Hold harmless

The Jolly Contrarian’s Glossary The snippy guide to financial services lingo.™ →Go uptown Index — Click the ᐅ to expand: Glossary Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

hold harmless
/həʊld/ /ˈhɑːmlɪs/ (n.)
Under a hold harmless, one party agrees not to sue the other for losses it incurs in performing the contract.

A hold harmless is thus a slightly odd undertaking, because as a general proposition, a contracting party would not be liable for losses the other suffers unless they are caused by its breach of contract — that is, a hold harmless isolates a party from a liability it shouldn’t have under a contract in the first place. It may operate to shut down an argument based on an implied term, or prevent a claim in tort arising from faithful performance of the contract that somehow breaches a non-contractual duty of care to the other party (don’t get me started on concurrent liability).

The paradigm case is the parking building that asks its customers to hold it harmless for damage or theft to their vehicles while parked in the parking building.

Not to be confused with an indemnity

A hold harmless is subtly different from an indemnity - it’s more like a beneficent inversion of one. Under an indemnity, one party (the “indemnifier”) agrees to pay the other the “indemnified”) an agreed amount should a specified event occur during the contract.

The “events” covered by an indemnity are usually unexpected costs and expenses the indemnified party incurs while performing obligations under the contract, the benefits of which accrue exclusively to the indemnifying party: things like tax charges levied on a custodian relating to assets it holds for its clients. Without an indemnity, the party incurring these costs would just have to wear them. This would be a windfall for the benefiting party.

An indemnity thus creates a payment obligation under the contract where one would not otherwise exist. If the indemnified event occurs and the indemnifier doesn’t pay, the indemnifiee has an action in breach of contract.

And that’s about it. An indemnity gives you a right to sue where, without it, you would not have one.

Indemnity for breach of contract? No, sir.

In any case, indemnities should not, ever, cover losses arising from breach of contract. Like, ever. Anyone who tells you anything different — and in this old salt’s long and grim experience, many people who should know far better will — should be directed to the coat check. Here is why: if the other guy has breached the contract, Q.E.D. you have a right of action under the contract. You don’t need an indemnity. This is self-evidently true. An indemnity claim for a defined amount of money. It requires no proof of breach, causation, or quantification. All of these things are vital to the allocation of losses following breach of contract.

There is, we think, a common misconception amongst eaglery that an indemnity can vouchsafe a claim for breach: that it can, somehow, make recovery under a contract quicker, more certain or more straightforward.

It cannot.

At the limit, a well-crafted indemnity would stipulate a fixed sum payable on breach of contract, regardless of loss, and this the courts would regard as an unenforceable penalty.