In April 2017, California Governor Jerry Brown signed into law Senate Bill-496 (SB-496), which modifies the existing Civil Code section 2782.8, adding protections for private contracts entered into by design professionals on or after January 1, 2018 and strengthening the protections available to design professionals with regard to public contracts too. Importantly, the new law limits the “duty to defend” to the comparative fault of the professional in both private and most public construction contracts. Civil Code section 2782.8 previously applied to public contracts entered into by design professionals with local public agencies, excluding state agencies as defined in the statute. The revised 2782.8 places private contracts and public contracts, with non-state agencies, on equal footing with some limited exceptions.
The enactment of this legislation follows many years of efforts by the design professional community in California through their professional associations to secure more equitable footing in contracts where indemnity clauses would often include an immediate duty to defend, which was uninsurable.
The efforts began around the time of the Crawford v. Weather Shield Mfg. Inc. (2008) 44 Cal.4th 541 (Crawford) case. It was a California Supreme Court case. In Crawford, the California Supreme Court held that the contractual duty to defend was immediate even when not specifically called out as such in the contract at issue. The Crawford court held that a subcontractor, by virtue of an indemnity clause in its contract with the general contractor, had an immediate duty to defend and was therefore ordered to pay all of the general contractor’s attorney’s fees and costs even though it was ultimately found by the jury through a trial to be fault free. Making matters worse was the UDC v. CH2M Hill (2010) 181 Cal.App.4th. 10 (CH2M-Hill) case where the California Court of Appeal made it explicitly clear that the holding in Crawford concerning an immediate duty to defend extended to design professionals. In that case a jury also found the design professional to be fault free, but the professional was still ordered to pay all of its client’s attorney’s fees and costs by virtue of signing a contract with a contractual indemnity provision.
The practical implications of the new law are extremely beneficial to design professionals, especially those working primarily in the private sector. For all private construction contracts entered into by a design professional before January 1, 2018 (contracts without the protections of SB-496) containing a provision requiring the professional to indemnify their client, the professional could have to pay for all of their client’s attorney’s fees and costs, even if the professional was ultimately found by a court to be fault free.
For private contracts and contracts with local public agencies entered into on or after January 1, 2018, with the protections of SB-496 in place, any contract that attempts to include an immediate duty to defend should be found by any court that analyzes it to be unenforceable. For instance, if the matter is litigated and the design professional is determined to be 25% at fault, then the law provides that the professional would only be responsible for 25% of the attorney’s fees and costs of the party seeking contractual indemnity. If found 0% at fault, the professional would not be responsible for any attorney’s fees or costs. This result would be the opposite of what occurred in theCrawford/CH2M-Hill cases and has been applauded by the design professional community. However, good practice still dictates that where possible, the contractual language should still reflect the intent of the parties and the law that there is no immediate duty to defend.
Importantly, the new law does not affect situations where the design professional is a joint venture partner in a design-build agreement. The exact perimeters of just what this means and how it will be handled will have to be sorted out in the courts. SB-496 also provides when any defendant is unable to pay its fair allocated share of defense costs due to bankruptcy or dissolution of the business, the parties shall “meet and confer” with the other parties regarding unpaid defense costs. Exactly how this “meet and confer” requirement will work will have to play out in practice and eventually the courts as well.
What SB-496 means for California design professionals in 2018 and beyond?
Though SB-496 does not completely eliminate the contractual duty to defend or duty to indemnify, it significantly reduces the harshness of its impact on design professionals. Therefore, for design professionals entering into private contracts or public contracts with a non-state agency starting on January 1, 2018 it is still prudent to the extent it is possible to negotiate these provisions out of professional service contracts. However, given business realities it is understood that this is not always realistic. Notwithstanding, this legislation will allow for more equitable risk sharing in construction projects concerning the built environment in 2018 and beyond.
The real impact of SB-496 really won’t be felt until lawsuits are filed against design professionals who have entered into these contracts on or after January 1, 2018 and then tested in the courts. Another tip is to make sure that any contract signed on or after January 1, 2018 should bear an effective date of on or after January 1, 2018 rather than one that may be signed in 2018 but show an effective date in 2017 usually at the beginning of the contract. Given that the new law will only apply to contracts entered into on or after January 1, 2018, it will likely take many years for judicial interpretations to work through the system to provide more guidance on the limits of the new law. For now though, it should be a very good start to 2018 for all design professionals in California. Happy New Year!
Authors: Justin Witzmann, Esq. and Brian Stewart, Esq.
About the authors:
Brian Stewart, Esq. is the Managing Partner of Collins Collins Muir + Stewart, LLP (CCM+S) based in its South Pasadena, CA office. CCM+S has 5 offices providing legal services in the state of California and beyond. Mr. Stewart was a member of the “Duty to Defend” sub-committee of the American Council of Engineering Companies –California (ACEC-CA) that
was the lead proponent of SB-496. He also a member of the American Institute of Architects – California Chapter (AIACC) and its AIACC Advocacy Advisory Committee that was also involved in passing SB-496. Mr. Stewart spends most of his professional time in the areas of professional liability defense and defending public and private entities in litigation involving catastrophic injuries.
Justin Witzmann, Esq. is an Associate in CCM+S’ Carlsbad office and is actively involved in the local chapters of the AIA, ACEC, and ASCE and practices in the area of professional liability defense, public entity defense, employment litigation, general liability and general civil litigation.