New California Laws for 2012, part 3

The following is part 3 of my series regarding new laws effective January 1, 2012 (unless otherwise indicated), that may affect how you do business in California.

Elimination of Type 1 Indemnity effective January 1, 2013

Type 1 indemnity provisions were eliminated in residential construction subcontracts in 2009 by statute.  SB 474, which amends Sections 2782 and 2783 of the Civil Code, and adds section 2782.05, now eliminates type 1 indemnity provisions in commercial construction subcontracts.

For construction contracts and amendments executed on or after January 1, 2013, a general contractor may no longer require a subcontractor to defend against, or provide insurance coverage to defend against, the active negligence or willful misconduct of the general contractor.  The general contractor may also no longer require a subcontractor to defend against claims for defects in design.  Lastly, the general contractor may not require a subcontractor to defend against claims that do not arise out of the scope of work of the subcontractor pursuant to the written subcontract. 

This new statute also provides that public agencies and private owners cannot shift liability for the agencies’ or owners’ active negligence to the contractor (the statute previously only provided so for public entities).  The new statute authorizes a general contractor to request that a subcontractor either provide a defense, or pay for the general contractor’s defense (under a type II or III indemnity provision), but the subcontractor who does so can request reallocation and reimbursement of defense costs under certain circumstances, for example, if costs were paid by the subcontractor that were ultimately deemed to be related to claims outside the scope of work of the subcontractor.

This is a major change to the law of indemnity, the contracting relationship between generals and subcontractors, and the handling and management of claims when they arise.    

Prompt Payment Provisions, Payment Bonds and Retention

SB 293 amends and repeals several sections of the Business & Professions Code, Public Contracts Code and Civil Code, relating to the timing of payment of progress payments (and the trigger for prompt payment penalties which may attach), and retention. 

Under existing law, whether a private or public work of improvement, a contractor is required to pay its subcontractor a progress payment within ten days of the contractor’s receipt of payment from the owner, unless agreed to otherwise in writing.  These new laws now require that payment to be made within seven days.  See my earlier blogs related to prompt payment penalties, and how they are calculated for more information on prompt payment penalties specifically.

The statutory changes also now exempt laborers from the requirement to serve a preliminary 20 day notice to make a claim on a payment bond.

Lastly, these changes lower the retention withholdings allowed on public works, presently 10%, to no more than 5%.  The only exemption is if a general contractor required a subcontractor to post a bond, and the subcontractor was unable to comply.

Questions?  Concerns about how this may impact your business?  Comment, or send me an email, and let’s discuss.  Best wishes for a happy holiday season!

Nothing in this blog is intended to create an attorney-client relationship.  This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation.  Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.