Can I be Required to Mediate, Arbitrate or Litigate a California Construction Dispute in Some Other State?

William L. Porter | Porter Law Group

It is not uncommon in the construction industry for an out-of-state general contractor to include a provision in a subcontract requiring a California subcontractor to resolve disputes outside the state of California, even though the work is to be performed within California. Fortunately, most California subcontractors are immune from this tactic. California law generally prohibits clauses requiring subcontractors to travel outside California to resolve construction disputes.

California Code of Civil Procedure Section 410.42, [CCP 410.42 Link] renders “void and unenforceable,” any provision in a contract that “purports to require any dispute to be litigated, arbitrated, or otherwise determined outside this state,” so long as the contract is “between the contractor and a subcontractor with principal offices in the state, for the construction of a public or private work of improvement in this state.” Similarly, this law voids any similar contractual term that might prevent the California subcontractor from commencing an action, obtaining a judgment, or resolving its dispute in the courts of California.

The Third Appellate District of the California Court of Appeal has provided the only published opinion that analyzes and applies Section 410.42. In the case of Dick Emard Electric, Inc. v. Templeton Development Corp., (2006) 144 Cal. App. 4th 1073, Emard sued Templeton and various other parties in California for breach of contract and foreclosure of a mechanics’ lien after Templeton failed to pay Emard for the labor, services, materials, and equipment supplied by Emard pursuant to the contract, which was performed in California. Templeton unsuccessfully moved to dismiss the lawsuit, arguing that Emard must mediate before filing suit and that any mediation or lawsuit must take place in Las Vegas, Nevada, pursuant to the contract. Prior to Templeton’s Motion, Emard offered to mediate in California, pursuant to Section 410.42. Templeton refused the offer.

The Appellate Court ruled that Section 410.42 dictates that the out-of-state mediation provision was unenforceable and that Emard fulfilled any mediation requirement by offering to mediate in California instead of Las Vegas. Templeton filed a petition for a writ of mandate with the Third Appellate District seeking to have the decision set aside, in part because Section 410.42 does not specifically mention “mediation.” The Appellate Court upheld the prior ruling, determining that the phrase “or otherwise determined,” includes mediation. The Court published its opinion, establishing a legal precedent for future California cases.

The out of state forum selection clause seems a daunting hurdle to a subcontractor contemplating whether to enter into a subcontract where it would appear that the subcontractor could only enforce its rights by traveling out of state. The prospect of bringing witnesses and legal counsel to another state sets an unequal bargaining position from the outset. Fortunately, CCP Section 410.42, and the Emard case avoid the prospect of dragging California subcontractors to another state to resolve their dispute.

As a final bit of advice, when subcontracts contain a provision that would force a California construction dispute between a contractor and subcontractor to be mediated, arbitrated or litigated in another state, be sure to consider the impact of the Federal Arbitration Act, 9 U.S.C., §1, et seq. (“FAA”). To avoid any confusion, and to keep the dispute resolution process within California, be sure that the agreement also unambiguously states that California procedural and substantive law will govern the agreement rather than the provisions of the Federal Arbitration Act.


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.

Progressive Design-Build Takes Another Step Forward in California

Mary Salamone | Procopio, Cory, Hargreaves & Savitch

Legislators have gradually expanded local agencies’ authority to procure construction projects over the last couple of decades by using various alternatives to the design-bid-build delivery method, which requires that contracts are awarded to the lowest responsible bidder. Recently, California took another step forward in this regard.

On September 2, 2022, Governor Newsom signed into law SB 991, which expands the use of progressive design-build (PDB) project delivery in the public sector for certain water projects. This process has proven to be well-regarded by the construction industry for its balanced risk allocation, while simultaneously providing municipalities more flexibility in addressing challenges such as droughts.

Existing law, until January 1, 2025, authorizes local agencies to use the traditional design-build procurement process for specified public works with prescribed cost thresholds. This new legislation, until January 1, 2029, authorizes local agencies to use the PDB process for up to 15 public works projects in excess of $5 million for each project, similar to the PDB process authorized for use by the Department of General Services.

The term “local agency” is defined in the bill as any city, county, city and county, or special district authorized by law to provide for the production, storage, supply, treatment or distribution of any water from any source. The bill requires a local agency that uses the PDB process to submit, no later than January 1, 2028, to the appropriate policy and fiscal committees of the Legislature, a report on the use of the PDB process containing specified information, including a description of the projects awarded using the PDB process.

PDB emerged as a project delivery model in Canada in 2020 and quickly gained traction in the U.S. The PDB process has grown in popularity in recent years as a valuable form of collaborative project development that can help the project stakeholders minimize some of the customary risks inherent in traditional design-build, specifically by helping to avoid unforeseen conditions and design changes through a more achievable schedule and cost structure.

