Lead Paint Coverage Claim Bites The Dust

Gina M. Foran, William Baron and Philip Matthews | Duane Morris

Duane Morris lawyers helped secure a victory at the California Court of Appeal when the court held Tuesday that ConAgra’s insurers have no duty to indemnify ConAgra against a public nuisance action in which ConAgra was ordered to contribute to an abatement fund due to its predecessor’s promotion of the use of lead paint in pre-1950 homes.  (See Certain Underwriters at Lloyd’s London, et al. v. ConAgra Grocery Products Companyet al., Case No. A160548, April 19, 2022, certified for publication (“ConAgra“).)

The underlying case (the “Santa Clara  Action”) began in 2000 when Santa Clara County, later joined by other California government agencies filed a class action complaint against certain lead paint manufacturers, including ConAgra, NL Industries, Inc., and Sherwin-Williams Company. The focus of the underlying case was narrowed, and that case ultimately went to trial on one cause of action for representative public nuisance.  In pursuing that causes of action, the underlying plaintiffs alleged that the presence of lead in paint and coatings in and around homes and buildings in California created a public health crisis created and/or assisted by the defendants.  In a pre-trial appeal in the Santa Clara  County action, the court held that the representative public nuisance cause of action required as an essential element that the paint manufacturers had acted intentionally with actual knowledge that their marketing of lead paint for interior residential use would cause harm.  (See County of Santa Clara v. Atlantic Richfield Co.  (2006) 137 Cal.App.4th 292, 299 (“Santa Clara I“).)  The underlying case went to trial under that standard, and the court found the manufacturers jointly and severally liable for representative public nuisance.

In 2017, the Court of Appeal in the Santa Clara  Action affirmed the finding that the paint manufacturer were liable, although the Court ruled that the amount of the judgment must be re-tried.  (People v. ConAgra Grocery Products Co.  (2017) 17 Cal.App.5th 51 (“Santa Clara II“).).  In upholding the finding of liability, Santa Clara II  held that when ConAgra’s corporate predecessor, W.P. Fuller & Co. (“Fuller”) marketed paint for use inside homes, Fuller had “actual knowledge of the hazards of lead paint—including childhood lead poisoning,” and specifically that “(1) ‘lower level lead exposure harmed children,’ (2) ‘lead paint used on the interiors of homes would deteriorate,’ and (3) ‘lead dust resulting from this deterioration would poison children and cause serious injury.'”  (Santa Clara II, supra,  17 Cal.App.4th at 85.)

The plaintiffs’ public nuisance cause of action in the Santa Clara  Action did not seek damages, but instead sought abatement, which allows a plaintiff to obtain relief before a hazard causes physical injury or damage to property.  The trial court in the Santa Clara  initially ordered the defendants to pay $1.15 billion into an abatement fund.  On remand after the 2017 appellate opinion, the Santa Clara  trial court recalculated the amount of the abatement fund to be $409 million.  The parties in that case eventually reached a settlement, which required ConAgra to pay $101,666,666 to resolve the plaintiffs’ claims.

While the underlying Santa Clara  action was pending, in January 2014 certain London Market insurers filed a declaratory relief action seeking a determination that they had no coverage obligations to ConAgra under policies issued to ConAgra and its predecessors, and bringing numerous other insurers into the case.  The coverage case was stayed while the underlying case went forward.  The insurers ultimately filed a motion seeking summary judgment on the grounds that: (1) Cal. Ins. Code Section 533 prohibits coverage for ConAgra’s intentional promotion of lead paint with actual knowledge of the health hazards that would result; (2) there was no “occurrence” under the policies because the harm was expected or intended from the standpoint of the insured; (3) the abatement remedy was not liability for “damages” or an “expense” under the policies; and (4) ConAgra’s liability was not “because of” or “on account of” “bodily injury,” “property damage” and/or “personal injury” under the policies.

