1 INDEMNITY AND CONTRACT CLAUSES JANUARY 18, 2013 CFMA – Sacramento Chapter J. Scott Alexander Ken Schumaker Murphy Austin Adams Schoenfeld LLP 304 “S” Street, Sacramento, CA

2 INDEMNITY LAW Please be assured that we make every effort to make certain that the information contained in this presentation is current at the time of the presentation. Because laws and legislation are constantly changing, please contact us if you are unsure whether this material is still current. Nothing contained herein should be construed as legal advice or a legal opinion on any specific facts or circumstances or as creating an attorney-client relationship. The contents are intended to be for general information purposes only. We assume no liability in connection with the use of the information contained in this presentation. Please contact us to answer any questions you may have.

3 INDEMNITY LAW Key Indemnity Statutes found at Civil Code section Old way to analyze indemnity: 3 “Types” of Indemnity – Types I (most onerous type), II (passive negligence) and III (limited to only indemnitor’s conduct). Old law - could not be indemnified for sole negligence or willful misconduct Duty of indemnity v. duty to defend – what does this mean? On residential projects, no indemnity for negligence of others – what about commercial/public works projects?

4 INDEMNITY LAW CHANGES 2013 New language in Civil Code section 2782(b)(2) and (c)(1) as of January 1, 2013 for public works contracts (expands prior language to now include subcontractors and suppliers) and commercial projects: (b) (1) Except as provided in Sections , , and , provisions, clauses, covenants, or agreements contained in, collateral to, or affecting any construction contract with a public agency entered into before January 1, 2013, that purport to impose on the contractor, or relieve the public agency from, liability for the active negligence of the public agency are void and unenforceable. (2) Except as provided in Sections , , and , provisions, clauses, covenants, or agreements contained in, collateral to, or affecting any construction contract with a public agency entered into on or after January 1, 2013, that purport to impose on any contractor, subcontractor, or supplier of goods or services, or relieve the public agency from, liability for the active negligence of the public agency are void and unenforceable.

5 INDEMNITY LAW CHANGES 2013 (c) (1) Except as provided in subdivision (d) and Sections , , and , provisions, clauses, covenants, or agreements contained in, collateral to, or affecting any construction contract entered into on or after January 1, 2013, with the owner of privately owned real property to be improved and as to which the owner is not acting as a contractor or supplier of materials or equipment to the work, that purport to impose on any contractor, subcontractor, or supplier of goods or services, or relieve the owner from, liability are unenforceable to the extent of the active negligence of the owner, including that of its employees. (2) For purposes of this subdivision, an owner of privately owned real property to be improved includes the owner of any interest therein, other than a mortgage or other interest that is held solely as security for performance of an obligation. (3) This subdivision shall not apply to a homeowner performing a home improvement project on his or her own single family dwelling.

6 INDEMNITY LAW CHANGES 2013 New language in Civil Code section as of January 1, 2013 for general contractor/subcontractor contracts: (a) Except as provided in subdivision (b), provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any construction contract and amendments thereto entered into on or after January 1, 2013, that purport to insure or indemnify, including the cost to defend, a general contractor, construction manager, or other subcontractor, by a subcontractor against liability for claims of death or bodily injury to persons, injury to property, or any other loss, damage, or expense are void and unenforceable to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of that general contractor, construction manager, or other subcontractor, or their other agents, other servants, or other independent contractors who are responsible to the general contractor, construction manager, or other subcontractor, or for defects in design furnished by those persons, or to the extent the claims do not arise out of the scope of work of the subcontractor pursuant to the construction contract. This section shall not be waived or modified by contractual agreement, act, or omission of the parties…

7 INDEMNITY LAW CHANGES 2013 SO WHAT DO THESE CHANGES MEAN? No longer do/can we have Type I provisions. Levels the playing field. Subcontractors greatly benefit. What is active negligence? How is it different than passive negligence? On indemnity side, easy to understand, but determination is usually done by trier of fact and defense duties are not always clear. The overall intent of the changes is to "ensure that every construction business in the state is responsible for losses that it, as a business, may cause." The laws apply to construction performed on property located in California even if the parties have attempted to opt out of these changes or have agreed to a non-California choice of law provision in their contract. Cal. Civ. Code §§ (c), (d).

