What is a Release Agreement?
A release agreement typically encompasses provisions in which both parties agree to exempt each other from any further liability for a specific event or transaction. A party executing a release generally understands its scope, and is willing to afford the other party immunity from future claims for damages arising from the earlier event or transaction. A release is commonly attached to a "release and indemnification agreement" that also incorporates the same language and effect of the release but with slightly different legal effect. A general, non-employment release will state that the parties are releasing their respective claims against each other in exchange for terse statements of value. Typical language contained in a release agreement will provide that:
…the Contents are made and delivered, and the Other Party and I do by these presents forever release, discharge, and exonerate the Other Party…
….a full and final compromise , adjustment and settlement of each and every controversy, claim, indebtedness, account, demand or liability which the Releasing Party had in the past or now has with respect to the Subject Matter.
The key is that the purpose of the release is to exempt the party from liability for future conduct based on a specific transaction or event. An example of this is a release in connection with a loan transaction, in which a borrower agrees to all of the lender’s terms and then "releases" the lender from any future liability, in exchange for the money being loaned. The agreement would recite the specific deal and set forth the sums to be paid back, and represent that this is the complete understanding of the parties. While the language can vary widely, generally speaking, these types of forms will incorporate release language. Releases are also frequently combined with indemnity agreements, applying similar concepts to the scope of possible future liability.
Indemnification: Your Shield from Liability
The term indemnification refers to a contractual provision that relieves one party from certain liabilities. One commonly used form of indemnity is "indemnification for actions of negligence." Such a provision might set a very low bar, such as "[contractor] agrees to indemnify [homeowner] for claims or damages arising from [contractor’s] negligent acts or omissions in performance of this contract." However, some indemnification clauses are much stronger. For example, an indemnification provision might require indemnification for any claims arising from contractor’s work.
Indemnification clauses are common provisions in construction contracts. They serve to shift liability for claims brought by third parties against an owner to its contractor. Let’s use the following hypothetical to explain how this works. Suppose a homeowner hires a contractor to demolish her old house and build a new one in its place. Suppose the work goes fine for the first few months and then the homeowner decides to have a party one weekend. To make space for the party tent, one of the guests knocks down a temporary support beam that was just for that weekend. The incident was an accident and no one was hurt. The homeowner would like to be compensated for the damage that results, but the contractor argues that it should not be required to pay anything because the incident was an accident. If that has not already been determined by a court, or if the indemnification clause does not require indemnification for "accidents," then the contractor may have a strong argument.
If, however, the contract with the homeowner contains a sufficiently broad indemnification clause, then the contractor may have to pay to replace the support beam that was knocked down. Perhaps an indemnification clause would require the contractor to pay for any damage caused by an "act" of the contractor. An "act" is usually defined broadly to include the contractor’s failure to act, so whether or not the damage is characterized as the result of negligence or an accident would not matter. The contractor would be wise to pay for this because, even if a court determines that the contractor is not responsible for the damage, the contractor has probably already incurred at least some cost in litigating the dispute. Of course, the contractor could have avoided the problem entirely by negotiating for a narrower indemnification clause in the first place.
The Hold Harmless Provision
A hold harmless clause is a provision that obligates one party (indemnitor) to protect another party (indemnitee) from specific claims or damages in connection with the general subject matter of the contract. The scope of the indemnity provision will determine whether the indemnitee is protected or not. For instance, if the indemnity provision protects against claims for "the negligence of indemnitee", the indemnitee may be protected from claims that indemnitee’s negligence caused the damages, but may not be protected against claims that unrelated to indemnitee. A typical hold harmless clause will read something like: Indemnitor shall defend, indemnify, and hold harmless Indemnitee and its officers, board members, staff members, agents, and volunteers and permit them to recover all reasonable costs, attorneys’ fees, and expenses from Indemnitor arising out of or resulting from any claim, demand, action, or suit at law or in equity, including, without limitation, medical or personal injury claims or death and property damages when such claims are based upon Indemnitor’s sole negligence, gross negligence, intentional acts, or material breach of contract, provided, however, Indemnitee shall not be indemnified for Indemnitee’s own negligence or intentional acts.
The key is to remember to read the entire indemnity provision to determine what is covered and what is excluded. For instance, was there a third-party requirement, such as a "prudent contractor" standard for section 4B? That section may provide more information about the scope of the indemnity protection than the "hold harmless" language, which is often standard contract language.