The trial court granted summary judgment in favor of the insurers, ruling that Insurance Code Section 533 barred coverage as a matter of law where liability arises from deliberate conduct that the insured expected or intended to cause damage. The court reasoned that Fuller, ConAgra’s predecessor, intentionally promoted lead paint for use inside homes with actual knowledge that damage to children was at least highly probable.

ConAgra appealed the judgment to the California Court of Appeal. It advanced several arguments in its appeal, including contentions that: (1) Because it was ConAgra’s predecessor, Fuller, that committed the wrongful acts, Section 533 did not apply to bar coverage for ConAgra; (2) Section 533 is inapplicable because the loss for which ConAgra seeks indemnity was too attenuated from Fuller’s past promotion of lead paint for Section 533 to apply; and (3) the underlying findings did not establish as a matter of law that Fuller acted with the requisite knowledge under Section 533. The Court of Appeal rejected each of these arguments.

With respect to its first argument, ConAgra reasoned that its predecessor’s knowledge should not be imputed to ConAgra under Section 533, citing cases that allowed coverage where an insured was vicariously liable for willful conduct of another person. The court rejected this argument, holding that cases regarding vicarious liability do not apply in situations involving successor liability.  The Court reasoned that, in the event of a merger, as occurred when Fuller was merged into ConAgra through several corporate acquisitions over time, the successor is on notice that it is succeeding to the liabilities of its predecessor and is therefore responsible as the wrongdoer for purposes of Section 533.

In its second argument, ConAgra contended that even if the focus is on its predecessor’s conduct, Section 533 should not apply because the loss ConAgra was being held liable for was too attenuated from Fuller’s promotions.  ConAgra argued that Section 533 required both a direct causal relationship and a close temporal connection between the act and the loss. Because only a few of Fuller’s promotions were held to be actionable, and the harm resulted decades after the wrongful conducts, ConAgra argued that Section 533’s requirements were not satisfied. The court disagreed, noting examples of environmental contamination cases where Section 533 applied to bar coverage where the wrongful act causing damage occurred many years before the damage eventually resulted. The Court also quoted the lower court for its statement that the connection between the promotion and current presence of lead was not too attenuated, as those who were influenced by the promotions to use lead paint were the “single conduit” between defendants’ actions and the current hazard. The Court of Appeal stated that the underlying litigation conclusively established ConAgra’s liability for public nuisance, and that the proper inquiry under Section 533 is whether the loss for which an insured seeks indemnity was caused by a willful act of the insured.

ConAgra last argued that the underlying findings did not establish that Fuller acted with the requisite knowledge under Section 533. ConAgra argued that the “actual knowledge” found was not the same as the subjective “substantial certainty” required under Section 533, and that coverage could be precluded only if evidence showed that Fuller believed the widespread prevalence of deteriorated lead paint was substantially certain to result from its few actionable promotions. The Court rejected this argument, noting that the proper test was whether there was a willful act of the insured performed with the expectation that harm would result.  Because the courts in the Santa Clara  action had found that it conclusively established that Fuller had actual knowledge that harm would result from its promotion of lead paint, Fuller necessarily acted with knowledge that lead paint was “substantially certain” or “highly likely” to result in a hazard. This evidence satisfied Section 533’s willful act requirement.

As part of its last argument, ConAgra asserted that Section 533 could bar coverage only if it was proven that Fuller’s management had the requisite knowledge to preclude coverage. The Court of Appeal rejected that argument, citing prior case law holding that the knowledge of all employees is imputed to the corporation for purposes of applying Section 533.

Accordingly, the Court of Appeal affirmed the lower court rulings and upheld summary judgment in favor of the insurers.

See full opinion here.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

A Riveting (or at Least Insightful) Explanation of the Privette Doctrine

Garret Murai | California Construction Law Blog

“The wheels of justice turn slowly, but grind exceedingly fine” – Plutarch

And grind they do . . . slowly. For long time readers of the California Construction Law Blog you may recall a case we reported on over three years ago in 2018 – Sandoval v. Qualcomm Incorporated – a rather sad case about a severely injured employee of an electrical subcontractor with an even more surprisingly ending.

