New California Law Will Prevent Contractors From Shifting Liability for Their Own Active Negligence to Downstream Contractors and Suppliers

by Greg Clement, Partner, Burkhalter, Kessler, Clement & George LLP

Senate Bill 474, codified in California Civil Code section 2782.05, will broaden the types of indemnity provisions that are unenforceable under California law.  Effective January 1, 2013, “Type 1” indemnity provisions in construction contracts, which cover a contractor’s concurrent active negligence, will no longer be enforceable.  In conjunction with the new law, the contractor’s ability to shift the costs of defense to downstream contractors and suppliers will also be limited.

Under existing law, contractors can include broad indemnity provisions in commercial construction contracts which shield the contractor from liability even for its own “active” negligence.  These “Type 1” broad indemnification provisions have been enforceable as long as the liability does not arise from the “sole negligence or willful misconduct” of the contractor or owner.  Civ. Code §2782(a) (emphasis added).

California Civil Code section 2782.05 now renders “Type 1” indemnification provisions unenforceable, imposing liability upon general contractors, construction managers, or other subcontractors for “claims of death or bodily injury to persons, injury to property, or any other loss, damage, or expense” arising out of the “active negligence or willful misconduct of that general contractor…”.  Civ. Code §2782.05(a) (emphasis added).  Furthermore, although construction contracts with public agencies and owners of privately owned real property are expressly excluded from section 2782.05, public agencies and private owners are similarly prohibited from including “Type 1” indemnity provisions in their construction contracts pursuant to section 20782(b)-(c).

Another change in the law is that contractors will be prohibited from allocating the costs of defense of claims to their downstream contractors and suppliers.  The new restrictions contained in section 2782.05 prohibiting indemnity for one’s own active negligence specifically include the “costs to defend” claims in litigation.

Senate Bill 474 describes the express purpose of the new law as a means “to ensure that every construction business in the state is responsible for losses that it, as a business, may cause.”  The statute also prevents a contractor from “forum shopping” to avoid the effect of the new law by imposing a requirement that California law will apply to these contracts without regard to any choice-of-law rules that might otherwise apply.  In addition, any waiver of any of these provisions is contrary to public policy, void, and unenforceable.  Civ. Code §2782.05 (c)-(d).

Consequently, contractors must be especially mindful of the new law to ensure that any indemnification provisions included in their construction contracts or subcontractor agreements, entered into after January 1, 2013, are in compliance with the new law; and contractors must understand they can no longer shift liability for their own active negligence to downstream contractors and suppliers.