California's New Subcontractor Defense Regime For Non-Residential Projects: Creating Order Or Chaos?

As explained in a recent Commentary (available at http://www.jonesday.com/navigating_treacherous_waters), California's recently enacted and amended anti-indemnity statutes have expanded the bar against one construction participant forcing another to indemnify the first participant for its own "active negligence." As discussed in this Commentary, these statutes have also created a new regime governing how subcontractors, having contractually agreed to defend the general contractor or construction manager, will share that defense duty. In a nutshell, under California Civil Code section 2782.05(e), which governs most non-residential projects, a general contractor ("GC") or construction manager ("CM") may only allocate a reasonable share of its defense to each subcontractor. In response, each subcontractor may elect either to defend the GC or CM or to reimburse a reasonable share of the GC's or CM's defense costs. The new regime also provides a mechanism to re-allocate defense shares after final resolution of the claim and for ensuring compliance with its provisions. As with the recent amendments barring indemnity for a participant's active negligence, California's new subcontractor defense regime may raise more questions than it answers. Construction participants attempting to navigate the requirements of section 2782.05 may find themselves in murky waters without a clear course to avoid disputes and litigation. This commentary analyzes the recently added subcontractor defense regime and flags some of the uncertainties and risks it may create. The New Regime for Subcontractor Defense Duties on Non-Residential Projects In the past, some GCs, having contractually bound their subcontractors to indemnify them against claims arising from the project, have demanded that each subcontractor pick up the whole tab for the GC's defense against a claim by the owner or other claimant. Now, for contracts and amendments entered into on or after January 1, 2013, a new regime has been created under section 2782.05(e) to govern the allocation and performance of defense obligations by and among subcontractors on non-residential projects, both public and private. This new regime draws from the nearly identical pre-existing defense rules for residential projects under California Civil Code section 2782(e) (governing contracts entered into after January 1, 2009). While section 2782.05(e) should be consulted in connection with any request for defense or indemnity, a summary of the new rules follows. Projects Subject to the New Regime The new subcontractor defense rules under section 2782.05(e) apply to any indemnity provision subject to subdivision (a) of section 2782.05, which governs "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. Section 2782.05(a) invalidates any clause in such a contract that seeks to require the subcontractor to indemnify or insure the GC, CM, or other subcontractor (a) for that other party's active negligence or willful misconduct, (b) for defects in the project's design provided by that other party to the subcontractor, or (c) for claims arising outside the scope of the subcontractor's work. §2782.05(a). However, the defense-duty regime under section 2782.05(e) does not apply to the following circumstances enumerated in section 2782.05(b):

Contracts for residential construction that are subject to any part of Title 7 (commencing with Section 895) of Part 2 of Division 2; Direct contracts with a public agency that are governed by subdivision...