Thursday, January 31, 2008

Hold Harmless Clause as a Tort

In hold harmless clause, the offeree of a contract promises to reimburse the offeror for any expenses arising out of the performance of the contract.

1) One may find these clauses everywhere, especially in terms of service contracts on the internet, in employment, and other types of contracts.

2) Many of these contracts are contracts of adhesion. Discussed here. The UCC Section 2-302 deems a contract of adhesion to have procedural unconscionability.

3) The UCC Section 2-302 finds these hold harmless clauses to have substantive unconscionability if the parties are uneven.

4) The clauses are really limitless insurance policies, to the last button of the offeree.

5) The offeror has made the offeree violate the law by providing unlicensed, unregulated insurance. These contracts may be void for illegality, by inducing unapproved, unregulated insurance coverage.

6) These insurance policies have a value, as business liability insurance granted to the offeror. Let's say, one may buy a liability policy for $1 covering $1000 in liability. Let's say the offeree has assets worth $1 million. To buy a business liability policy for $1 million in coverage by the full assets of the offeree, the offeror would have to pay an insurance company $1000 a year in an insurance premium.

7) The offeror has thus been unjustly enriched by the hold harmless clause, for $1000 a year for the ten years of the contract. The offeree should be able to make the offeror disgorge these unjust profits for the period in which the contract was in effect, $10,000.

What alternative best serves justice? Each party should agree to take financial responsibility for its own mistakes, and to get regular insurance coverage if the risk warrants it.

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