8 INDEMNITY CLAUSES Sample Subcontract Clause Using New Law: INDEMNIFICATION. To the fullest extent permitted by law, Subcontractor shall indemnify, defend and hold harmless Owner and Contractor, including their officers, agents, employees, affiliates, parents and subsidiaries, and each of them (“Indemnified Parties”), of and from any and all claims, demands, causes of action, damages, costs, expenses, actual attorneys’ fees, losses or liability, in law or in equity, of every kind and nature whatsoever (“Claims”) arising out of or in connection with any act or omission of Subcontractor or any sub- subcontractor of any tier or anyone that Subcontractor or its sub- subcontractors control or exercise control over, or Subcontractor’s work or operations performed or to be performed under, or breach of, this Agreement, including, without limitation, for:

9 INDEMNITY CLAUSES a. Personal injury or property damage, including, but not limited to, bodily injury, emotional injury, sickness or disease, or death to persons, including, but not limited to, any employees or agents of Subcontractor, Owner, Contractor, or any other subcontractor and/or damage to property of anyone (including loss of use thereof), caused or alleged to be caused in whole or in part by any negligent act or omission of Subcontractor or anyone directly or indirectly employed by Subcontractor or anyone for whose acts Subcontractor may be liable regardless of whether such personal injury or damage is caused by a party indemnified hereunder. b. Penalties imposed on account of the violation of any law, order, citation, rule, regulation, standard ordinance or statute, caused by the action or inaction of Subcontractor. c. Infringement of any patent rights which may be brought against the Contractor or Owner arising out of Subcontractor’s work. d. Claims and liens for labor performed or materials used or furnished to be used on the job, including all incidental or consequential damages resulting to Contractor or Owner from such claims or liens. e. Subcontractor’s failure to fulfill the covenants set forth in Labor Relations f. Failure of Subcontractor to comply with insurance requirements g. Any violation of infraction by Subcontractor of any law, order, citation, rule, regulation, standard, ordinance or stature in any way relating to the occupational health or safety of employees, including, but not limited to, the use of Contractor’s or other’s equipment, hoist, elevators, or scaffolds.

10 INDEMNITY CLAUSES The indemnification provisions herein, including, without limitation, of (a) through (g) above shall extend to claims occurring after this Agreement is terminated as well as while it is in force. Subcontractor, however, shall not be obligated under this Agreement to indemnify, including the cost to defend, the Indemnified Parties for Claims arising out of, pertaining to, or relating to the active negligence or willful misconduct of the Indemnified Parties, or for defects in design furnished by such persons, or to the extent the Claims do not arise out of the scope of work of the Subcontractor pursuant to this subcontract. However, Subcontractor shall be responsible for the portion of the claim attributable to its share of the cost. Subject to the requirements above, Subcontractor shall: (a) At Subcontractor’s own cost, expense and risk, defend all Claims as defined above that may be brought or instituted by third persons, including, but not limited to, governmental agencies or employees of Subcontractor, against Contractor or Owner or their agents or employees or any of them; (b) pay and satisfy any judgment or decree that may be rendered against Contractor or Owner or their agents or employees, or any of them, arising out of any such Claim; and/or (c) Reimburse Contractor or Owner or their agents or employees for any and all legal expense incurred by any of them in connection herewith or in enforcing the indemnity granted. Risk of Loss. All work covered by this Agreement done at the site or in preparing or delivering materials or equipment, or any or all of them, to the site shall be at the risk of Subcontractor exclusively until the completed work is accepted by Contractor. No Limitation of Liability. The indemnities set forth in this section shall not be limited by the insurance requirements set forth in the Insurance Requirement section.