In Sandoval, the 4th District Court of Appeals affirmed a $7 million judgment against project owner Qualcomm Incorporated in which a jury found that Qualcomm was liable under the Privette doctrine for injuries sustained by the employee who was severely burned over one third of his body by an “arc flash” from a live circuit breaker. The Court of Appeals, in a surprising decision, upheld the verdict holding that Qualcomm was liable even through: (1) Qualcomm had informed the electrical subcontractor that certain live circuit breakers were energized; (2) Qualcomm had not authorized the lower-tiered contractor to remove a panel that resulted in the arc flash; and (3) employees of Qualcomm were not in the room when the accident happened.

Fast forward three years to September 2021. Qualcomm attorneys petition the California Supreme Court for review of the Court of Appeal’s decision. And the Supreme Court granted review.

The Supreme Court Decision

In Sandoval v. Qualcomm Incorporated, Case No. S252796 (September 9, 2021), the California Supreme Court, describing the Privette doctrine and two of its exceptions – the “concealed hazard” exception and the “retained control” exception – explained:

Strong public policy considerations readily acknowledged in our past decisions generally support a straightforward presumption about the responsibilities of hirers and contractors for worker injuries in situations like this: A person or entity hiring an independent contractor (a “hirer”) ordinarily delegates to that independent contractor all responsibility for the safety of the contractor’s workers. This presumption is rooted in hirers’ reasons for employing contractors in the first place, and society’s need for clear rules about who’s responsible for avoiding harms to workers when contractors are hired. We have therefore generally avoided subjecting hirers to tort liability for those workers’ injuries. But that presumption gives way to two recognized exceptions: where the hirer either withholds critical information regarding a concealed hazard (Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 664 (Kinsman)); or retains control over the contractor’s work and actually exercises that control in a way that affirmatively contributes to the worker’s injury (Hooker v. Department of Transportation (2002) 27 Cal.4th 198, 202 (Hooker)).

Describing the “concealed hazard” exception under Kinsman, the Supreme Court explained:

In Kinsman we recognized that a landowner-hirer cannot effectively delegate its duties respecting a concealed hazard without disclosing that hazard to the contractor. In this context, a “concealed” hazard means something specific: a hazard that the hirer either knows or reasonably should know exists, and that the contractor does not know exists and could not reasonably discover without the hirer’s disclosure. We draw no distinction between a hazard whose very existence is concealed and a hazard which is in some way apparent but whose dangerousness is concealed. The sufficiency of the hirer’s disclosure is “measured by a negligence standard,” that is, a standard of reasonable care. If the hirer does not sufficiently disclose the concealed hazard, the hirer retains its tort duties owed to the contract workers respecting that hazard. A contrary conclusion would cut against the rationale justifying Privette‘s presumption of delegation. A contractor is not best situated to perform work safely when the contractor lacks critical information about relevant hazards. Nor is there any unfairness in holding the hirer liable where only the hirer possessed that critical knowledge.

Describing the “retained control” exception under Hooker, the Supreme Court explained:

In Hooker, we recognized that hirers do not always fully delegate control to their contractors. We concluded that in some such “retained control” situations, notwithstanding Privette‘s presumption to the contrary, the hirer must owe a duty of care to the contract workers.

The plaintiff in such cases must establish not only that the hirer retained control over the contracted work, but also that the hirer actually exercised that retained control in a manner that affirmatively contributed to the contract worker’s injury. Because Hooker‘s application has produced significant confusion, we dwell at some length here on the meaning of Hooker‘s three key concepts: retained control, actual exercise, and affirmative contribution.