So…What’s the Difference Between Release, Indemnification, and Hold Harmless?
Release agreements, indemnification clauses, and contractual hold harmless agreements are often used interchangeably in commercial agreements. However, there are a number of distinctions among these agreements and clauses that need to be clearly understood in light of the specific use and the surrounding circumstances. For example, a release agreement relieves a party of liability for certain harms, but it is not mutually exclusive of indemnification provisions. An indemnification provision, in many cases, may need to be supported by adequate consideration, whereas releases require consideration to be enforceable. A hold harmless agreement is a type of indemnification agreement and indemnification clause is a type of hold harmless agreement, but neither may require a large amount of additional consideration. Further, a hold harmless agreement may only be limited to claims arising out of a specific set of circumstances and may provide for an obligation to defend as well as indemnify.
It is important to understand the differences in the context of your agreement.
Drafting the Provisions
When considering the best way to draft a release, indemnification, or hold harmless agreement, there are a few common considerations that come into play. First, it must conform with the written expression of the parties’ intent. Second, the language must be sufficient under the law to carry out the intent of the parties. Third, the language must be conspicuous. Fourth, it must be unambiguous .
Some common mistakes made when dealing with these kinds of agreements include overly broad definitions of what claims are released, supported, or being indemnified. The scope of the release, indemnification, and hold harmless clause must be appropriate in context. It is also common to see ambiguous language inserted, that which may allow the drafting party a "get out of jail free card" at the expense of the other party’s rights.
Legality and Enforceability
The enforceability of release, indemnification, and hold harmless agreements, commonly referred to as exculpatory clauses, is a topic that has generated extensive judicial commentary and analysis. The legal enforceability of a release, indemnity, or hold harmless agreement depends upon the interplay between common law principles and statutory requirements.
Many states have enacted anti-indemnity statutes that dictate the enforceability of indemnification provisions, a few of which are summarized below:
Colorado
Colorado’s indemnification provisions are set forth in the general provisions of Article 10 of Chapter 13 of the Colorado Revised Statues. Under Colorado Revised Statutes § 13-10-201, a contractor and a subcontractor with respect to improvements to real property may agree to indemnify each other for claims that arise out of the performance of the contract but a party seeking such indemnification must be able to show either that (a) he was injured by an agent or employee of the person seeking indemnification; (b) the damages for which indemnification is sought arose from a breach of a contractual duty that was owed to the injured party by the person seeking indemnification; or (c) the claims sought to be indemnified are based on injuries to persons or property occurring during the performance of the contract by the person seeking indemnification. This anti-indemnity statute has been held to be "exculpatory only insofar as it applies to passive indemnity, and therefore, applies to both active and passive indemnity." Campbell v. Am. Home Assurance Co., 788 P.2d 818, 821 (Colo. Ct. App. 1989). Colorado Courts have held that a duty to indemnify under the Colorado Construction Trust Fund Statute "would not relieve the trustee of additional fiduciary obligations." Doylev. Doylev. Continental Casualty Company, 111 P.3d 457, 460 (Colo. Ct. App. 2005).
Arizona
Arizona’s indemnity provisions are set forth in Title 33 of the Arizona Revised Statutes. These provisions generally restrain the scope of indemnification to the extent that the legislation does not affect a "legal obligation" or "statutory liability" and also provide that a construction contract may require indemnity but only up to the limit of anticipated liability insurance proceeds. Ariz. Rev. Stat. § 33-1006. However, this provision may not apply if the contract is "between related parties." Ariz. Rev. Stat. § 33-1006.
California
Like Colorado’s anti-indemnity provisions, California’s Restrictions on Construction Contract Indemnity Agreements, codified in California Civil Code § 2782, prohibits provisions that require indemnification for bodily injuries or property damages "arising from the negligence, recklessness, or willful misconduct of the party seeking indemnity," such as a general contractor seeking to shift liability to its subcontractors. Conversely, California Civil Code § 2782.2 permits indemnity for design defects to the extent the contract is separately negotiated.
Texas
Texas Courts have provided that a construction contract between parties involved in construction to an improvement on real property may indemnify a party against a claim for personal injury, death, and property damage so long as the agreement satisfies the requirements of Texas Civil Practice and Remedies Code § 130.001. These requirements provide, in relevant part, that such agreements are enforceable provided that: (a) "the contract is [1] in writing, [2] conspicuous, and [3] separately signed by the party seeking indemnity"; (b) they expressly state the parties’ intention to waive the application of the Texas Civil Practice and Remedies Code §130.002; and (c) they specifically refer to the TPC exemption. Tex. Civ. Prac. & Rem. Code §130.001.
