Hold Harmless and Indemnification Agreement - What?

Hold harmless and indemnification agreement: a phrase we have all heard of but probably have little idea of what it really means. Why should we be aware of it, use it when appropriate, and challenge it when added to an agreement, especially, when it is not to your best interest?

In many situations a partnership, or co-owners in an LLC or corporation enter into an agreement with a third party, could be the bank, an investor, a landlord, a vendor, any one to whom you are financially obligated.

Then one of the two or more guarantors, choose to leave the entity, exiting the partnership, corporation, or LLC. The problem is the third party to whom you have both signed personal guarantees is unwilling to release the exiting partner, co-guarantor, so what can that person do to remove the continuing obligation?

Not a lot, as the third party has any incentive to let the guarantor out of his guaranty.

In this situation, lawyers have come up with a reasonable alternative to resolve this matter, and it is a hold harmless and indemnification agreement.

What it means is the remaining partner, co-guarantor, agrees with the exiting partner to "hold him harmless". In other words, remove his responsibility from him for this obligation, by "indemnifying" him, or paying him back for any losses he may incur because of this debt.

The intent of this agreement is to circumvent the reality that the exiting partner cannot exit an agreement he made with a third party but the remaining partner can cover his losses should they occur. Thus if the bank, or landlord or whomever experiences a loss from this relationship, and claims are made on both guarantors, the remaining partner will pay for and cover any expenses incurred by the exiting partner.

The reality is the exiting partner is still responsible and could be forced to pay on his guaranty, but then the remaining partner would be obligated to cover his costs and expenses.

Of course, the real problem and issue is that while it all sounds good, in all reality if a guaranty is called, the likelihood that the remaining partner has the cash to cover the exiting partner is very low. If he had the cash the debt would have been paid before the guaranty was called in, thus it really is usually an empty promise that cannot be implemented. It may have been well meaning but usually impossible to enforce.

In the end the eating partner has a cause of action, a law suit against his partner for breaching his hold harmless and indemnification agreement but really that is a lost cause at the time it is being considered as clearly the remaining partner is out of cash.

All too often I see this clause snuck in by cagey lawyers to unsuspecting partners who are dissolving their relationship, without the remaining partner really understanding what he is committing to and if he did understand would certainly not agree to it. When you see this phrase, and are on either side of the deal, remaining partner or exiting partner, be cautious, inquire as to its meaning and make certain it is what you want to do. If you are the exiting partner, be aware it is usually an empty promise and if called on is unlikely to be paid on.

Thus in all reality, if you signed a guaranty, and want to exit the relationship, chances are very good that someday you will have to answer to your guaranty and will NOT find success in your ex-partners promise.

Call your lawyer when this happens.