11 INDEMNITY CLAUSES RECENT CASES: Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th For all residential construction contracts entered into before January 1, 2006, a properly worded contract can compel a subcontractor to immediately defend a builder regardless of whether the subcontractor is ultimately required to indemnify the builder or even found to be at fault. Waiver of consequential damages. UDC-Universal Development, L.P. v. CH2M Hill (2010) 181 Cal. App. 4th 10 - a design professional had a duty to defend the developer of a condominium project as soon as the developer tendered the defense request to the design professional, independent of any duty to indemnify, and irrespective of a finding by the jury of no negligence and no breach of contract in favor of the design professional.

12 INDEMNITY CLAUSES Civ.C. § – Voids indemnity agreements pertaining to residential construction projects covered by a wrap-up (consolidated) insurance program. Trend Away From Rigid Type-Classification Of Indemnity Agreements - Regardless of the general classifications for indemnity agreements, courts will look to the specific wording of the agreement to determine how the agreement should be applied. See, Continental Heller Corp. v. Amtech Mechanical (1997) 53 Cal.App.4th 500; Centex Golden Const. v. Dale Tile Co. (2000) 78 Cal.App.4th 992.

13 “Battleground” Prime Contract Provisions CPM schedules, delays, time extensions and liquidated damages. Dispute Resolution. Grounds for withholding monies.

14 “Battleground” Prime Contract Provisions DELAYS AND TIME RELATED ISSUES: Acceptance v. approval of schedules. Requirements for baseline schedule and updates – CPM schedules? “No damage for delay” clauses. Defining compensable and non-compensable delays.

15 “Battleground” Prime Contract Provisions DISPUTE RESOLUTION: Litigation v. Arbitration. “Meet and confer” and mediation as pre-conditions to formal proceedings. Do you include an attorneys’ fees provision? Venue provisions – can you require the parties to litigate somewhere other than where the project is located?

16 “Battleground” Prime Contract Provisions WITHHOLDING: Disputes over grounds for withholding. Examples of disputed provisions include: Timely notice of withholding and time to cure by contractor; Defective Work not remedied; Third party claims filed or reasonable evidence indicating probable filing of such claims; Failure of the contractor to make payments properly to subcontractors or for labor, materials or equipment, reasonable evidence that the Work cannot be completed for the unpaid balance of the Contract Sum;

17 “Battleground” Prime Contract Provisions WITHHOLDING: Reasonable evidence that the Work will not be completed within the Contract Time, and that the unpaid balance would not be adequate to cover actual or liquidated damages for the anticipated delay; or Persistent failure to carry out the Work in accordance with the Contract Documents.

18 “Battleground” Subcontract Provisions “Pass Through” claims of subcontractors. Terminations Warranties Incorporating “proposals” and order of precedence clauses. Timing of payments/”pay if paid/pay when paid” clauses.

19 “Battleground” Subcontract Provisions “PASS THROUGH” CLAIMS: Subcontractor claim for which owner is responsible must be “passed through” and sponsored by prime contractor (except for stop notice claims). Who pays for pass through claim and what level of cooperation is required? Who is responsible for a false claim? Certification of claim

20 “Battleground” Subcontract Provisions TERMINATIONS: Time/notice to cure prior to termination. What level of breach/default allows for termination? Costs recoverable for terminations for convenience. Waiver of claims?

21 “Battleground” Subcontract Provisions WARRANTIES: Length of express warranties? One or two years. Time of commencement of warranties. Difficulties when manufacturer’s warranties commence upon installation of product/equipment at project.

22 “Battleground” Subcontract Provisions PROPOSALS/INCORPORATION: Subcontractors desire to include proposals and all exclusions therein. Do proposals take precedence over subcontract, prime contracts, and plans/specifications? Incorporation by reference: what if you haven’t seen all of the prime contract documents? Order of precedence clauses. “More stringent” requirements? Site inspection clauses – to what standard should a subcontractor reasonably be held?

23 “Battleground” Subcontract Provisions TIMING OF PAYMENTS/WITHHOLDINGS: Notices to cure prior to withholdings. Final payment to subcontractor after full project completed or within time period after subcontractor completes its work? Payment of change orders – can payment be limited to what owner pays prime contractor?

24 MURPHY AUSTIN ADAMS SCHOENFELD LLP 2013 CONSTRUCTION LAW SEMINAR Questions & Answers THANK YOU FOR COMING!