A hirer “retains control” where it retains a sufficient degree of authority over the manner of performance of the work entrusted to the contractor. This concept simply incorporates the Restatements’ theory of retained control: Against a backdrop of no hirer duty respecting the manner of performance of work entrusted to a contractor, the Restatements provide that a hirer who retains control over any part of that work owes others a duty of reasonable care respecting the hirer’s exercise of that retained control. So “retained control” refers specifically to a hirer’s authority over work entrusted to the contractor, i.e., work the contractor has agreed to perform. For simplicity we will often call this the “contracted work” — irrespective of whether it’s set out in a written contract or arises from an informal agreement. A hirer’s authority over noncontract work — although potentially giving rise to other tort duties — thus does not give rise to a retained control duty unless it has the effect of creating authority over the contracted work. Furthermore, a hirer’s authority over the contracted work amounts to retained control only if the hirer’s exercise of that authority would sufficiently limit the contractor’s freedom to perform the contracted work in the contractor’s own manner. 

*****

A hirer “actually exercise[s]” its retained control over the contracted work when it involves itself in the contracted work “such that the contractor is not entirely free to do the work in the contractor’s own manner.” In other words, the hirer must exert some influence over the manner in which the contracted work is performed. Unlike “retained control,” which is satisfied where the hirer retains merely the right to become so involved, “actual exercise” requires that the hirer in fact involve itself, such as through direction, participation, or induced reliance.

“Affirmative contribution” means that the hirer’s exercise of retained control contributes to the injury in a way that isn’t merely derivative of the contractor’s contribution to the injury. Where the contractor’s conduct is the immediate cause of injury, the affirmative contribution requirement can be satisfied only if the hirer in some respect induced — not just failed to prevent — the contractor’s injury-causing conduct. It is not enough for the hirer’s exercise of control to incidentally give the hirer the opportunity to prevent the contractor’s injury-causing conduct.

A hirer’s conduct also satisfies the affirmative contribution requirement where the hirer’s exercise of retained control contributes to the injury independently of the contractor’s contribution (if any) to the injury. 

The critical factor here is the relationship between the hirer’s conduct and the contractor’s conduct, not whether the hirer’s conduct, assessed in isolation, can be described as “affirmative conduct.” Importantly, neither “actual exercise” nor “affirmative contribution” requires that the hirer’s negligence (if any) consist of an affirmative act. The hirer’s negligence may take the form of any act, course of conduct, or failure to take a reasonable precaution that is within the scope of its duty under Hooker.

Applying each of these exceptions, the Supreme Court held that Qualcomm owed no tort duty to the injured worker, Sandoval, because Qualcomm neither failed to sufficiently disclose the hazard of a potential arc flash under Kinsman nor affirmatively contributed to Sandoval’s injuries under Hooker. The Supreme Court also held that the pattern jury instruction used in the case – CACI No. 1009B – does not adequately capture the elements of a Hooker claim.

With respect to the “concealed hazard” exception under Kinsman, the Supreme Court explained that Frank Sharghi, President of TransPower Testing, Inc., the general contractor who had hired the subcontractor employing Sandoval, had testified that that he was aware of which circuits were live and which were not. Thus, explained the Supreme Court, the condition of the live circuits “was not actually concealed.” Further, explained the Supreme Court,  the testimony of Qualcomm’s plant operator Mark Beckelman, was that he reminded Sharghi and his team that some circuits in the switchgear room would remain live. Thus, explained the Supreme Court, Qualcomm had in fact disclosed that there would be live circuits in the switchgear room. “Either way,” held the Supreme Court, “Qualcomm effectively delegated to TransPower any tort duties Qualcomm otherwise would have owed Sandoval respecting these live circuits under Kinsman.”

With respect to the “retained control” exception under Hooker, the Supreme Court explained that, while Qualcomm had control over the power-down process, by powering-down the circuits to be worked on but not powering down other circuits. this did not constitute “retained control” over the contracted work because the power-down process was not within the scope of work Qualcomm had entrusted to TransPower:

True: Qualcomm directed TransPower to observe the power-down process. And it asked TransPower to confirm that TransPower was satisfied with Qualcomm’s performance of the power-down process. Qualcomm nonetheless stopped short of offering — and TransPower never agreed — that TransPower take responsibility for actually performing the power-down process. Nor is it enough here that the power-down process was a necessary precondition for TransPower’s work, or that both the power-down process and TransPower’s work were essential components of a single larger job. Instead, Qualcomm’s performance of the power-down process implicates a retained control duty only to the extent that performance actually resulted in retained control over the work Qualcomm did entrust to TransPower: the inspection of the main cogen circuit.

