In Brief: Expanding the Prohibition on "Type I" Indemnity Agreements
For many years, our subcontractor clients have been faced with a tough decision: Accept the one-sided language that the GC or developer stipulates in their contracts, or not get the job. We know the spot that puts you in!
On the flip side, many of our developer and GC clients need the extra protection they can get by asking for the maximum transfer of risk to their subs. And since the GC calls the shots, we recognize that you've got to protect yourself!
The answer so far has been for both subcontractors and general contractors to work with educated agents (First Service comes to mind) who understand the risks involved so you can go into such agreements with eyes open. Even with this help, the subcontractors often took the brunt of the liability. In the end, this meant that the subs get dragged into claims in which they otherwise don't have any liability to justify their involvement.
Now, with this new legislation, there appears to be some light at the end of the tunnel. But is it only benefitting the subcontractor? Let's take a look at the specifics and see.
As of January 1, 2013, "Type I" indemnity agreements will no longer be enforceable in most construction contracts. The new law, which will apply to contracts entered into on and after January 1, 2013, expands the class of indemnity provisions that are unenforceable under California law.
Under current California law, higher tier construction participants (generally owners, developers and general contractors) typically use what is referred to as a "Type I" indemnity provision in contracts to shift liability to lower tier construction participants (generally subcontractors). Under a "Type I" indemnity provision, the subcontractor agrees to indemnify the owner, developer or general contractor, even against liability caused in whole or in part by that party's own active negligence.
So, the Type I wording can drag a subcontractor into a dispute that is brought against the GC, even if the GC is solely responsible for whatever negligence is claimed. Obviously, the Type I wording favors the GC.
On private construction projects, "Type I" indemnity provisions are currently enforceable as long as the alleged liability does not arise from the indemnified party's "sole negligence or willful misconduct." Although some legislative changes have been made to alleviate the effect of "Type I" indemnity provisions in the context of residential construction, SB 474 expands these protections to commercial projects. Under the new law, such "Type I" indemnity provisions will no longer be enforceable for commercial projects.
SB 474 also imposes stricter limitations on the ability of developers and general contractors to require their subcontractors to cover litigation defense costs. The new law may conflict with a string of cases in California known as the Crawford line of cases, which require a contractor to provide an immediate defense upon tender.
The effects of SB 474 remain to be seen, but what we know for sure if that having a well-informed agent working for you is more important than ever.
Note: In our next issue we will cover Assembly Bill 2237- Requirements of Owner Builders.