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Depending on the nature of your commercial agreement, you may encounter a ‘hold harmless clause’. A hold harmless clause is a promise by an indemnifier to hold the indemnified party ‘harmless’ against any loss they may suffer. As a result, this clause can minimise risk within a contractual relationship. This article will outline some basic terms used in contract law and illustrate how a hold harmless clause can be beneficial in various commercial agreements.

By considering the benefits of a hold harmless clause in a commercial contract, you can decide whether such a clause would suit your business arrangement.

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Basics of Indemnity

Some commercial agreements may refer to a hold harmless clause as an ‘indemnity clause’. Primarily, an indemnity involves promising to compensate another person for potential losses they experience during a contractual relationship. Once you agree to an indemnity clause in a contract, you are legally bound to indemnify the other party. 

Often an indemnity clause will refer to the ‘indemnifier’ and the ‘indemnified.’ To clarify, the:

  • ‘indemnifier’ is the person who promises to provide the indemnity; and
  • ‘indemnified’ party refers to the person who will be compensated for their losses or held harmless.

Say you enter into a contract with a major supplier for the delivery of goods. In the contract, the supplier might agree to indemnify you against any loss you suffer due to any damage or fault in the goods. In this instance, the supplier would be the ‘indemnifier’, and you would be the ‘indemnified’.

The nature of an indemnity can also vary depending on your circumstances. Some standard indemnities include:

Bare indemnityWhere the indemnifier protects the indemnified party from losses caused by a specific set of circumstances under the contract.
Proportionate indemnitiesWhere the indemnifier agrees to protect the indemnified party for loss that is proportionate to the indemnifier’s fault.
Third party indemnitiesWhere the indemnifier agrees to be responsible for any losses suffered by the indemnified party as a result of a third party bringing a claim against them.

Ultimately, you must be aware of the scope of your indemnity. If you are unsure about the extent of your protection, you should seek the advice of a lawyer. 

Hold Harmless Clauses vs. Make Good Clauses 

Under a hold harmless clause, the indemnifier agrees to hold you harmless against losses you might incur due to entering into the contractual relationship. Ultimately, if you suffer any harm specified under the agreement, the indemnifier will be liable for breaching the commercial arrangement. 

On the other hand, a make-good clause allows the indemnified party to claim compensation if they suffer loss or damage. Essentially, a make-good clause places the suffering party back into the position they were in before they made their claim. Furthermore, it compels the indemnifier to repay a debt to the indemnified. In contrast, a hold harmless clause shifts the liability for breach within a commercial arrangement.

However, these clauses might not protect you against all losses you suffer during a transaction. 

For example, whilst the supplier might indemnify you against faults in the goods they produced, they might not indemnify you against matters outside their control, such as delays in international shipment. Nevertheless, a hold harmless clause can be beneficial by minimising risk in a contractual relationship. It does so by compelling a party to prevent the other party from suffering a loss. If they fail to do so, they risk breaching the contract themselves.

Instances Where Hold Harmless Clauses Can Be Beneficial

Hold harmless agreements can be helpful when contracting into high-risk activities. Primarily, they assist in minimising risks in your commercial agreement. You will find a brief outline of these activities below.

Event Planning Agreements

If you are organising an event, there are countless injuries or damages that you could be held liable for. For example, say your events company organises a charity event for another company. If an attendee suffers an injury at the event, your company may face legal action. In this instance, the contracting party can ‘hold you harmless’ against any claims brought by third party attendees. This is done so simply by agreeing to a hold harmless clause.

Construction Contracts

In the construction industry, building contractors and subcontractors face significant liability risks. For example, a leading building contractor can be held liable for the property damage caused by a subcontractor. But, again, a hold harmless clause can ensure that the subcontractor ‘holds you harmless’ against any claims brought by third party attendees for their actions.

Key Takeaways 

In short, the main benefits of a hold harmless clause include reducing the risk in commercial arrangements. Essentially, a hold harmless clause is a promise by one party (the indemnifier) to hold another party (the indemnified) harmless against the loss they suffer from entering into the contract. As soon as the indemnified experiences a loss (as specified in the indemnity clause), the indemnifier can be liable for breach of contract.

If you need some advice on how a hold harmless clause affects your business arrangement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions 

What is a hold harmless clause? 

A hold harmless clause is where a contracting party promises to ‘hold you harmless’ against loss you might suffer due to entering into the contractual relationship.

What is a make good clause? 

A make good clause is where a contracting party promises to compensate you for loss or damages you suffer that your commercial agreement covers.

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