Have you ever been blamed for something entirely out of your control? It’s happened to most of us, often for minor transgressions around the house or office. The blame game can happen to businesses, too, including public and affordable housing organizations.
For instance, if a housing organization hires a contractor, and the contractor is injured on the job, the contractor could seek financial compensation from the housing organization, even if the contractor is at fault. Fortunately, in the business world, you can lean on a well-written, legally binding contract to help shield your housing organization from liability.
“A contract can protect you from these situations by including a hold harmless clause,” said Martin Ween, senior counsel with Wilson Elser.
Hold harmless clauses are commonly used in business contracts to release liability, noted Stephen Brown, a partner with Wilson Elser. In most circumstances, one party releases the other from any liability related to injury or property damage.
“If I’m engaging you for your services, I expect you to be doing them as a professional, so when a problem does arise because it’s not performed in that way, [the hold harmless clause] provides risk transfer,” Brown said. “I’m transferring my risk back onto you.”
Brown’s statement is an example of a unilateral hold harmless clause, in which one party acknowledges that it won’t hold the other accountable. In contrast, a reciprocal clause is an acknowledgment by both parties that neither will hold the other legally accountable.
Ween suggested partnering with relevant members of your organization, including legal counsel, to outline the scope of the contract and any terms your organization wants to be included. Among the terms to consider are elements of risk transfer, such as hold harmless, the duty to defend, and indemnity clauses.
The point of risk transfer is to assign responsibility to the party that's in the best position to control the risks related to the contracted services. It's critical to outline your organization's risk transfer terms ahead of negotiations, so there's no disagreement further down the line.
In contracts, you’ll often see language stating that one party agrees to “indemnify, defend, and hold harmless” the other party. The phrase includes three distinct elements of risk transfer, though they often work together (the below image is an example of a combined hold harmless and indemnity clause). Since we’re focusing on hold harmless, we won’t dwell on indemnity and the duty to defend, but if you’re interested (you should be), we will address these topics in upcoming editions of Contract Clues.
It’s essential to clarify how a hold harmless and indemnity clause differs. In a hold harmless clause, a party assumes liability for certain acts, circumstances, and events as defined in the scope of the contract. Say your housing organization hires a general contractor to renovate several units. Your organization can negotiate a hold harmless clause in the contract to prevent your organization from being held liable for any injury or property damage resulting from the renovation project.
An indemnity clause protects one party to a contract from paying for losses related to certain acts, omissions, or occurrences specified in a contract. Ween said indemnity can protect your housing organization “from having to pay money upfront for losses or defense of a claim.”
So, while your organization may be legally liable for a loss, another party agrees to cover expenses related to the loss. It’s similar to an insurance policy in that an insurer agrees to reimburse its policyholders for specified losses.
To put indemnity into perspective, let’s look at a real scenario we previously outlined in this series. A housing organization contracted with a mowing contractor to service multiple properties in two municipalities. The contract didn't specify any grass length requirements. The housing organization later learned that one of the properties violated a local ordinance in one municipality because grass grew too long between each mowing.
Ween argued that the mowing contractor should know local ordinances regarding grass-length requirements. If the contract is renegotiated in the future, he recommended that the housing organization include an indemnity clause requiring that the mowing company pay any related fines or penalties.
Ween and Brown both stressed that hold harmless clauses aren’t universally accepted across the U.S. Many states ban hold harmless clauses to prevent corporate abuse of such provisions, so it’s critical to loop in your legal and risk management teams for review before a contract is signed.
“Even if you already have these [hold harmless] provisions in a finalized contract, consult with an attorney to see how enforceable it will be in various situations,” Martin said.
Like any negotiation, there may be some give and take, but if a vendor refuses to agree to a hold harmless clause, you may want to reassess your options. On the other hand, some vendors may also request to be held harmless in certain situations, in which case a reciprocal clause may be an amenable option.
Remember, contracts are negotiable. At the very least, have your legal counsel review them before you sign to ensure they’re written in your favor and properly executed. You don't want to run into a scenario where a contractor declines to check a box, forcing your organization to take on liability it shouldn't.
Editor’s Note: This is part two of a nine-part series exploring contract best practices from a public and affordable housing perspective. A contract is a legal agreement involving two or more parties who agree to mutual rights and responsibilities. Contracts are necessary to protect your rights when entering into an agreement with another party. A best practice is to seek legal counsel regarding contract questions and recommendations.
Includes copyrighted material from a company under the HAI Group family, with its permission. This post is for informational purposes only and is not intended to provide legal advice, and shall not be relied on as such. We strongly recommend consulting with legal counsel or an appropriate subject matter expert.