Jurisdictional distinctions notwithstanding, the general rule regarding the enforceability of release, indemnification, and hold harmless agreements is that they are enforceable so long as they are specific and conspicuous, compliant with any applicable statutes or case law, and are not contrary to public policy.
Case Studies and Applications
Researched cases involving releases, indemnification and hold harmless provisions provide the insight necessary to assist in avoiding disputes. Shadowy cases focusing around indemnities or hold harmless provisions may not provide the entire portion of a contract requiring resolution. Often, additional havoc has already disrupted the relationship before the issue is finally resolved by the court.
New Jersey Courts have repeatedly held that agreements to indemnify or hold harmless must be clear and express in their terms. Sykes v. American Cyanamid Co., 490 A.2d 395 (N.J. App. Div. 1985). Furthermore, such provisions in conveyances must be liberally construed. Modesta v. Antonides, 674 A.2d 1064 (N.J. Super. L. Div. 1995).
Damages suffered by the indemnitee from suits against it for indirect or consequential loss or damages fall outside of limitations against indemnification. Morristown Mem. Hosp. v. Rulon, 625 A.2d 1119 (N.J. Super. A.D. 1993). Relationships between joint venturers can trigger the importation of equitable principles of indemnity between them upon interpretations of their agreement. McGowan v. Huddart, 136 A.2d 639 (N.J. Super. L. Div. 1957).
Third parties affected by such agreements that impact the security of contracting parties may also have recourse, via the New Jersey Law Against Discrimination (LAD). Cartel Capital Corp. v. Fireco of New Jersey, 810 A.2d 702 (N.J. 2002). Implied indemnification obligations can be thrust on a contracting party occupying a position of trust, stability and responsibility over the negligent party. Mas v. Coca-Cola Bottling of New York, Inc., 363 A.2d 327 (N.J. Super. L. Div. 1976). An insurer’s right to subrogation to assert claims arising from an insured’s indemnification obligation under its contract with the insured has been recognized. Mercy-Douglass Hosp. v. D’Alessio, 418 A.2d 429 (N.J. App. Div. 1980).
Actual participants in a joint venture have responsibilities and burdens imposed on them through the existence of a joint venture. The party may only be indemnified by clear and unmistakable terms. Sykes v. American Cyanamid Co., 490 A. 2d 395 (N.J. App. Div. 1985). Nevertheless, an equitable right to indemnification may be intertwined with the contract, depending on the situation. In such events, the courts look to the statutes and deciding cases within the specific jurisdiction to determine when one party should receive compensation for loss or damage from another. Fowler, her son and a friend visited the Somerset Mall where they allegedly encountered an employee of a jewelry store. The mall employee reportedly followed the three throughout the mall, verbally accosting them and blocking their path. Miller and the mall’s management were notified. Fowler, her son and a friend sued the mall’s management for emotional and psychological damages regarding "emotional distress". The trial court found that there was no employer-employee relationship between the mall and the jewelry store employee and granted defendants’ motion. The appellate division affirmed the decision. The Court based its holding on procedural grounds, construing that the trial court had no jurisdiction over the case. It continued its analysis to show that even in the event that the trial court had jurisdiction, under LAD, the defendants did not breach their duties. The Court observed that the jewelry store employee was not an employee of the Somerset Mall and, as a result, the defendant was not in a position to be held responsible for the acts. All three plaintiffs failed to support assertions with sufficient evidence and as a result, the Court affirmed the lower court’s decision.
Consult a Lawyer
The vast majority of release, indemnification and hold harmless agreements are fairly straight-forward, and even the more complex forms often have templates that can be obtained off of the website of a government agency or internet search. However, if you find yourself offered an agreement that is significantly different from the standard form or which imposes obligations upon you beyond what you consider reasonable, it is usually worth your time to consult with a professional who can review the terms of the agreement and ensure that your rights, interests and obligations are properly considered . Without having sufficient awareness of these types of agreements and the relevant laws and regulations, you may not be able to determine whether the terms of the agreement are sufficient or not, or whether you are being asked to agree to something that you should not have to agree to. Having a lawyer review a proposed agreement is often very affordable, particularly when compared to the value it can add.