February 11, 2013 | Author: Joseph Aguilar

The beginning of 2013 brings many different changes in the world of California Construction Law. California Senate Bill 474 (“SB 474”), passed in 2011, provided sweeping changes to the indemnity obligations of contractors and subcontractors in private commercial construction projects entered into after January 1, 2013. This legislation attempts to extend many of the reforms to limit Type 1 indemnity for subcontractors that to effect in 2009 as they related to private residential construction.

SB 474 also changes the characteristics of the duty to defend for cases involving allegations of construction defects in both residential and commercial construction. California Civil Code section 2778 states that a construction contract containing an indemnity obligation against claims, demands, or liability also “embraces the costs of defense against such claims.” In the seminal case of Crawford v. Wheathershield Manufacturing, Inc. (2008) 44 Cal.4th 541, the California Supreme Court held that the defense obligations in section 2778 arise immediately upon the tender of a defense. The Appellate Court in UDC Universal Development, L.P. v. CH2M Hill (2010) 181 Cal.App.4th 10, further held that the duty to defend is not dependent on the establishment of negligence in the indemnitee’s work.

The amendments added by SB 474 seem to conflict, or at the very least alter, the immediacy of the duty as described in Crawford and UDC Universal Development. As to residential construction entered into after January 1, 2013, Civil Code section 2782(e) now requires that in order to trigger the duty to defend a general contractor must submit a written tender to the subcontractor with all of the information provided to the general contractor by the claimant. This tender must include at least the information provided pursuant to Civil Code section 910 relating to the claims caused by the subcontractor’s work. If the general contractor sufficiently follows this procedure, the subcontractor can choose to provide a defense through counsel of choice within 90 days of receipt of the tender, or start paying an allocated share of the general contractor’s defense within 30 days of receiving an invoice. Under the first option, the subcontractor must provide a full defense for the general contractor, excluding claims resulting from the work of the general contractor or any other party. Similarly, if the subcontractor chooses to pay for the general contractor’s defense under the second option, the subcontractor is only responsible for its reasonable allocated share of the general contractor’s costs and fees. Under both defense payment options, the allocation of the subcontractor’s defense obligations must be consistent with subsection (d), which prohibits indemnity or defense for the negligence of the general contractor or other subcontractors.

As to commercial construction contracts entered into after January 1, 2013, SB 474 requires similar procedures of the general contractor or construction manager to trigger the duty to defend. Civil Code section 2782.05, the new section added by SB 474, requires the general contractor to tender to subcontractors in writing with information provided by the claimant relating to the subcontractor’s scope of work. Unlike in residential construction, the tender for commercial construction must also include a written statement regarding how the reasonable allocated share of fees and costs was determined. The subcontractor must choose within 30 days whether to defend the claim with counsel of its choice or to pay within 30 days of receiving an invoice for its reasonable allocated share. Importantly, the allocation of the subcontractor’s defense obligations must be consistent with section 2782.05(a), which prohibits indemnity by a subcontractor for the active negligence or willful misconduct of the general contractor or other subcontractors. It is notable that the general contractor and subcontractor can alter the timing or immediacy procedures in their subcontract in either residential or commercial construction contracts.

Without explicitly mentioning or attempting to abrogate Crawford or UDC Universal Development, SB 474 seems to change the timing and procedures for triggering the duty to defend as interpreted from those cases. In the future, general contractors must decide early to tender to subcontractors and put pressure on claimants to supply sufficient information to satisfy the requirements for implicating the subcontractor’s scope of work. Undoubtedly, this will lead to future fights of what constitutes sufficient information to implicate the subcontractor’s work. Similarly, subcontractors and their defense counsel must make sure to hold general contractors to the informational requirements dictated by SB 474 to sufficiently understand that their scope of work is implicated.

More importantly, SB 474 codifies the requirements that a subcontractor’s defense obligations are limited to their reasonable allocated share of the defense, and not the entire defense of the general contractor. Specifically, the statute limits the subcontractor’s defense allocations through reference to the limitations on indemnity. The statute places the added burden on general contractors to make an evaluation of each subcontractor’s reasonable allocated share and not simply evenly split the obligation among obligated subcontractors or assume joint liability. In commercial construction, this allocation must be done early and included in the tender; otherwise the subcontract is not under a duty to participate in paying for the general contractor’s defense.

For further information and possible seminars on SB 474 or other Construction Law developments, contact the Low, Ball & Lynch Construction Law Editor Joseph Fenech.

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