What is an Indemnification or Hold-Harmless Clause In A Contract ? Are they Enforceable in California? By: Richard E. Korb[1]
For a free consultation with an experienced business attorney with offices in Berkeley-Oakland -Walnut Creek, Please call Richard at 510-524-0903.
Suppose you are the owner of a company who has contracted a manufacturer to supply you with a device that you in turn sell to your customers. If one of your customers receives a defective device and subsequently decides to sue you, who should be responsible for the financial burden of the claims, costs suit and damages? Or suppose you enter a contract with a construction company to build your house, but months later the water-pipes burst underground and cause damage to the structure of your neighbor’s house.
If your neighbor decides to sue you, should you be held accountable for the legal fees and the damages incurred? If an Indemnification or Hold-Harmless clause was agreed to in the original contract, the clause would provide the allocation of liability in such an event.
An Indemnification or “Hold-Harmless” Clause is a provision in a contract that explicitly states which party is responsible for which risks in the event of a lawsuit. Normally, it exempts one of the parties of legal and financial responsibilities for all claims and legal action brought against them by a third party. The agreement may be one-sided, allocating all risk to one party, or it may allocate specific risks to both of the parties in the contract.
[One-Sided] Example:
“(Contractor) agrees to indemnify and hold harmless (Owner) of and from any and all claims, demands, actions, causes of action, losses, damages, lawsuits, including reasonable attorneys’ fees and court costs, but only to the extent caused by, related to, or arising out of the work performed by (Contractor).”
The Indemnification or Hold-Harmless Clause essentially allows the “indemnitee” to seek reimbursement (“indemnity”) for money damages and legal fees they are forced to pay a third-party as a result of a physical or monetary injury caused by the “indemnitor” (party who they seek reimbursement from). Who actually handles the defense of the claim depends on the contract stipulations. If not stipulated in the contract, the two parties may come to an agreement on this matter through negotiation.
A well-composed Indemnification/Hold-Harmless Clause should address several specific issues: First it should define which acts, occurrences, omissions, and/or claims give rise to the indemnification obligation. It should then specify the losses or expenses that the indemnitee is entitled to be indemnified for under the designated appropriate circumstances (e.g. court fees, time invested, damages etc.).
It should also make clear any obligations of prior notice that must be given to the indemnitor by the indemnitee in the event of a lawsuit. Provisions for the defense of the claim are another essential specification to include. The right or obligation of one of the parties to defend the third-party claim in court should be clearly defined, as well as the responsibility for the selection of the legal counsel. In addition, if the indemnitor is provided the obligation to defend on behalf of the claim against the indemnitee, the degree to which he can settle said claims without the consent of the indemnitee should be addressed in the clause.
California does enforce Hold-Harmless/Indemnity Clauses, but has distinctly defined the limits to which it will hold them enforceable. In the case of Queen Villa’s Homeowner’s Association vs. TCB Property Management, a California appellate court concluded that an indemnity clause cannot be enforced for claims relative to the agreement between two parties of the contract, only for claims that arise outside of the agreement brought by a third-party. (Although in other states, the clause may be enforceable when addressing claims that arise between the two parties.) And when analyzing the definition of “Hold-Harmless,” the same court concluded that it means “the right not to be bothered by the other party itself seeking Indemnification.”
So arguably, the Hold-Harmless/Indemnification Clause in California requires three parties (two of the contract and the third who is suing one of the parties) and, if the party being sued is the indemnitor, they must not bother the protected party. If the party being sued is the indemnified party, then the other party must reimburse (indemnify) them for their monetary losses/damages.
In a few instances, a Hold-Harmless/Indemnity Clause may be invalid. If the claim is a result of intentional harm or gross negligence on behalf of the “indemnitee,” the clause may be void, and all risk would be allocated to the [previously] protected party. Also, note, if the indemnitee does not have the financial means to pay the costs and damages, then the clause is essentially worthless so go into any agreement with both eyes wide open.
For a free consultation with an experienced business attorney with offices in Berkeley-Oakland -Walnut Creek, Please call Richard at 510-524-0903.
[1] RICHARD E. KORB is a seasoned attorney with 30 years of business, business litigation and transactional (contracts) experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2010
For a free consultation with an experienced business attorney with offices in Berkeley-Oakland -Walnut Creek, Please call Richard at 510-524-0903.
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