What is a Hold Harmless Agreement?
Hold harmless agreements, also known as indemnity agreements, are a common method for shifting risk from one party to another prior to litigation. A hold harmless agreement is essentially a promise by one party to assume financial responsibility for any liability the other party may incur, either as a result of the contract or a third-party claim.
The fundamental purpose of any hold harmless agreement is to make clear the duty to indemnify in the event the other party is found liable. In turn, indemnification means that one party has the obligation to cover the cost of any judgment or settlement. Under New York law, and generally, there are three types of indemnity – express, implied and common law. An express indemnity mimics the phrasing of the hold harmless agreement, explaining that party A agrees to indemnify party B for any claims arising out of the contract. Express indemnity agreements are enforceable as long as the language setting forth the promise to indemnify is clear and unambiguous. An implied indemnity agreement is similar to an express agreement , but does not expressly set forth the duty to indemnify. These agreements cannot be enforced unless there is a secondary relationship between the two parties (for example, an employer/employee relationship or principal/agent relationship). Finally, there is common law indemnity which does not make for a contracting party, but instead shifts the liability between parties, usually in the context of a party attempting to recover under an indemnity provision when they have no direct contact with the party from whom they seek indemnity (such as where a defendant seeks indemnity from its insurer when being sued).
Examples of hold harmless agreements include requirements that one party indemnify another against any claim arising out of the contract itself (e.g. a construction agreement), or a party agreeing to indemnify another against any harm arising out of a third-party suit. In these cases, the general principles outlined above apply.
Requirements for Legal Hold Harmless Agreements in NY
In the State of New York, to create a legally binding hold harmless agreement, it is necessary to have a mutual agreement between two parties -the party who agrees to be held harmless and the person or entity agreeing to hold them harmless. Coming to an agreement generally requires a meeting of the minds, where both parties can agree to terms in a manner that is "reasonably definite." A hold harmless agreement is enforceable in New York only if both sides understand the terms and circumstances of what they are agreeing to. In order to be valid under common law, a hold harmless agreement must be explicit or implied.
All New York hold harmless agreements must adhere to either § 5-321 of the General Obligations Law, or Article 22 § 15 of the Real Property Law. It is important to note these laws refer to contractors, curing obligations and the respective liability of owners and contractors for work performed by contractors and subcontractors on certain premises. New York generally has a strict enforcement of these statutes as applied to construction contracts. If it was the intent of the parties to absolve one party from liability in a contract, such provisions are "strictly construed" and will only apply to "those parties expressly within its scope." Because of this strict construction, courts will not recognize hold harmless provisions in construction contracts that are not directly tied to indemnification provisions, because indemnification provisions are usually the only ones that would convey the intent to shift liability between parties. Any contract language that is in general conformance with these statutes, but not a verbatim copy of the statute are construed to abide by the coverage of these statutes.
Types of Hold Harmless Agreements
There are two main types of hold harmless agreements: unilateral and mutual. Unilateral hold harmless agreements typically obligate only one party to indemnify the other party, while mutual hold harmless agreements require both parties to indemnify each other for their own fault. In New York, mutual hold harmless agreements are prohibited in the context of construction contracts (see A.O. Fox Memorial Hospital v. L.J. Angell & Son, Inc., 95 A.D.3d 1296 [3d Dept 2012]).
In the context of "construction contracts", General Obligations Law §§ 5-321 and 5-322.1 specifically render void all agreements between contractors and owners (and their sureties and insurers) that indemnify the owner for injury or damage arising out of its own negligent acts or omissions.
On the other hand, hold harmless agreements that merely require one party to indemnify others for damages that arise out of their own negligence are valid and enforceable under New York law.
While as a general rule construction contracts are excluded from the hold harmless provisions of General Obligations Law §§ 5-321 and 5-322.1, this exclusion is narrow, and mutual hold harmless agreements tending to indemnify the owner for the owner’s own negligent acts and omissions may not be enforceable in the absence of some express statutory authority. One such statutory authority may be found in the New York City Administrative Code, which generally permits contracts between the City of New York and contractors to require the contractor to indemnify the City with respect to the City’s joint negligence – provided that the indemnification clause is sufficiently limited to permit it to survive the application of Sections 5-321 and 5-322.1 of the General Obligations Law (GOL). See Schmitt v. 242 East 136th Street Hous. Dev. Fund Corp., 73 N.Y.2d 966 (1989).
Value of Hold Harmless Clauses
Adding a hold harmless clause or indemnity clause to a contract can be vital for the parties involved. Specifically, such a provision may eliminate, limit or minimize liability from claims made by other parties or even by parties not involved in the contract. A hold harmless is a promise by which one party assumes the financial and legal responsibilities of another. Hold harmless clauses are very important for contractors and subcontractors. Contracting without the protection of a hold harmless agreement can expose parties to significant risks on a construction job. Even if contracting parties are insured, damages outside the scope of their insurance may be incurred. Liability due to defective work or products, or personal injury or property damage to others on the job site are expenses and exposures that can be financially devastating. In addition to its importance for contractors and subcontractors, they are also of significance in real estate agreements, equipment rental agreements, industrial agreements and other commercial transactions.
Drafting Hold Harmless Agreements in NY
Should you be faced with the task of drafting a general hold harmless agreement in New York, then with most cases, the agreement must be in writing to be enforceable. Separately from the statute, courts are reluctant to allow injudicious parties to escape responsibility for property damage. To avoid problems arising from interpretive questions under the statute, it is best practice to have all releases of liability in writing.