Essentially, the PDB model generally includes two phases. In the first phase, the awarding authority uses a “best value” process primarily focused on qualifications and experience to select a design-build entity. Notably, the fee to be paid to the design-build entity for both phases of the project is agreed upon at selection; however, the overall project cost and schedule are not established at the time of the selection. This mitigates the issue of a design-build entity bidding on a project with incomplete plans and specifications.

In phase one, the design-build entity completes preliminary plans and preconstruction services necessary to provide a cost estimate and final design proposal. During this phase, the design-build entity collaborates with the awarding authority and with its own consultants to develop the project’s overall design and clearly define the programming and priorities. Generally speaking, most owners, consultants, and contractors would choose a collaborative work environment as opposed to the adversarial approach inherent in many traditional forms of contracting.

The project then progresses to the second phase where the awarding authority and design-build entity agree to a final design, cost, and schedule, creating full transparency with an open-book approach. At an agreed upon time, typically when the design is between 50 and 75 percent complete, the design-builder will present the awarding authority with a commercial proposal to deliver the project in phase two, which is for the final design, construction, and commissioning.

The design-build entity would present a specific schedule along with a guaranteed maximum price (not to exceed) cost basis. If the parties cannot agree on a fair value cost, then there is a contractual “off ramp” that the awarding authority can exercise in its discretion if it elects not to proceed. Even if the “off ramp” is used, the awarding authority still benefits from having the first phase work complete since it may then solicit competitive proposals to complete the project from other entities. This differs from traditional design-build project where the awarding authority contracts with a single entity to design and construction a project at a set price before design work begins in earnest and without a similar “off ramp.”

Thus far, the PDB delivery method has been well-received in the construction industry since it appropriately and reasonably allocates the risk for each party involved in a project, which has been a frequent criticism of the traditional design-build approach. It also allows an awarding authority high level of input and control while allowing the design-builder the best possible environment to foster the innovation much needed for complex water projects. California is in another cycle of drought, and SB 991 could provide an opportunity to assist local agencies in addressing the state’s critical need for additional water.


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.

Architect, Engineer, and Design Professional Liens in California: A Different Animal than the Mechanics’ Lien

William L. Porter | Porter Law Group

Most in the construction industry are familiar with the rules governing California mechanics’ liens.  They know that the Preliminary Notice of Civil Code Section 8034 and 8200-8216 is an important foundational prerequisite document and that the deadline to record a mechanics’ lien is generally triggered by events occurring at the end of construction, including completion of the work of improvement and/or the recording of the notice of completion or notice of cessation.  Most of these rules are found in California Civil Code sections 8160-8494.

While architects, engineers and other design professionals are certainly entitled to pursue a mechanics’ lien at the end of a construction project when they are unpaid for their work, unless they also consider the remedy available to them under the California “design professional lien,” they are missing a powerful opportunity to preserve the right to payment only available to architects, engineers, and design professionals.

The California design professional lien is generally available to any certified architect, registered professional engineer or licensed land surveyor who furnishes services under a written contract with a landowner for the design, engineering or planning of a work of improvement, other than a single-family, owner-occupied residence with construction costs of less than $100,000 in value.  These rules are generally found in California Civil Code sections 8300-8319.

Where a building permit or other governmental approval for the work of improvement has been obtained, the recorded design professional lien will encumber the property where the work is to be preformed from the date of recording of the design professional lien notwithstanding the fact that the actual construction work on the project has not yet commenced (Civil Code sec. 8304).  This differs from the California Mechanics’ lien which is generally pursued long after work has commenced and in most cases been completed.

Under the design professional lien process, after the landowner defaults in the payments required by the written contract with the design professional, the design professional must mail a written demand to the owner specifying that a default in payment has occurred and the amount of the default.  The letter must be sent by registered or certified mail, express mail, or overnight delivery by an express service carrier. Only after properly sending such a notice and waiting 10 days may the design professional record the design professional lien at the office of the County Recorder (Civil Code sec. 8304).

The deadline for the recording of the design professional lien is important. The design professional lien must be recorded no later than 90 days after the design professional knows or has reason to know that the landowner is not commencing the work of improvement (Civil Code sec. 8312).  In addition, the design professional lien automatically expires and becomes null, void and of no further force or effect on the occurrence of either of the following:

  1. The commencement of the work of improvement for which the design professional furnished services at the request of the landowner; or
  2. The expiration of 90 days after recording the notice of lien, unless the design professional files a lawsuit to enforce the lien within 90 days of recordation (Civil Code sec. 8306).

The impact of these rules is that in order to ensure preservation of the right to a design professional lien, the design professional should draft the contract with the landowner so that to the greatest extent commercially feasible it is not possible for the landowner to commence construction of the work of improvement for which the design was created until payment from the landowner has been received.  One way to do this is to contractually authorize withholding of the delivery of design documents until satisfactory payment has in fact been received.  If the design documents are delivered without payment and actual construction work on the project commences, the right to an enforceable design professional lien will be lost.

