The California Legislature Passes a Bill Limiting Design Professional Defense and Indemnity Obligations

On April 28, 2017, the California Legislature passed Senate Bill No. 496, which limits the defense and indemnity obligations of design professionals who enter into contracts to perform design professional services on or after January 1, 2018. Existing law limits design professional defense and indemnity obligations for contracts entered into with public agencies to claims that arise out of, pertain to, or relate to the negligence, recklessness or willful misconduct of the design professional. SB 496 makes these provisions applicable to all contracts entered into for design professional services. According to a bankruptcy attorney the bill also prohibits the cost to defend charged to the design professional from exceeding the design professional’s proportionate percentage of fault, except in the event that one or more defendants is unable to pay its share of defense costs due to bankruptcy or dissolution of its business.

There are two exclusions to the provision which are (1) a contract for design professional services where a project specific general liability policy insures all project participants on a primary basis including all design professionals (which is rare) and (2) a design professional who is a party to a written design-build joint venture agreement.

SB 496 amends Section 2782.8 of the Civil Code. A copy of the bill is available here:

The California Supreme Court Determines That Settlement Proceeds Can Constitute a “Net Monetary Recovery” Allowing the Plaintiff to Recover Costs as the Prevailing Party

In a March 10, 2016 decision titled DeSaulles v. Community Hospital of the Monterey Peninsula, 62 Cal. 4th 1140, 1144 (2016), the California Supreme Court held that where a settlement agreement is silent regarding litigation costs, a plaintiff who enters a stipulated judgment to be paid money in exchange for a dismissal obtains a “net monetary recovery,” which allows the Plaintiff to recover costs as the “prevailing party.”

Under California law, the party that prevails in a lawsuit is entitled to recovery of its costs. California Code of Civil Procedure §1032(a)(4) provides a variety of categories that define a prevailing party for purposes of recovering costs in litigation. Two of these categories are: 1) the party with a net monetary recovery, and 2) a defendant in whose favor a dismissal is entered. These two categories are in conflict when the parties enter into a settlement wherein the defendant pays the plaintiff in exchange for a dismissal. In DeSaulles, the California Supreme Court explicitly held that in such cases, the plaintiff obtains a “net monetary recovery,” and that a dismissal is not a dismissal [in the defendant’s favor] under the statute. As such, the plaintiff is the prevailing party and is entitled to costs. The Court, however, emphasized that the statute only provides a default rule and the parties are free to make their own arrangements regarding costs. As such, it is important for parties to specifically spell out in their settlement agreements which party, if any, is to recover its costs of suit. This is especially important in cases that settle close to trial wherein the costs may be substantial and may affect the amount of money the settling party is willing to pay.

Effective January 1, 2016 California Contractor License Bonds Will Increase

As of January 1, 2016, the required amount of a contractor’s bond will again increase from $12,500 to $15,000. Contractor bonds are required for the issuance of an active license, reactivation of a license, and for the maintenance of any actively renewed license. The $2,500 increase is the result of Senate Bill 467, which was approved by the Governor on October 8, 2015. Previously, an applicant was also required to provide evidence of financial solvency. However, this requirement has been removed and instead, the amount of the bond was increased to $15,000. Although the amount of the contractor’s bond will increase, the amount of a qualifying individual will remain at $12,500.

For contractors whose bonds do not expire on December 31, 2015, the Board is requiring an endorsement authorizing the increase that must be signed by an attorney-in-fact for the surety company. This endorsement will have no bearing on the effective date of the bond, so contractors should remain aware of the date that the bond expires, at which point it will need to be renewed. As a result of the increase, applicants should expect to pay a slightly higher premium for their bond. Failure to file a bond or increase endorsement timely may lead to suspension or revocation of current licenses. As such, contractors should allow plenty of time for the Contractors State License Board to process the bonds and endorsements to ensure that there is no lapse in coverage.

California Appellate Court Rejects Liberty Mutual and Requires Plaintiff to Follow the Right to Repair Act’s Pre-Litigation Procedures

On August 26, 2015, in McMillin Albany LLC et al. v. Superior Court (Van Tassell et al.) F069370, the California Court of Appeal, Fifth Appellate District, held that the Right to Repair Act (Cal. Civ. Code §895 et seq.) provides the exclusive remedy for homeowners seeking damages for certain claims for construction defect, regardless of whether or not the defects resulted in property damage. The McMillian Albany LLC (“McMillin”) court explicitly rejected the Fourth Appellate District’s decision in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 1194, 212, which reached the opposite conclusion just two years prior. The McMillian decision represents a possible step forward for builders that stand to benefit from the Act’s pre-litigation procedures, which include the right to repair alleged defects prior to the start of litigation.

In McMillin, the plaintiff homeowners filed an action against the builders of their homes for alleged construction deficiencies. The builder petitioners moved to stay the litigation until the homeowners complied with the prelitigation procedures of the Right to Repair Act. The homeowners opposed the motion, contending that the Act’s requirements did not apply because their complaint alleged common law claims and did not allege a violation of the Right to Repair Act. The trial court denied the stay and petitioners filed a writ of mandate.

The Court of Appeal reversed the trial court’s decision and mandated that the court grant a stay pending completion of the pre-litigation process. The McMillin court explicitly rejected the court’s decision in Liberty Mutual, which held that plaintiffs could pursue common law claims for construction defect if they could show evidence of actual property damage. The McMillin court found that the Liberty Mutual court improperly neglected to consider certain provisions of the Act, including Civil Code §943, which provides that “no other cause of action for a claim covered by this title or for damages recoverable under Section 944 is allowed,” in rendering its decision. The McMillian court also looked to the legislative comments, which professed that the bill would make major changes to the substance and process of the law governing construction defects. As such, the court concluded that the legislature intended that all claims arising out of certain defects in residential construction be subject to the pre-litigation requirements of the Act.