The hold harmless clause should begin out with an identification of the simplest possible scope of the release. A proper draftsman of such a release would usually begin by setting forth the names of the parties, the subject matter and the location of the event at which the loss or damage arose. The next clause of the release should describe the damages that result from the event and are to be included within the hold harmless clause. Next, the draftsman will typically include some language specifying that the entire agreement constitutes the parties’ entire agreements. Also, in order to avoid any disputes about when a dispute has arisen over the subject matter of the hold harmless clause, the draftsman should include a clause specifying the particular process that the parties agree to follow after a breach in the implied warranty has occurred in order to inculcate into the parties some form of dispute resolution .
In addition to the aforementioned clause topics, it is also best practice for the draftsman to include some form of choice of law clause, setting out the particular state or federal law the parties wish to apply to the interpretation of their agreement. Typically, it is best practice for the draftsman to include a particular choice of law clause to avoid parties from forum shopping. New York prefers having more certainty than less when making legal decisions, so the New York legislature has promulgated a statute requiring contracting parties to agree to a particular choice of forum and choice of law, as a matter of public policy. With the above provisions negotiated between the parties and included into the final writing, the hold harmless agreement may then be signed and dated by the parties. At this point, the parties should execute the hold harmless agreement in the presence of a notary in order to afterwards give to themselves a notarized copy of the executed agreement. This copy with the notary stamp and signature remains in the parties’ possession, and may thereafter be used in court to establish the eligible parties to the hold harmless agreement and their identities.
Enforcement and Limitations
In New York, a hold harmless agreement or indemnification provision is enforceable if it is clear and unequivocal, and where it comports with the reasonable expectations of the parties. Gohari v. Dardanelos, 294 AD2d 543, 743 N.Y.S.2d 365 (2002). Therefore, indemnification provisions and hold harmless agreements are generally enforceable under New York law, but courts will enforce them when the parties’ intent is unambiguous; where such an agreement is silent as to the situation giving rise to the liability, the agreement may be construed to cover only those liabilities which were within the reasonable contemplation of the parties at the time of its execution. Oehler v. Amoco Oil Co., 88 A.D.2d 631, 452 N.Y.S.2d 519 (2d Dep’t 1982), citing Petito v. Landau Sys., Inc., 26 A.D.2d 188, 272 N.Y.S.2d 578 (2d Dep’t 1966). Courts generally uphold fully comprehensive indemnity clauses and hold harmless agreements as long the wording is sufficiently specific. For example, in Oehler, supra., the Court held that although the indemnification language in the contract could be read broadly to include claims other than those arising from the work to be performed thereunder, the evidence at trial established that the agreement was intended to apply only to work to be performed by the contractor in land preparation. See also, Moder v. National Fuel Gas Co., 60 A.D.2d 109, 400 N.Y.S.2d 872 (4th Dep’t 1977); Nuttall v. County of Broome, 165 Misc.2d 250, 627 N.Y.S.2d 227 (Sup. Ct. 1995). However, there are instances when an indemnification clause or hold harmless agreement may be held to be void or unenforceable based on public policy grounds, on the basis of the precept that no party can insure against any consequences of its own intentional or negligent conduct. See, Seabrook, supra; Riemer v. New York State Thruway Authority, 40 N.Y.2d 429, 387 N.E.2d 559, 386 N.Y.S.2d 594 (1976)(indemnification provision in toll collection method agreement between Authority and contractor was void on grounds of public policy); McKinney v. Geller, 262 A.D.2d 516, 691 N.Y.S.2d 792 (2d Dep’t 1999) (hold-harmless provision that absolves an owner and general contractor of liability for their own negligence is not favored in New York and, hence, is not enforceable); Hurtado v. Crystal Springs Apartments, 27 A.D.3d 946, 812 N.Y.S.2d 338 (4th Dep’t 2006).
Common Misconceptions
Often in New York, individuals believe that a hold harmless agreement provides them with guaranteed protection, or protects them from all liability. Nothing could be further from the truth. Many construction workers are told that they are protected if a hold harmless agreement is signed. The simple fact is that these hold harmless agreements aren’t worth the paper they’re written on (but nevertheless are often signed without reading). For example, a construction worker who signs a hold harmless agreement waiving his or her right to sue an owner for a "Labor Law" claim is out of luck at trial when his or her employer doesn’t have insurance, because the owner will simply bring forth evidence of the hold harmless agreement. The typical unsigned employment contract does not include any hold harmless language, and if the employer doesn’t have sufficient insurance, the injured worker is left without compensation.
Another common misconception individuals have regarding a hold harmless agreement is that it will provide them indemnification from liability for all torts under New York law. First, a litigation based on a contract breach or violation of an independent duty does not constitute an injury that can be compensated through a "common-law" indemnification. Second , a hold harmless agreement does not provide protection for immunity under New York law to indemnity against claims for injuries for which an employer may be held liable under New York’s Workers’ Compensation Law. Similarly, notwithstanding the language included in a hold harmless agreement, the general rule is that it does not provide protection against liability for "personal consequences arising out of its own negligence involving personal injuries sustained by its employees who turned their work into a turf battle with an outsider." See, Corsetti vs. Stone Co., 57 N.Y.2d 435 (1982). This type of indemnification is not created by agreement, but rather must be a right provided by statute.
In sum, although in New York a party may indemnify, and hold harmless another party, from losses or liability incurred under a tort theory or for damages in a breach of contract action, the indemnitor does not have the right to indemnification under New York law. An indemnitor seeking indemnification under New York law has to establish the right to indemnity based upon either an express contractual provision or on some established public policy basis.