Please note that the fact that the design professional has the unique right to a design professional lien does not mean that the design professional may not also later claim the California mechanics’ lien remedy available to contractors, subcontractors, suppliers and others under the rules of California Civil Code sections 8400-8494.

While this short article cannot fully describe all the advantages or the limitations of the design professional lien, it is important for certified architect, registered professional engineer or licensed land surveyors to realize that they have these rights and to draft their contracts and adjust their procedures to protect these rights to the extent possible.  For further detail on the design professional lien please consult California Civil Code sections 8300-8319.  This Civil Code section and all California Codes are currently available for reference on-line at www.leginfo.ca.gov.


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 Bars General Contractors From Collecting Compensation for Work Performed by Unlicensed Subcontractors

Cary Jones and Kennedy Williams | Snell & Wilmer

On May 13, 2022, the California Court of Appeal for the Sixth Appellate District issued its opinion in Sally Kim et al., v. TWA Construction Inc., et al, finally resolving a long-standing issue: the Court of Appeal held for the first time that California Business and Professions Code section 7031 bars general contractors from collecting compensation for services performed by an unlicensed subcontractor.

Background

Sally Kim et al., v. TWA Construction Inc., et al, involves the construction of a California residential home. The property owners hired a general contractor to construct a home and bridge on a wooded lot. As part of the project, they sought to remove some trees, including a large eucalyptus tree (the “eucalyptus”). At the time, the property owners were unaware that the eucalyptus was partially on their neighbor’s property, requiring her approval to remove it.

The general contractor hired a subcontractor it found on CraigsList.org to perform the tree work. The general contractor did not verify the subcontractor’s license status before the subcontractor performed work. Before the subcontractor could finish removing the eucalyptus, the neighbor instructed the subcontractor to stop work and contacted the police. The eucalyptus removal ceased.

Because the property owners could not secure a construction loan, they ultimately terminated the construction agreement with the general contractor. The property owners paid the general contractor $16,000 for its work and later hired another contractor to complete the project.

The neighbor sued the property owners and the general contractor2 for negligence, trespass, and other claims related to the work on the eucalyptus. The property owners filed a cross-complaint against the general contractor for, among other things, comparative negligence, breach of contract, express contractual indemnity, and equitable indemnity. In turn, the general contractor filed a cross-complaint against the property owners for breach of contract.

The Lawsuit

Before trial, the property owners filed a motion in limine requesting the trial court require the general contractor to make an offer of proof as to the subcontractor’s licensure status. The property owners argued that, under Business and Professions Code section 7031, the general contractor has the burden of establishing proper licensure and further claimed that the general contractor should disgorge the $10,000 they had paid for the tree work because it was performed by an unlicensed subcontractor. The general contractor countered by claiming it was entitled to recover payment for all work performed on the project. The general contractor, however, never suggested it had any evidence that the subcontractor was properly licensed and failed to make any offer of proof on the subject. The trial court granted the motion in limine, holding that section 7031 barred the general contractor from “collecting compensation for services performed by the subcontractor for the tree trimming if, in fact, the subcontractor was unlicensed at the relevant time.” The trial court repeatedly noted that this ruling did not explicitly bar any party from bringing evidence at trial as to whether the subcontractor was licensed.

In the midst of trial, the property owners reached a settlement with the neighbor whereby the property owners would pay $50,000 and the neighbor would allow the eucalyptus to be removed. As to the cross-complaints, the jury found the general contractor to be 100 percent liable for negligence. The trial court entered judgment in favor of the property owners and ordered the general contractor to disgorge the $10,000 for the tree trimming work performed by its unlicensed subcontractor.

On appeal, the general contractor claimed, among other things, that the trial court erred as a matter of law in its pretrial ruling on the application of section 7031. Ultimately, the Court of Appeal affirmed the trial court’s ruling and in doing so, held “section 7031 bars all actions, regardless of the equities and however they are characterized, which effectively seek ‘compensation’ for illegal, unlicensed contract work. Thus, if the primary ‘relief sought is compensation’ for the unlicensed work, then ‘section 7031 bars the action.’” (Citing Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995).

In its analysis, the Court of Appeal reasoned that because section 7031 bars a contractor from recovering for any work it performed while unlicensed and includes both subcontractors and specialty contractors in its definition of “contractor,” section 7031 would also bar a subcontractor from recovering for any unlicensed work it performs. The Court then turned to other provisions of the statute to address the ambiguity of whether section 7031 would in turn bar a general contractor’s recovery from any work an unlicensed subcontractor performs. The Court found that it would be “unreasonable to permit [general contractors] to collect compensation for work performed by an unlicensed subcontractor when all facets of the Contractors’ State License Law are directed at ensuring licensing compliance.”