Further, explained the Supreme Court, although Qualcomm’s performance of the power-down process arguably limited TransPower’s own freedom to power down “additional” circuits during its inspection, Qualcomm did not retain control over the inspection of the main cogen circuit merely by keeping certain other circuits live:

Qualcomm’s creation of this condition at the worksite imposed too little a degree of control over TransPower’s manner of performing the inspection. Even if Qualcomm could be said to have conveyed an expectation that TransPower perform its work in the presence of live circuits, TransPower was aware of and had ample freedom within the scope of its entrusted work to accommodate the presence of the live circuits effectively in its own manner, particularly since they were safely covered by bolted-on protective panels and not relevant to TransPower’s inspection. Qualcomm did not retain control over the inspection merely by declining to shut down these circuits or to give TransPower the authority to do so. Under the circumstances here, Qualcomm’s control over what was and what was not powered down did not constitute retained control over the contracted work.

Finally, explained the Supreme Court, even though Qualcomm may have had authority to require specific precautions during the inspection, such as by powering down the generator, Qualcomm did not “actually exercise” that authority:

Even assuming that Qualcomm retained control by retaining the authority to require or provide such precautions — e.g., supervision, a personal warning for Sandoval, arc flash protection suits, barricades, and/or additional warning signage — TransPower remained entirely free to implement (or not) any of these precautions in its own manner, issues over which Qualcomm exerted no influence. Although Sandoval argues that Qualcomm’s performance of the power-down process gave rise to a “duty” on Qualcomm’s part to take these precautions, he does not argue — nor is there any indication in the evidence — that Qualcomm’s performance of the power-down process induced TransPower’s failure to take any of these precautions itself. Likewise, that Qualcomm may have previously supervised TransPower’s work does not establish, in this case, that Qualcomm induced TransPower’s reliance on Qualcomm supervision. Sharghi’s uncontradicted testimony established that the reason TransPower did not request or wait for Qualcomm’s supervision was that Sharghi felt “in charge,” “knew what [he was] doing,” and didn’t “need” a monitor. That Qualcomm’s employees may have been trained to provide personal warnings to everyone in the room, or that Qualcomm’s managers and experts may have considered such warnings “critical,” does not establish that Qualcomm induced TransPower’s reliance on Qualcomm to provide them. Substantial evidence does not support the conclusion that Qualcomm actually exercised its retained control with regard to any of these precautions.

Conclusion

Sandoval provides important clarifications under Privette doctrine and, specifically, with respect to the “retained control” exception under Hooker. First, even if a hirer could make a worksite safer, as in the present case had Qualcomm powered down all of the circuits, if the scope of work does not involve work in the still dangerous areas, the hirer will not be deemed to have retained control over those dangerous areas. Second, even if there are dangerous areas of a worksite, so long as a contractor has adequate means of ensuring the safety of its workers, the hirer will again not be deemed to have retained control over those dangerous areas. And, finally, even if a hirer could require that its contractors implement certain worksite safety measures, a hirer will not be deemed to have retained control over the contractor’s means and methods so as to avoid injury to the contractor’s employees. 

Extra Credit Points: Can you guess what the illustration above is based on? If you guessed Plutarch, sorry. If you guessed the “Wheel of Pain” from 1982’s Conan the Barbarian, featuring our former Governor, you guessed right. We’re very high brow here at the California Construction Law Blog.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

California Statutes Authorizing Public-Private Partnership Contracting

Robert A. James and Shade Oladetimi | Gravel2Gavel

Public-private partnerships are often cited as a key pathway to restoring and enhancing the nation’s infrastructure. They can be challenging arrangements to structure. (As a result of the pandemic, they have even suffered the indignity of having their “PPP” acronym coopted by the Paycheck Protection Program. With apologies to Small Business Administration practitioners, we use “PPP” in this article to refer to the infrastructure tool.)

