in any contract that the parties had the power, actual or implied, to insert." 116 Or App. at 402, 706 P.2d 622 (1985) (internal quotation omitted). This echoes Ferder v. Weiser, 72 Or App. 1, 3, 692 P.2d 706 (1984), which maintained that while the contract must be decided in favor of one party or the other, if the intent of the parties is still served by enforcing the contract and not modifying it, that intent should prevail over imposition of limitations that they could have included in the initial agreement.
Modifications and Termination of Hold Harmless Agreements
As with most contracts, a Hold Harmless Agreement (HHA) can be modified by agreement of the parties. ORS 41.550 ("An obligation that requires a promise, for example, not to do something specific, or to do something specific, can be revoked until some third person becomes legally bound by the promise.").
Managers frequently strive to strike the right balance between giving the protection desired to the party seeking protection and not granting more than necessary or appropriate. In this context, I have found that the following follows conceptually from typical Oregon approaches to modifying HHAs:
o Any modification should be in writing, signed by the parties and attached to the HHA.
o The specific terms of the originally negotiated HHA should be repeated in any modification (often the "party A will hold harmless party B from" provision is reinserted).
o The modification may simply state that one or more of the indemnification obligations are being modified or eliminated, or may state that all of the indemnification obligations are being modified or eliminated. If the latter, it is critical that the language relieve party A of its obligations to indemnify party B.
o The language should also stay in line with the original protection goal. If the original goal was to protect party B from all claims and it still should be-even if just during a specific period-the language should continue to provide an indemnity for all such claims.
o If the original intent was to protect from legal liability, but now the intent is to also protect party A from claims that do not have legal basis no matter how baseless those claims may be, the language should reflect the expanded goal.
o The modification should be recorded by the manager in the appropriate board meeting minutes so that the records will demonstrate how the manager and board are seeking to protect the Association without violating any applicable statutes.
Seeking Legal Advice in Oregon
Due to the complexity of these agreements, it is unwise for those in the Portland region or anywhere else in the state to draft or evaluate a hold harmless agreement without first consulting with an experienced legal professional. Whether you are managing risk from an incoming storm, building a new structure, or developing a new opportunity , it is almost always in your best interests to consult with an attorney. An Oregon attorney can help draft contracts and agreements as well as advise on how best to avoid miscommunication or misunderstandings in the future. When working with contracts, hold harmless agreements, and releases, it is best not to wait until the language of an agreement becomes an issue to seek advice from an attorney.