Before Celebrating the Market Rebound, Builders Need to Read the Fine Print: New Changes in Construction Law Coming Out of the Recession

November 26, 2014 — Alan H. Packer - Newmeyer & Dillion, LLP
As the homebuilding market continues to improve, many builders find themselves maneuvering familiar roads. That said, important new realities have taken hold since the market collapse. Navigating these changes requires extra thought for practical and legal reasons. Using Old Designs “Off the Shelf”? The adoption of the California Building Standards Code in 2010, with an updated schedule to go into effect January 1, may complicate the use of older designs. In addition, some builders are contemplating building on pads constructed five or more years ago, temporarily shelved until market conditions improved. Because of changes in both the applicable Code and due to possible changes in the underlying soils and drainage, these projects require additional scrutiny before starting construction. Mechanic’s Lien Law Changes Not too long ago, the California Legislature recently overhauled the entire mechanic’s lien law system in California. New forms, new statutory references, new rules and deadlines are all applicable to projects under construction now. Make sure your documents are up to date, as the use of older forms (particularly for liens, progress payments, and final payments) could create legal problems in the future. Indemnity Law Changes Since 2006, California lawmakers have passed four rounds of legislation aimed at limiting indemnity provisions in construction contracts. The laws are aimed at two aspects of indemnity law: “Type 1” indemnity provisions, and liability for the costs of defending a claim. Type 1 Indemnity. California law previously permitted a builder to obtain “Type 1” indemnity from its subcontractors for all claims. Under a Type 1 provision, if a claim arose out of the trade’s work, the trade was fully responsible to defend and indemnify the builder – even if other trades or the Builder were partially at fault. Some cases even allowed, typically in a commercial context, the builder to obtain Type 1 indemnity even if the trade was not negligent, as long as the claim involved its work. Defense Obligation. In 2008, California’s highest court issued an opinion in Crawford v. Weather Shield, evaluating an indemnity provision requiring trade (a window supplier/manufacturer) to defend the builder in claims involving allegations of damages arising out of the trade’s work. Because the trade had contractually agreed to defend the builder, the Court held it responsible for the builder’s defense costs -- even though, ultimately, the trade was found not liable for the actual damages claimed. Recent legislation after Crawford has dramatically shifted how indemnity provisions will be enforced. Builders may no longer obtain Type 1 indemnity for residential construction defect claims covered by SB800; instead, indemnity is limited to the extent a claim arises out of the trade’s work. Even more recent legislation applied these changes to claims arising out of commercial construction projects. The recent legislation allows the trades “options” on how to defend the builder, with an eye toward requiring that they pay only a “reasonably allocated” portion for the builder’s defense costs. Smart builders are refining their contract documents to take into account these new limitations on indemnity provisions. Insurance Market Changes Due to uncertainties in subcontractor insurance and other factors, many builders have also converted their liability insurance from a “bring your own” model to “wrap-up” insurance, where the builder’s policy also covers their trades. Builders should carefully examine their subcontracts in light of this change as well. Trade Partner Changes On a practical level, many trade partners, particularly in the residential sector, have gone out of business or moved on to greener pastures. Builders need to find and negotiate contracts with new trade partners on the fly, and educate them on the builders’ procedures for payment and construction. SB800 documentation A decade ago, most builders updated their purchase documents and subcontracts for California’s “Right to Repair Law” (also known as SB800), which set forth functionality standards for construction defects in residential housing, and procedures for resolving claims prior to litigation. Builders ramping up to meet market demand should examine how they implemented SB800 changes in contract documents. Issues to consider:

• Whether to opt out of -- or back into -- statutory procedures.
• Whether to include arbitration or judicial reference provisions to control where claims are litigated after the SB800 process.
• Re-training personnel to preserve SB800 rights, including sign-offs on purchase documentation and recordation of key documents.
• Recent Court of Appeal decisions have complicated the SB800 landscape, potentially opening the door to “common law” tort claims in at least subrogation contexts. Strategic planning at the document stage may be a good way to mitigate this risk as the cases wind their way through the judicial process.

The continuing surge in building activity is a welcome sign for builders who have weathered the storm. Before taking too many steps, builders should consult with counsel, their designers, and their insurance advisors to take into account the new realities of this recovering housing market. About the Author Alan H. Packer is a partner in the expanding Walnut Creek, CA, office of the law firm of Newmeyer & Dillion LLP whose specialties include real estate, insurance, and construction litigation. To reach Alan, call 925.988.3200 or email him at alan.packer@ndlf.com.