Practical Law

I was talking to a Dutch lawyer at a conference the other day. He asked me what “hold harmless” meant and whether it was necessary to use it when drafting an indemnity under English Law. The conversation went on to discuss whether giving an indemnity was better than an ordinary contractual obligation (or worse – depending on whether you are giving or receiving).

I suggested that there is a sort of a hierarchy in the drafting of contractual obligations. They seem to sit one on top of the other like layers in a wedding cake.

First level: breach of contract

You promise in a binding contract to do something. If you don’t do it (or you don’t do it properly) then you are in breach of contract. You can be sued for damages by the other party. But you have some protection as you can rely on common law concepts such as mitigation, remoteness and the like.

Second level: indemnity

An indemnity means, in essence, that if the other party suffers a loss you have to reimburse them. But do remoteness and mitigation apply to indemnities? Or is liability under an indemnity more like a debt recovery claim than a claim for breach of contract? In practice, this is not entirely clear.

Take mitigation. I have always thought of mitigation as a mirror image of causation. If somebody fails to mitigate, when it would be reasonable to mitigate, could it be said that the resulting loss arises not from the breach but from the failure to mitigate? So, if the obligation is to indemnify in respect of losses caused by a breach, doesn’t that wording preserve the concept of mitigation (or at least its causation equivalent)?

The problem, and the reason why I think it’s not clear, is that indemnities were not originally a technique of recovering compensation for breach of contract.

The original purpose of an indemnity was for one person to compensate another for losses caused by an event for which the indemnifier was not to blame. The best example is an insurance policy, such as professional indemnity insurance. If a negligent surveyor gets sued for negligence by a client, the insurer pays the claim. This indemnity is a stand-alone (albeit contingent) obligation to pay. Liability is triggered by the indemnified party’s loss, not by the indemnifying party’s breach.

However, that still leaves the question of what losses are covered. To answer that question, you have to interpret the wording of the indemnity rather than looking at the general law on damages. That’s why the comparison is problematic. You shouldn’t compare an indemnity with a damages claim. They are different things, not different versions of the same thing.

One other result of that difference is limitation. We know that, in contract, the limitation period starts from the breach. However, if you are enforcing an indemnity, the limitation period will start from the right to be indemnified, or possibly even from a failure to indemnify when the indemnifier is asked for the money. This will turn on the wording of the indemnity which, as I have said before, is the key.

Third Level: hold harmless

Back to the wedding cake … and the (allegedly) increasing onerous contractual obligations.

Not just a damages claim. Not just an indemnity on top. If you add “hold harmless” words and say that you will indemnify the other party and hold them harmless, then you are really saying something…

Or are you?

Some people assume that if you hold people harmless you are saying that they will suffer no harm. But that’s not the real meaning of this term, which originated in the USA. A better way of expressing it would be to say that you will hold them (or consider them) blameless.

There is an old story about a man who insured a box of cigars against a number of risks (including fire). After smoking them he claimed on his insurance policy saying that they had been destroyed in a series of small fires. An amusing story, but there is a serious point here…

If an engineer insures against claims brought by clients for negligent work, could the insurer run a similar argument? Albeit the engineer’s mistakes are not deliberate, could the insurer argue that the claims were the result of negligence and the engineer should not profit from that “wrong”?

A “hold harmless” provision is designed to negate that argument. In essence, it says that the indemnifier will not blame the beneficiary if the beneficiary has caused or contributed to the loss. So there is potentially an impact on contributory negligence, and possibly on gross negligence or wilful or deliberate acts.

So you really are saying something by including “hold harmless” provisions. Or is it implicit in an indemnity that you will not a resist a claim on the ground that the beneficiary contributed to the loss? Looking back at my causation/mitigation mirror, could failure to mitigate count as contributing to the loss?

I’m not sure.

As I said, with an indemnity, it’s all about the drafting. Common law rules from the law relating to damages are interesting, but not sufficiently relevant to be relied upon.

Insurance policies generally deal with this by exclusions. So if you are holding harmless (or even if you are not), think about expressly carving out from the indemnity the things you are not prepared to cover, such as gross negligence, deliberate acts or unforeseeable loss.