Many already know that, effective January 1, 2013, significant changes were made to the indemnity rules for California non-residential construction projects. (See Civil Code sections 2782, 2782.05). Despite over a year having passed, we continue to see many contracts that have not adopted the changes mandated by the new statutes.
While the effect of some of the changes will remain unclear for some time as courts and lawyers wrestle through the issues, it is important for all players in the California construction industry to evaluate their contract language to ensure it complies with current California law.
The changes to the law are in response to case law holding that with appropriately broad indemnity language, a contractor or subcontractor could be held responsible for 100% of a claim even if its fault was extremely minor. Moreover, one could be held responsible for 100% of the defense costs even if found not liable.
The new law places limits on the scope of indemnity provisions between owners and contractors, between contractors and subcontractors, and between subcontractors and lower-tier subcontractors.
The exceptions and specifics are too numerous to mention here, but seek assistance if your indemnity clauses violate the following general concepts:
For prime contracts (where owner is indemnitee, and contractor is indemnitor):
For public contracts, the owner may not require an indemnity provision that requires the contractor to indemnify the public agency for its "active negligence." (The distinction between "active" and "passive" negligence can get prickly, but active negligence is taking some action negligently whereas passive negligence is negligently failing to do something that should have been done.)
For private contracts, a provision that requires the contractor to indemnify the owner from the owner's active negligence is unenforceable.
The cliff's note version of this change is that a contractor can no longer be required to indemnify the owner from the owner's negligent actions. However, since only active negligence is involved in the statutes, the rule does not prevent a contractor having to indemnify the owner from the owner's passive negligence.
For subcontracts (of any tier):
A subcontractor required to indemnify another entity cannot be required to indemnify the other entity:
for the other entity's active negligence or willful misconduct;
for the other entity's agents/employees/subcontractors' active negligence
for defects in design furnished by a third party or the third party's, employees, or subcontractors;
to the extent the claims do not arise out of the subcontractor's (i.e., the indemnitor's) scope of work.
Note that under the new rules pertaining to subcontractors, a subcontractor owes no obligation of defense or indemnity to a contractor (or construction-manager) until the contractor provides written notice of the claim. The written notice must pass along information relating to the claim, and must also include a written statement "regarding how the reasonable allocated share of fees and costs was determined." This language requires that the contractor must make a reasonable allocation of fees and costs between subcontractors where multiple subcontractors are potentially at fault for the issue.
The summary version of the new subcontractor rules is that a subcontractor cannot be required to indemnify other entities' (contractor, subcontractors, designers, owner) for those other entities' own active negligence. Moreover, a subcontractor cannot be required to indemnify for claims that do not arise out of the subcontractor's scope of work. In theory, the days of the fencing or landscape subcontractor having to indemnify the contractor for claims arising from the electrician's work are over. Finally, the subcontractor's obligation to indemnify does not arise until after the contractor gives the written notice required by the code.
Regarding defense costs and fees, once a written tender is given, the subcontract must either: (1) defend the action with its own counsel; or (2) agree to pay the reasonable allocated share of defense costs incurred by the contractor. The rules allow the contract to set the "timing" or "immediacy" of the defense obligation, so indemnity provisions will likely now contain language on when the defense obligation will kick in.
There is little doubt that indemnity can be one of the most confusing areas of any construction contract. In complex construction-defect or personal injury cases, the battles over defense costs and indemnity can become more important than the underlying defect itself. The takeaway is this: if you have not evaluated your form construction contract indemnity provisions since January 2013, you should do so; and if you frequently evaluate indemnity provisions imposed on you by others, you are now entitled to require that the indemnity provisions comply with the new law.