The McMillin court’s diversion from the holding in Liberty Mutual and the cases that followed creates conflicting legal ground. Until further word from the legislature or review by the California Supreme Court, California courts are free to choose whether to follow the Liberty Mutual line of case law or the McMillin court’s decision and require homeowners to follow the prelitigation procedures set forth in the Right to Repair Act.

AB 1897 Holds Client Employers Liable if Labor Contractors Fail to Pay Adequate Wages or Provide Workers’ Compensation for Injuries on the Job

Effective January 1, 2015, employers who hire temporary labor from labor contractors can be held liable for payment and workers’ compensation violations. Specifically, the bill adds California Labor Code §2810.3, which provides in pertinent part:

 (b) A client employer shall share with a labor contractor all civil legal responsibility and civil liability for all workers supplied by that labor contractor for both of the following:

 (1) The payment of wages.

 (2) Failure to secure valid workers’ compensation coverage as required by Section 3700.

The bill was enacted as a reaction to a recent shift from a traditional employer-employee relationship towards a business model that utilizes subcontracted or contingent workers. Proponents are concerned that this change creates challenges for workers and enforcement agencies in ensuring workers’ rights.

The law will affect the construction industry by increasing liability of employers who hire temporary labor to work on specific projects. According to a group of workers compensation lawyers, although existing workers compensation law requires employers to enter into written contracts for construction services that include workers compensation and wage information, the new law holds employers specifically accountable for violations related thereto.  Employers should be diligent in researching the policies of the labor contracting companies they work with and ensuring the adequacy of their wages and workers compensation coverage. If for any reason you find that your employer is not providing all things by law then you should contact a workers compensation attorney for help on the matter.

To see the bill in its entirety, click here.

Contractor’s State License Law Does Not Preclude Change in Business Entity’s Status During Contract Period

Section 7031 of the California Business and Professions Code precludes unlicensed contractors from maintaining actions for compensation.  The provision is strictly applied and precludes recovery even in the face of injustice to the unlicensed contractor.

In E. J. Franks Construction, Inc. v. Sahota, (2014) 226 Cal. App. 4th 1123, a California appellate court held that the provision does not preclude recovery by a licensed contractor that changed its business status during the construction of the defendant’s home pursuant to a home construction agreement.  In the June 5 case, the plaintiff contractor commenced work as a licensed sole proprietor, E. J. Frank Construction.  During the course of construction, E. J. Franks Construction incorporated and the license was reissued to the corporation.  The court allowed the corporation to recover on a quantum meruit basis.

The court stressed that the purpose of Section 7031 is to deter unlicensed contractors from recovering compensation for their work, not to deter licensed contractors from changing their business entity status.  Therefore, as long as a contractor ensures that its license is reissued to the new entity it may change its status during a contract period.

Plaintiffs Must Provide Notice Before Repair Is Made to Recover Under SB800

On Feb. 21, in KB Home Greater Los Angeles, Inc. v. Superior Court of Los Angeles B246769, the California Court of Appeal, Second Appellate District held that the failure to give timely notice or an opportunity to inspect under the Right to Repair Act before a repair is made is fatal to the cause of action.

In KB Home Greater Los Angeles, the plaintiff discovered a water leak in a home built by KB Home Coastal, Inc. (KB Home).  The homeowner’s insurer, Allstate, completed repairs and subsequently sent KB Home a notice of its intent CON BLOG_water leakto pursue its subrogation right for the cost of the repair.  After receiving no response from KB Home, Allstate filed a complaint.

The court held that due to Allstate’s failure to timely notify KB Home as required by the act’s prelitigation procedures, it could not recover for the repairs. The court rejected Allstate’s argument that the act does not specify the order of inspections and repairs. The court also rejected Allstate’s argument that the act should be construed to allow for reasonable notice in cases of emergency.  The court pointed to the ability under the act to utilize any of the builder’s customer service procedures and to recover compensation from all damages incurred within the time frame for repair.

It may be possible for a plaintiff to recover without first providing notice by bringing a common law tort claim instead.  Due to the recent holdings in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 1194, 1212 and Burch v. Superior Court (Premier Homes LLC) B248830, a plaintiff can bring a tort claim for construction defects that caused actual property damage; a claim that is not subject to the requirements under the act.  See the previous blog post titled “Homeowners Maintain Right to Bring Common Law Claims for Construction Defects Causing Property Damage.”  However, if the plaintiff alleges claims under SB800, which doesn’t require property damage, then the plaintiff must provide notice before a repair is made to obtain recovery.

Image courtesy of Flickr by Jeff Drongowski

California Civil Code §1375 Repealed and Continued in §6000

As of Jan. 1, 2014, California Civil Code §1375, which previously governed the Calderon Process, was repealed.  However, Civil Code §6000 continues the statute without any substantive changes.  Thus, while there is a new statute to cite, the legal principles as well as the majority of the language of the statute remain the same.

The statute governs the pre-litigation “Calderon Process,” named after the author of the original legislation, state Sen. Charles Calderon.  It dictates the procedures for construction defect litigation brought by homeowners’ associations against builders, developers, and general contractors. The provisions provide specific actions and timelines that must be followed before an association files a complaint for damages.

Section 6000 becomes inoperative on July 1, 2017, and will be repealed on Jan. 1, 2018.