One gating condition to setting up a PPP is identifying the authority for a public entity to use a contracting method that does not run afoul of the general requirements that (i) works of improvement be let to the lowest responsive bid by a responsible bidder and (ii) design services be awarded through a qualifications-based selection process. Integrated forms of project delivery that vest in a single concessionaire multiple design, construction, financing, operation, maintenance and entrepreneurial roles must find an exception to any applicable background rules.

Some jurisdictions, such as Arkansas and Puerto Rico, have broad statutes that allow the use of PPP in a wide variety of local, regional and statewide projects in the transportation, social, education and utility sectors. California, along with other states, has a patchwork approach, with multiple statutes that cover different kinds of agencies for different kinds of projects. The below chart turns the patches into a quilt, identifying and providing links (current as of January 2022) to a number of these statutes.

Chart: Public-Private Partnership Enabling Statutes (California)

This quilt does not include all statutes applicable to a single project, such as those for the University of California at Merced and the Los Angeles Airports Connector. It does not address innovative means of financing, including federally tax-exempt 63-20 financing for affiliated nonprofit entities. And creative agencies may find build-to-suit leases and development agreements to be useful tools in the real property context. The quilt is only a summary of selected elements of the statute, and it omits discussion of many important exceptions and conditions for use of each such authority.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

California Court of Appeal Finds Alleged Inadequate Defense by Insurer-Appointed Defense Counsel Does Not Trigger a Right to Independent Counsel

Robert Dennison | Traub Lieberman Insurance Law Blog

The California Second District Court of Appeal had occasion to examine an insurer’s duty to provide independent counsel (“Cumis counsel”) to its insured in a declaratory relief action entitled Nede Management, Inc. v. Aspen American Insurance Company. The action arose from a fire on a property covered by an insurance policy issued by Aspen American Ins. Co (“Aspen”). Aspen’s insureds were sued for wrongful death and negligence by tenants and squatters allegedly injured by the fire.

Aspen defended three individual members of the family who owned the property and the family business, Nede Management, Inc. (“Nede”), which managed the property. The defense was subject to reservations of rights on the lack of an obligation to pay any judgment in excess of the $1 million policy limits and no coverage for punitive damages. Aspen appointed defense counsel to defend its insureds. The insureds sought independent counsel based on the assertion that defense counsel appointed by the insurer defended the action inadequately, failed to communicate an initial settlement demand within policy limits and failed to fully investigate the case. Aspen did provide Cumis counsel to Nede for a period but terminated the arrangement after revoking its reservation of rights to that entity. The underlying case eventually settled at no cost to the insureds.

The insureds sued Aspen for declaratory relief on their right to Cumis counsel and Aspen’s duty to pay fees incurred by the insureds, asserting that a conflict of interest existed between insurer-appointed counsel and the insureds. The trial court dismissed the case on demurrer, finding that Aspen’s reservation of rights did not trigger the right to Cumis counsel and the alleged conflict with defense counsel did not create the type of conflict of interest triggering a duty under Civil Code section 2860 as to Cumis counsel.

The appellate court agreed with the trial court’s reasoning. Under longstanding California case law, and section 2860(b), the reservation of rights on policy limits and lack of coverage for punitive damages did not create a conflict of interest giving the insured a right to Cumis counsel. Further, assertion by the insureds that there was a conflict of interest from the conduct of the defense by appointed defense counsel was said to misunderstand the nature of the right to Cumis counsel under the statute. The insurer has the right to control the defense provided there is no conflict of interest. The court emphasized that the right to control the defense “would be gutted if the insured could create a conflict of interest merely by complaining about how the insurer-appointed counsel was handling the case.” In response to a claim that defense counsel was hostile to the insureds as exemplified by an expressed belief that the insureds would make poor witnesses, the court stated that a defense attorney’s honest assessment about the merits of a case, including the performance of witnesses, was necessary to inform an insurer about whether to settle or not. That assessment served the interests of both the insurer and the insured. The failure to inform about the early settlement demand for policy limits did not trigger the right to Cumis counsel because the insurer had the right to reject the settlement demand and continue its defense of the insureds. The judgment was affirmed once modified to include declarations negative to the insureds’ position.

