Senate Bill 474: Leaving Design Professionals to Fend for Themselves on Indemnity

By Samuel J. Muir, Esq. & Stephen B. Litchfield, Esq of Collins Collins Muir + Stewart LLP
 
 
“The Legislature finds and declares that it is in the best interests of this state and its citizens and consumers to ensure that every construction business in the state is responsible for losses that it, as a business, may cause.”
 
-Section 1, Senate Bill 474 (2011)
Enacted in 2011 with important substantive provisions coming into effect on January 1, 2013, Senate Bill 474 aims to limit the allowable scope of express indemnity enforceable against Subcontractors, but a last minute amendment to the Bill leaves Design Professionals vulnerable. 
According to the California Legislature, the goal of S.B. 474 was to force parties entering into construction contracts to be accountable for their own actions. With such a well focused purpose, the Bill could have served as a referendum on the California courts’ rapid departure from the values of personal responsibility in construction contracts. Instead, S.B. 474 works in piecemeal fashion to provide greater protection against express indemnity for Subcontractors, while leaving Design Professionals to fend for themselves. This newsletter clarifies the scope of allowable express indemnity after S.B. 474 and advises Design Professionals to be vigilant in reading and understanding indemnity provisions in contracts entered into after January 1, 2013.
 
WHAT DOES S.B. 474 DO?
 
Public Contracts: For contracts between a public agency and a “contractor, subcontractor, or supplier of goods or services,” a provision purporting to indemnify the public agency for its own active negligence is void and unenforceable. Thus, the possible universe of parties to a public agency construction contract who may utilize the protection from onerous indemnity provisions is expanded, and Design Professionals are arguably included in this group.
Private Contracts: Construction contracts between a private owner and “contractor, subcontractor, or supplier of goods or services,” which purport to indemnify the owner for his own active negligence are void and unenforceable to the extent of the owner’s active negligence. These sections provide a potential avenue through which Design Professionals may assert that they are “suppliers of services” within the meaning of the statute, thereby affording some protection against active negligence indemnity provisions in direct contracts with public agencies and private owners. 
 
THE ELIMINATION OF TYPE I INDEMNITY FOR SUBCONTRACTORS?
 
By far the most talked about modification made by S.B. 474 is the addition of Civil Code section 2782.05, which applies expressly to contracts entered into after January 1, 2013 between General Contractors, Construction Managers, and Subcontractors with other Subcontractors. In these contracts, provisions that purport to indemnify, including the cost to defend, a General Contractor, Construction Manager, or Subcontractor (commonly known as Type I indemnity provisions) are void to the extent of that party’s active negligence or willful misconduct. 
 
In effect, this means that a Subcontractor can no longer be forced to defend and indemnify a General Contractor without a consideration of the General Contractor’s negligence. Previously, a General Contractor was permitted to enforce an indemnity provision even where the General Contractor was 99% at fault due to his active negligence. Therefore, section 2782.05 adds a dimension of allocation of fault to this analysis that did not exist previously.
Subcontractors and Design Professionals have been actively lobbying the Legislature to enact provisions that hit back against expansive interpretations of indemnity provisions and the duty to defend in court decisions such as Crawford and CH2M Hill. S.B. 474 works towards that end. However, while Subcontractors may be celebrating their newfound protections under the law, contracts with Design Professionals are EXPRESSLY EXEMPTED by the statute. This means that an indemnity provision in a contract between a General Contractor and a Subcontractor might be void and unenforceable, but an identical provision would be fully enforceable as between a General Contractor and a Design Professional. 
In other words, a General Contractor may still insist that a Design Professional indemnify them for the General Contractor’s passive AND active negligence. 
 
HOW ARE DESIGN PROFESSIONALS AFFECTED?
 
The ramifications of this discrepancy are readily apparent, but one example in particular helps to drive home the potential peril for Design Professionals under the new law: a Design Professional contracting with a General Contractor to provide services for a “design-build” project could potentially be the only party to the project with an express indemnity provision binding them to indemnify and defend for the active negligence of the General Contractor.
General Contractors will likely come to understand and exploit this discrepancy in the law, and since litigation costs may no longer be passed downstream to Subcontractors through the old mechanisms, General Contractors may insist that any contract with a Design Professional contain an indemnity provision whereby the Design Professional agrees to indemnify and defend even in the face of the General Contractor’s active negligence. 
 

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