California Expands Prohibition on Certain Indemnity and Cost of Defense Provisions in Construction Contracts

Back in October 2011, California Governor Jerry Brown signed into law Senate Bill 474, which addresses indemnity provisions and cost of defense requirements in commercial construction contracts. The new law goes into effect on January 1, 2013.

The primary change is an expansion of California’s restrictions on indemnity provisions in construction contracts. Under existing law, provisions in construction contracts requiring a contractor or subcontractor to indemnify an owner or upstream contractor or subcontractor against liability caused by the indemnitee’s “sole negligence or willful misconduct” are unenforceable. However, as long as the indemnitor is at least partially responsible for the loss, then the indemnity provision may be enforceable. Thus, under existing law, for example, a subcontractor who has only five percent responsibility for a loss could be required to indemnify a general contractor who has 95 percent responsibility for the loss.

Effective January 1st, there is an additional restriction on the permissible scope of indemnity clauses. Under Civil Code Sections 2782 and 2782.05, most indemnity clauses in favor of owners, contractors, construction managers and subcontractors will be unenforceable to the extent the clause requires indemnity for the “active negligence” of the indemnitee. Exactly what constitutes “active negligence” is not entirely clear, and we expect this issue to be clarified by the courts over the next several years. But at a minimum, this should eliminate the ability of a party, who is primarily responsible for a loss, to be indemnified from a party who had only a minor, non-active role in the loss.

Along the same vein, the new law permits a general contractor or construction manager to agree with its subcontractors on the timing and immediacy of providing a defense and the reimbursement of defense fees. But, such an agreement cannot waive or modify the prohibition against indemnity for sole negligence, willful misconduct or active negligence. Moreover, a subcontractor will not owe a defense unless and until the general contractor or construction manager provides a written tender of the claim, including information from the claimant regarding the claims caused by the subcontractor’s scope of work and a written statement explaining how the reasonable allocated share of fees and costs was determined. If a proper tender is made, the subcontractor then has the choice to either defend the claim with counsel of its choice, but only for those portions of the claim alleged to be caused by the subcontractor, or pay the subcontractor’s “reasonable allocated share” of the defense fees and costs.

The intent of California’s new “anti-indemnity” law is to “ensure that every construction business in the state is responsible for losses that it, as a business, may cause.” The law applies to all applicable construction contracts, and the parties cannot opt out of these provisions by using a non-California choice of law provision in their contract.

Topics:  Construction Contracts, Indemnity Agreements, Legal Costs

Published In: Administrative Agency Updates, General Business Updates, Construction Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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