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SB 293 was approved by the California legislators and is headed to the Governor
Posted by: Jonathan Bowne
September 16, 2011

As noted in our SB 474 posting, at least two construction-related laws were approved by California legislators at the end of the 2011 legislative session: SB 474 and SB 293. This post discusses SB 293. Both bills are now headed to the governor's desk for his signature or veto.

SB 293 includes several proposed modifications to construction law, but the one which has garnered the most attention is its provision to reduce the maximum retention amount which may be withheld on public works project to 5%. Currently there is no codified restriction on the proportion of retention which public entities may withhold. That said, this author typically sees 10% retention specified, perhaps subject to reduction at certain milestones. So, if passed, SB 293 would operate to reduce the status quo amounts.

Public entities are grumbling that this limit will operate to weaken their leverage in securing a timely and quality performance from their awardees. Contractors contend that reduced retention is necessary in light of current economic climate, when large retention withholdings can diminish their cash flow and cripple their ability to perform.

SB 293 would also modify "prompt payment" rules relative to progress payments on both public and private contracts. Currently, prime and upper-tier contractors have ten (10) days to pass progress payment proceeds onto lower-tiers after receiving the same. If SB 292 is signed into law, that timeframe would be lowered to seven (7) days. The timing of retention payments would not be modified.

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SB 474 was approved by the California legislators and is headed to the Governor's desk for signature
Posted by: Jonathan Bowne
September 16, 2011

California's legislatures got back to work with gusto upon returning from their summer recess last month. They had until the close of the 2011 legislative session on September 9 to approve bills if they wanted them forwarded on to Governor's Brown's desk for signature.

As legislators worked right up to this deadline, two important construction-related bills made the cut. On September 8, 2011 the legislators approved Senate Bills 474 and 293. SB 474 will be discussed below, and SB 293 will be discussed in a following post.

SB 474 (which we have blogged about previously) would bar so-called "Type I" indemnity agreements obligating subcontractors to indemnify general contractors from the latter's active negligence or willful misconduct, and limit indemnity obligations when claims do not arise out of the scope of work of the subcontractor.

Proponents of SB 474 (mostly subcontractors) believe it will increase equity between general and lower tier contractors when lawsuits are filed by allegedly damaged claimants. They believe that the Type I provision forces them (and their insurance companies) to bear an unfair burden of liability and defense costs. Opponents of the bill (mostly general contractors) believe that the legislators should leave the type and extent of indemnity obligations up to the contracting parties to negotiate, without interference from lawmakers. In reply, proponents argue that in practice subcontractors are never provided an opportunity to negotiate concerning the inclusion of Type I terms, because general contractors almost universally refuse to even discuss removal of Type I clauses, often threatening to seek alternative forces if their subcontractors reject the onerous Type I obligations. For the time being, it looks like the subcontractors have the upper hand, as legislators approved SB 474 by an overwhelming margin.

William C. Last, Jr., a founding partner at Last & Faoro, has worked closely with the Sheet Metal and Air Conditioning Contractors' National Association, Bay Area Chapter to see SB 474 through. Earlier this year Mr. Last testified before legislators in Sacramento in support of the bill. Now that it has passed, Mr. Last has sent a letter to Governor Brown urging him to sign the bill into law.

The governor now has 30 days to sign or veto the bill. While Governor Brown has not indicated how he will react to SB 474, he has warned legislators that they may get the "veto blues" this fall, commenting that, "Not every human problem needs a law." We will provide updates on Governor Brown's decision.

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