United States: What Does Your Defense And Indemnity Construction Contract Mean In 2017?

California's longstanding restrictions on defense and indemnity construction contracts have undergone several changes over the years with significant differences based upon the contract execution date. More specifically, the California Legislature enacted Civil Code § 2782 in 1967, and has amended its provisions several times since 2005. Consequently, parties in a construction dispute often ask, "what version of section 2782 applies, and what does it mean to my case?" We're here to help. This historical roadmap of Section 2782 will lead you to the answer.

Construction Contracts Executed From 1967 to December 31, 2005

In 1967, the California Legislature enacted Civil Code § 2782 to prohibit any construction contract that requires the promisor (the party accepting the indemnity obligation) to indemnify the promisee (the party benefiting from the indemnity obligation) for property damage, death or bodily injury caused by the sole negligence or willful misconduct of the promisee.

As of 2005, Section 2782 prohibited contracts that purport to indemnify the promisee against liability for damages arising from the sole negligence or willful misconduct of the promisee or the promisee's agents, servants or independent contractors who are directly responsible to the promisee, or for defects in designs furnished by such persons.1 A typical Type I indemnity clause, however, could require the subcontractor to assume liability for the builder/developer/general contractor's negligence and misconduct beyond the normal tort law principles of proportionate fault. Thus, under Type I indemnity agreements, the only loss not indemnified was for the sole negligence or willful misconduct of the builder/developer/general contractor. Indeed, the subcontractor was required to indemnify a builder/developer/general contractor for the entire loss, even if the developer performed the majority of the negligent work.

Residential Construction Contracts Executed From January 1, 2006 to December 31, 2007

In 2005, the California Legislature set out to address what were deemed unfair indemnity agreements commonly found in construction contracts which shifted liability from the general contractor to the subcontractor. This, in part, was due to the unfair bargaining power of general contractors and the perceived effect such agreements had on general liability insurance rates.

Consequently, the California Legislature amended Section 2782 to prospectively restrict Type I indemnity provisions in residential construction contracts between builders2 and subcontractors, effective January 1, 2006. More specifically, residential construction contracts entered into after January 1, 2006 could not require a subcontractor to indemnify, including the cost to defend, the builder of original construction individual dwellings3 for construction defect claims arising out of the negligence (or defects in design) of the builder, its agents or other subcontractors, or to the extent the claims did not arise out of the subcontractor's scope of work.  

Residential Construction Contracts Executed From January 1, 2008 to December 31, 2008

Effective January 1, 2008, Section 2782 was amended to clarify that the 2006 amendments regarding residential construction contracts would also apply to a general contractor or contractor "nonaffiliated" with a builder.

Residential Construction Contracts Executed From January 1, 2009 to December 31, 2012

In response to builders requiring subcontractors to pay for their defense costs unrelated to the subcontractor's work, thereby circumventing the intent of the 2006 amendments and the state's comparative fault principle, the California Legislature amended Section 2782. For residential construction contracts executed on or after January 1, 2009, a subcontractor has no defense or indemnity obligation to the builder or general contractor in a construction defect action unless and until the builder or general contractor provides a written tender of the claim to the subcontractor. Thereafter, the subcontractor is required to elect to either (1) provide a complete defense of all claims alleged to be caused by the subcontractor, or (2) pay the builder or general contractor the reasonable allocated share of the builder's or general contractor's defense fees and costs, on an ongoing basis with shares allocated to each subcontractor and/or the builder or contractor itself.

All Construction Contracts Executed On Or After January 1, 2013

The California Legislature placed further restrictions on construction contracts through its passage of Senate Bill No. 474 which applies to contracts executed on or after January 1, 2013.

Civil Code § 2782 now renders void and unenforceable any construction contract with a public entity or private property owner that purports to relieve a public entity or private property owner for its active negligence or to shift such liability to a contractor, subcontractor or supplier of goods or services. This prohibition only applies to owners that are not acting as a contractor or supplier of materials.  

Non-Residential Construction Contracts Executed On Or After January 1, 2013

Non-residential contracts executed on or after January 1, 2013, that require a subcontractor to insure or indemnify, including the cost to defend, a general contractor, construction manager, or other subcontractor against liability for claims of property damage, death or bodily injury are now void and unenforceable where such claims arise out of the active negligence or willful misconduct (or defects in design) of that general contractor, construction manager, or other subcontractor (or their agents), or to the extent such claims do not arise out of the subcontractor's scope of work under the construction contract. 4

We will continue to follow developments in Section 2782 and will report on changes to the law and relevant cases in future editions of this newsletter. Although you should always seek legal advice as to your particular case, we provide the following chart for ease of reference.

Footnotes

1 Section 2872 also prohibits construction contracts with a public agency which imposes on the contractor, or relieves the public agency from, liability for the active negligence of the public agency.

2 "Builder" means any entity or individual, including, but not limited to a builder, developer, general contractor, contractor, or original seller who, at the time of sale, was also in the business of selling residential units to the public for the property. "Builder" did not include any entity or individual whose involvement is limited to his or her capacity as general contractor or contractor and who is not a partner, member of, subsidiary of, or otherwise similarly affiliated with the builder. These nonaffiliated general contractors and nonaffiliated contractors were treated the same as subcontractors, material suppliers, individual product manufacturers, and design professionals. Cal Civ. Code § 911.

3 See, Civil Code § 896.

4 See Civil Code § 2782.05 for exclusions including, but not limited to, direct contracts with public agencies, owners of private property, design professionals, and any wrap-up insurance policy. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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