Construction Law Update

October 10 , 2005 ; Issue 7

A Message from the Partners

We are pleased to announce that on September 29, 2005, the Governor signed Assembly Bill 758 into law. The enactment of the legislation culminates over two years of work by Kring & Chung and various subcontractor trade groups in an effort to bring about legislative reform regarding construction defect litigation. This legislative involvement was one of the driving forces behind the establishment of our Sacramento office. Over the years, we have worked hard to bring various subcontractor associations together to provide a single, stronger voice in Sacramento. We have also met with numerous legislators and provided testimony at various hearings regarding the plight of subcontractors and the toll of construction defect litigation. 

As indicated below, these efforts have now resulted in tangible reform.

John R. Blakely

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AB 758 Passes out of the Senate

This legislative session, Democratic Assembly Member Ronald Calderon introduced Assembly Bill 758 to address the issue of Type I express indemnity.  Under such a provision, the subcontractor is contractually bound to indemnify the builder for losses which may not be attributable to the subcontractor’s negligence.

The subcontractor trade associations spent an enormous amount of time and effort to achieve legislative support for the bill. In addition, Assembly Speaker, Fabian Nunez, took an active role to bring about bi-partisan support for the bill. After extensive negotiation with the BIA and other builder groups, a consensus was forged and Republican Assembly Member Ray Haynes agreed to co-author AB 758.

As a result of the subcontractors’ efforts, the bill passed out of both the Assembly and the Senate by a wide margin earlier this year. On September 29, 2005, the Governor signed Assembly Bill 758 into law. The bill becomes effect January 1, 2006 and only pertains to residential construction contracts, and amendments thereto, entered into after that date.

Significantly, the bill renders unenforceable any contractual provision which purports to require the subcontractor to indemnify the builder for claims relating to the negligence of the builder or other subcontractors. In essence, the builder can only be indemnified for losses directly attributable to the contracting subcontractor’s negligence. In addition, the bill limits the subcontractor’s contractual duty to defend the builder  to only those claims pertaining to the subcontractor’s negligence.

Although originally addressed by the subcontractors in negotiations, the bill specifically does not affect insurer carrier obligations pursuant to Presley v. American States. Unfortunately, insurance carriers and their lobbyists took a hands off approach to the issue. Instead of legislative reform, it appears that the carriers opted to attack the problem by simply not issuing completed operations endorsements. The carriers’ absence from the negotiating table made legislative reform on the issue impossible.

We have received inquiries as to why the bill only pertains to residential construction contracts entered into after January 1, 2006. The reason is that retroactive application to existing contracts (or rewriting contracts) would not pass constitutional muster. To the extent that the legislature would enact such a bill, it is almost guaranteed that the court would find the application void and unconstitutional. As such, the bill only has prospective application.

In that regard, we want to pass on a few words of caution. Avoid entering long term master subcontracts prior to the end of this year. Any Type I indemnity provision in contained in master subcontract which pre-dates January 1, 2006 will be enforceable regardless of when the actual work takes place. In addition, it is important to review subcontracts for provisions indicating that the laws of another state apply to the contract. Such a provision may work to circumvent the application of the new law. If you have any questions regarding this bill, another bill, or our other legislative efforts  please contact any one of the firm’s partners.

For more information on Kring & Chung LLP, please visit  www.kringandchung.com

Kring & Chung, LLP is one of California’s fastest growing full-service law firms. With over forty attorneys, the firm practices business, corporate and securities, construction, real estate, labor & employment, insurance, estate planning and family law. The construction department of the firm serves the construction industry in relation to construction and design defect litigation, mechanic’s liens, stop notices, construction bonds, public works construction disputes, change orders, bid protests and delay claims.
 

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