Legislative Update: Construction Law Retention And Indemnity Changes

By Joseph M. Sweeney, Esq., Christopher J. Olson, Esq., Kristen E. Green, Esq. and Dana R. Corey, Esq.


Governor Brown Signs SB 293 (Retention) and SB 474 (Indemnification) into Law

On October 9, 2011, Governor Brown signed into law Senate Bills (“SB”) 293 and 474. SB 293 limits the amount of retention on public works to 5% (as opposed to the current limit of 10%) and provides for speedier progress payments to subcontractors and suppliers. SB 474 restricts the use of Type I indemnity clauses in certain construction contracts.

SB 293: Retention and Progress Payments

SB 293 implements changes both to retention on public works projects and the timing of progress payments to subcontractors and suppliers on both private and public works jobs.

SB 293 applies to public works contracts entered into on or after January 1, 2012. It prohibits retention proceeds from exceeding 5% of the contract. This prohibition applies to any contract between a public entity and an original (prime) contractor as well as any subcontract between the original contractor and its subcontractors -- including any lower-tiered subcontracts. The law does provide an exception if the prime contractor requires that the subcontractor provide a bond and the subcontractor fails to do so. The 5% cap on retention remains in effect through January 1, 2016.
SB 293 also provides that for both public and private works of improvement, prime contractors and subcontractors are obligated to pay to their subcontractors progress payments within 7 days after receipt. The previous requirement was 10 days from the receipt of the progress payment.

SB 474: Contractual Indemnity Provisions

SB 474 modifies existing indemnity law in the commercial, public works and residential construction context. SB 474 is effective on contracts entered into on or after January 1, 2013.
Currently, in non-residential subcontract agreements, a general contractor may require a subcontractor to indemnify the general contractor for all claims other than those arising from the general contractor’s sole negligence or willful misconduct. This is traditionally known as a Type I indemnity agreement. SB 474 restricts a general contractor’s ability to require Type I indemnity in its subcontracts. Non-residential construction subcontracts and amendments executed on or after January 1, 2013, may no longer require a subcontractor to indemnify a general contractor, construction manager or other subcontractor for (1) claims of personal injury or property damage or other loss to the extent that the claims relate to the active negligence or willful misconduct of the indemnified parties, (2) any defects in designs provided by the indemnified parties or (3) claims that do not arise out of the subcontractor’s scope of work set forth in the subcontract. Any such provision is unenforceable. Furthermore, SB 474 provides that any contractual provision attempting to waive these provisions is contrary to public policy, void and unenforceable. Similar provisions are currently in affect for residential construction and have not been modified by SB 474.
Additionally, SB 474 provides that construction contracts with a public agency entered into on or after January 1, 2013, may not impose liability for the active negligence of the public entity upon any contractor, subcontractor or supplier. Such provisions will also be void and unenforceable.
In the context of private works, SB 474 similarly provides that contracts with owners executed on or after January 1, 2013, cannot impose liability for an owner’s active negligence on a general contractor, subcontractor or supplier. Private work projects have exceptions for the owner acting as a contractor, construction manager or supplier, or a homeowner performing improvements on his or her own single-family dwelling.

 

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