If one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Winning Attorney Fees in Litigation as a California Construction Contractor or Subcontractor

William L. Porter | Porter Law Group

The General Rule in California: The Winner Does NOT Receive Attorney Fees and Costs:

There is a common misconception that court decisions require the loser in a lawsuit to reimburse the winner for the fees and costs incurred during the lawsuit. Reliance on this misconception in developing a legal strategy for dealing with disputes is a serious strategic error. Where the legal issue is, for example, “breach of contract,” the general rule in California is that there are only two methods by which the winning litigant will be awarded the attorney fees and costs incurred in bringing or defending the lawsuit. The first of these is if the contract in question contains an effective attorney fee clause specifically providing that the prevailing party will recover their attorney fees and costs. The second is if there is a statute on point which provides that the prevailing party will be awarded those fees and costs. The general rule in California is that each party pays their own attorney fees and costs, unless there is an independent legal basis that provides otherwise. This is known as the “American Rule,” used throughout most of the country.

The Issue is Important Because Spending More Money Than You Can Be Awarded is a Losing Strategy:

The importance of whether the prevailing party in a lawsuit will be awarded their fees and costs cannot be underestimated. The party contemplating whether to bring a lawsuit must seriously consider whether it is even worth the trouble. In many cases, unless the one bringing the lawsuit (the “plaintiff”) is entitled to be reimbursed for the considerable attorney fees and costs incurred in bringing the case, it is just not worth doing so. There is no point spending $50,000 on attorneys on a $40,000 claim unless the plaintiff can be awarded both the $40,000 and the $50,000 if the plaintiff wins. Unless fees and costs are awarded, the plaintiff will still be out $10,000 in the very best of cases. For a party sued (the “defendant”) a similar situation arises in that the defendant faces the reality that it may be less expensive to just pay on a frivolous or false claim than to fight it. Either scenario is unsatisfactory. On the whole, it is beneficial to have an attorney fee clause in a contract when either a plaintiff or a defendant must vindicate its rights.  Both deserve to be fully compensated to achieve justice. It is also beneficial to have an attorney fee clause in a contract to encourage the one who is at fault to resolve the case rather than risk paying the fees and costs of the other party who is likely to win the case. In either case, the presence of an attorney fee clause facilitates the party in the right and encourages resolution outside of litigation. These are admirable societal goals.

The Usual Situation Regarding Attorney Fees In California Construction:

In California construction, the American Rule is followed. If there is a statute providing that the prevailing party is awarded attorney fees and costs in a particular situation, then the prevailing party is protected. However, as to the prevalence of attorney fee clauses in contracts and subcontracts, the problem is that the one signing the contract or subcontract must generally sign the contract provided by another party. Generally speaking, a “direct contractor” signs the contract provided by the owner of the property where the work is performed.  The subcontractor signs the subcontract provided by the direct contractor. Whether there is an attorney fee clause in either case depends on whether the one providing the contract or subcontract has decided to include an attorney fee clause in the document. There is cause for suspicion when there is no attorney fee clause in the contract or subcontract.  In such a case, the party leaving out the clause may intend to leverage the absence of such a clause to their advantage when a later dispute arises. The signing party is often unable to alter the situation without additional effort and resistance. It is important that any effort to include an attorney fee clause in a contract or subcontract occur in the negotiation phase. Once the contract or subcontract is signed, the opportunity is lost.