Takeaways

Sally Kim et al., v. TWA Construction Inc., et al is reflective of California’s policy protecting “the public from incompetence and dishonesty in those who provide building and construction services.” While in theory, general contractors remain free to hire unlicensed subcontractors, this case clarifies that general contractors who use unlicensed subcontractors may not turn to the courts to recover compensation for those services provided by any unlicensed subcontractors if a dispute arises.


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 Supreme Court Rejects Third Exception to Privette Doctrine

Brad Vornholt and Joelle Nelson | Lewis Brisbois

In Gonzalez v. Mathis (August 19, 2021) 12 Cal. 5th 29, the California Supreme Court considered whether to create a third exception to the Privette Doctrine specific to known hazards on a worksite, when a contractor cannot remedy the hazard by taking reasonable safety precautions to protect against it.

Privette Background

Under the Privette Doctrine, the hirer of an independent contractor generally cannot be liable for injuries sustained by the independent contractor or its employees while on the job. This is due to the “strong presumption” that the hirer delegates all responsibility for workplace safety to the independent contractor. See Privette v. Superior Court (1993) 5 Cal. 4th 689. Since the Privette ruling in 1993, the California Supreme Court has identified two circumstances in which the presumption may be overcome. First, the hirer may be liable when it retains control over any part of the independent contractor’s work and negligently exercises that retained control in a manner that affirmatively contributes to the injury. Hooker v. Dept. of Transportation (2002) 27 Cal. 4th 198, 213. Second, a landowner who hires an independent contractor may be liable if the landowner knew, or should have known, of a concealed hazard to the property that the contractor did not know of and could not have reasonably discovered, and the landowner failed to warn the contractor of the hazard. Kinsman v. Unocal Corp. (2005) 37 Cal. 4th 659, 664. Here, in the Gonzalez case, the court considered whether a landowner could be liable for known hazards on the property.

Facts of the Case

In Gonzalez, the defendant was a residential property owner whose home had a flat sand-and-gravel roof with a large skylight. The roof had a three-foot high parapet wall between the skylight and the edge of the roof. The area between the parapet wall and edge of the roof was approximately 20 inches wide. The plaintiff was a professional window washer, who had been cleaning the skylight since the 1990s, and did so regularly since 2007. To clean the skylight, the plaintiff would climb onto the roof and work from the 20-inch space between the parapet wall and roof’s edge. The plaintiff testified that he did not work from the other side of the parapet wall (i.e. between the wall and the skylight) because it was obscured with ducts, pipes, and other permanent fixtures. It was undisputed that the 20-inch space between the parapet wall and roof edge was dangerous and dilapidated and that the plaintiff had told the defendant’s housekeeper and accountant that the roof needed to be repaired. Months later, the plaintiff was injured when he fell from the roof while walking on the 20-inch space between the parapet wall and edge of the roof.  

The trial court granted summary judgment for the defendant, finding that he owed no duty under Privette. The California Court of Appeal reversed and determined that the Kinsman exception should be extended to hold that a landowner may be liable when an independent contractor cannot take reasonable safety precautions to avoid or protect against a known hazard. A unanimous California Supreme Court disagreed, finding that Privette and its progeny, including Kinsman, “make clear” that a hirer is not responsible for any injury resulting from a known unsafe condition at a worksite. 

Court’s Reasoning

The court focused on the “strong presumption” that a hirer of an independent contractor delegates to the contractor all responsibility for workplace safety. This in turn, creates a duty on the contractor to determine whether the work can be performed safely despite a known hazard. An exception to this presumption, based on the argument that the contractor cannot not take reasonable safety precautions to protect against the hazard, would require the landowner to affirmatively assess workplace safety and therefore undermine Privette.

The court further explained that its reasoning is consistent with both Hooker and Kinsman. Under Hooker, a hirer is not liable, even if it permits a dangerous work condition or dangerous work practice to exist, as long as it does not affirmatively contribute to the worker’s injury. Under Kinsman, the hirer is not required to remedy a concealed hazard – it is only required to put the contractor on notice of the concealed hazard. Once the hazard is known to the contractor, the contractor has at its disposal all of the information necessary to determine whether or how the work can be performed safely.

Analysis

The Privette Doctrine remains a strong defense for landowners, general contractors, and other hirers of independent contractors because it establishes a “strong presumption” that the hirer delegates workplace safety to the independent contractor. Gonzalez further supports and reinforces this strong presumption by holding that, even if an independent contractor cannot take reasonable steps to remedy a known hazard, it is the contractor, not the hirer, who is in the best position to determine whether and how the work can be performed safely.


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.