Contractual Strategies to Include Attorney Fee Clauses:

There are several methods to be assured that you will have an attorney fee clause in your contract and ensure that you will be able to fully recover on your claim when you are in the right. Again, these are tasks to be accomplished before a party signs a contract to provide goods or services. Accomplishing these tasks before signing the contract will help establish the standards to be followed if a dispute arises during or after performance of the contractual obligations:

  1. Condition all bids and proposals on the inclusion of an Attorney Fee Clause which is clearly stated in the terms of the bid or proposal.  This way, if the bid is accepted, so is the attorney fee clause.
  2. Condition all bids and proposals on incorporating the bid or proposal into any subsequently executed contract or subcontract for the project.  This makes the clause a material term of the later integrated agreement.
  3. Require, within the bid or proposal, that the bid or proposal will “control and take precedence” over any other terms contained elsewhere in the subsequently executed contract or subcontract.  This will allow the term to control over conflicting terms in other contractual documents produced at a later time.
  4. Make it clear in the bid or proposal that the one accepting the bid or proposal must not accept it unless it agrees to do so without exception or reservation.  This puts the choice on the one who wants the service.  It is a practical step that tends to show clear intent.
  5. Make sure that any subsequently executed contract or subcontract clearly incorporates the bid or proposal into the contract or subcontract as an exhibit.  Make sure of this before signing the agreement.  This ensures that contractual technicalities are met.

There are many ways that the above tasks can be accomplished.  Please consult with an attorney experienced in construction law to assist you in including the proper language in your bids, proposals, and other contractual documents.

Helpful California Construction Statutes Providing for Attorney Fees:

As noted above, the second way in which attorney fees are awarded in a construction dispute in California is when there is a statute so providing. In California, there are a number of statues providing that the winner of a construction dispute will be awarded attorney fees and costs. For the direct contractor, the statutes usually provide that an owner must pay the direct contractor within a very short period of time unless there is some disputed issue which the owner is offsetting against the payment. The penalty for non-payment is generally up to an additional 2% interest per month, along with attorney fees and costs. For Subcontractors, there are similar statutes also providing for a penalty of up to 2% per month, along with attorney fees and costs when the contractor or a superior subcontractor is paid for the claimant subcontractor’s work and does not pass that same payment on to the claimant subcontractor. In either case, the successful unpaid claimant would be entitled to possibly up to 2% per month as well as attorney fees and costs. There are some statutes which may allow for interest exceeding 2% per month.

For direct contractors, the following statutes should be reviewed (live links as of writing provided):

Civil Code §§8800-8802 : https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CIV&division=4.&title=2.&part=6.&chapter=8.&article=1

Civil Code §§8810-8822: https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CIV&division=4.&title=2.&part=6.&chapter=8.&article=2

Public Contract Code §7107: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=PCC&sectionNum=7107

Public Contract Code §10261.5: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=PCC&sectionNum=10261.5

Public Contract Code §20104.50: https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=PCC&division=2.&title=&part=3.&chapter=1.&article=1.7

For subcontractors, the following statutes should be reviewed (live links as of writing provided):

Civil Code §§8810-8822: https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CIV&division=4.&title=2.&part=6.&chapter=8.&article=2.

Business and Professions Code §7108.5: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=BPC&sectionNum=7108.5.

Public Contract Code §7107: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=PCC&sectionNum=7107

Conclusion:

When construction claimants are in the right, they should be entitled to attorney fees and costs to pursue and defend claims.  When owners, contractors and subcontractors fail to pay those making legitimate claims they should be forced to pay fees and costs due to their failure to do so and should not be able to leverage their subordinate professionals to compromise for lesser sums.  At the same time, contractors who must bring actions against irresponsible subcontractors who fail to perform their work or against owners who do not pay them should be able to recoup their fees and costs for having to bring an action against them.  In each case, the absence of a provision for attorney fees and costs allows a wrongful party to take advantage of the party who is without fault.  With a proper attorney fees and costs clause, this issue can be mitigated, and cases can be resolved before litigation becomes necessary.  Hopefully, the above information will allow responsible members of the construction industry to act to protect their interests when they are in the right and resolve their differences when they are at fault.