BILL ANALYSIS
SENATE JUDICIARY COMMITTEE S
Charles M. Calderon, Chairman B
1995-96 Regular Session
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SB 1286 (Mountjoy)
As Amended on April 26, 1995
Hearing date: May 2, 1995
Civil Code
GEH:ilc
CONSTRUCTION CONTRACTS
LIMITATIONS ON LIABILITY
PENALTIES FOR LATE PAYMENTS TO DESIGN PROFESSIONALS
HISTORY
Source: Consulting Engineers and Land Surveyors of California
American Institute of Architects, California Chapter
Related Pending Legislation: None known
KEY ISSUES
1. SHOULD PROVISIONS IN CONSTRUCTION CONTRACTS LIMITING THE
LIABILITY OF ONE PARTY TO ANOTHER BE VALID, NOTWITHSTANDING THE
DOCTRINE OF UNCONSCIONABILITY AND NOTWITHSTANDING ANY OTHER
PROVISION OF STATUTORY OR COMMON LAW?
2. SHOULD OWNERS OF PUBLIC OR PRIVATE WORKS PROJECTS BE REQUIRED TO
PAY DESIGN PROFESSIONALS A STATUTORY LATE FEE IF THEY DO NOT PAY
WITHIN SPECIFIED PERIODS OF TIME?
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A. SHOULD DESIGN PROFESSIONAL BE ACCORDED THE SAME
PROTECTION
AS CONTRACTORS AND SUBCONTRACTORS?
B. SHOULD THE EXEMPTION FOR OWNER-OCCUPIED SINGLE-FAMILY
HOMES APPLY TO HOMES COSTING MORE THAN $100,000 TO BUILD?
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PURPOSE
This bill has two purposes:
1) To limit the legal effect of a state appeals court case which
held that a contractual provision limiting the liability of an
engineering firm to a design professional was unenforceable; and
2) To ensure prompt payment of design professionals by owners of
construction projects by providing for statutory late fees to be
paid by owners paying design professionals after specified
periods of time.
Liability Limitations in Construction Contracts
Existing law, Section 2782 of the Civil Code, declares void any
provision in a construction contract which indemnifies one party
against claims for damages by third parties arising from the party's
negligent or willful misconduct.
However, Section 2782.5 clarifies that Section 2782 does not make
prohibit the parties to a construction contract from negotiating and
expressly agreeing to a provision which limits the liability of one
of the parties to the other party.
In Markborough California, Inc. v. Superior Court (1991) 227
Cal.App.3d 705, the court held that Section 2782.5 does not impose
upon parties an affirmative duty to specifically advise the other
party of the inclusion of a liability limitation clause in the
contract or to inform the other party of the risks involved in the
project.
In Viner v. Brockway (1994) 30 Cal.App.4th 1307, as modified by 31
Cal.App.4th 746i, the court held that liability limitation
provisions in construction contracts were subject to the common law
principles of unconscionability and public policy, as those have
been applied to contracts limiting liability since the state Supreme
Court's decision of Tunkl v. Regents of University of California
(1963) 60 Cal.2d 92.
Applying those principles, the Viner court refused to enforce a
liability limitation provision in a contract between an engineering
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firm and a homeowner, even though the homeowner was represented by
counsel, principally because neither the homeowner nor his counsel
was trained to understand the technical engineering issues which
were the subject of the contract.
Last month, the state Supreme Court ordered the Viner case
de-published, meaning the case no longer has precedentual value.
This bill amends Section 2782.5 by providing that parties to a
construction contract may negotiate for, and expressly agree to,
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a liability limitation " notwithstanding any other provision of
statutory or common law, including the doctrine of
unconscionability...."
The bill also contains a legislative declaration that these changes
to Section 2782.5 are intended to limit the legal effect of Viner v.
Brockway, so that that decision does not apply to contracts entered
into on and after January 1, 1996.
Prompt Pay Provisions
Existing law, Civil Code Section 3260.1, establishes a special
penalty for the late payment of licensed contractor in a private
work of improvement contract. A 2 percent per month penalty is
imposed in lieu of interest if a progress or retention payment is
not timely made. Attorneys' fees are awarded to a prevailing party
in an action to collect wrongfully withheld funds. This section
allows parties to agree in writing to a contrary arrangement.
Existing law also provide special prompt payment protections for
licensed contractors in public works contracts. A state or local
agency is liable to a licensed contractor for a penalty of 10
percent per year on the unpaid amount if a progress payment is not
paid within 30 days of demand (Sections 10261.5 and 20104.50 of the
Public Contracts Code), and is liable for a penalty of 2 percent per
month in lieu of interest if the retention payment is not paid
within 60 days after the date of completion.
Existing law does not establish any special penalty for the late
payment of a design professional (licensed architect, professional
engineer or land surveyor). However, in any contract with a "small
business" for services or property, a state agency is liable to the
business for a penalty of 1/4 percent per day of the amount of the
undisputed claim due, if a proper claim is not paid within 30 days
without reasonable cause. (Section 926.15 of the Government Code)
For parties other than "small businesses", a state agency is liable
for an interest penalty fee if a proper claim is not paid within 50
calendar days of the date of invoice. (Section 926.17 of the
Government Code). The penalty is established at a rate of 1 percent
above the rate accrued by the state's Pooled Money Investment
Account.
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This bill would enact "prompt-pay" protections for design
professionals, in contracts for local public or private works of
improvement entered into on or after January 1, 1996, as follows:
1) A local public agency or private owner would be required to pay
any "prime design professional" (a design professional with a
contract directly with the owner) within 30 days of receiving a
written demand in accordance with contract for a progress
payment, and within 45 days of receiving a written demand for a
final retention payment.
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2) If an owner fails to make timely payment as provided in the
bill, the owner would be liable for a statutory penalty 1 and
1/2 percent per month on the wrongly withheld amount, in lieu of
any interest due, up to a maximum amount of 12 percent of the
total amount due.
3) If there is a good faith dispute over the amounts owned, the
owner may withhold from the payment an amount not to exceed 150
percent of the disputed amount. Any amount withheld pursuant to
this provision would not be subject to the late penalty.
4) A prevailing party would receive its reasonable attorneys' fees
and costs in any action to collect improperly withheld funds.
5) The monetary penalty, and any attorneys' fees and costs awarded
in an enforcement action, would be separate from any rights the
design professional has to file a mechanics or design
professionals lien or to serve a stop notice.
6) A "prime design professional" would be required to pay a
subconsultant design professional within 15 days of receiving a
progress payment or a final retention payment. Late payments by
a prime design professional to s subcontractor design
professional would be subject to the same provisions as late
payments by an owner to a prime design professional.
The bill allows parties to agree in writing to a contrary
arrangement.
The bill would not apply to any contract relating to a
single-family, owner-occupied residence where the construction costs
are less than $100,000. The bill would also not apply to state
agency contracts which are governed by Sections 926.15 or 926.17 of
the Government Code, which are described above.
COMMENT
1. Liability limitation provisions in construction contracts
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a) The Viner case
The Consulting Engineers and Land Surveyors of
California (CELSOC) have requested this bill's amendments to
Section 2782.5 because of the concern of its members over
Viner v. Brockway, supra.
CELSOC argues that if a liability limitation provision
in an engineering contract is unconscionable merely because
the client is not trained in engineering, then they will
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almost never be able to contractually limit their liability for
design errors to the amount of the contract price, as is the
common practice. Even though Viner has been de-published by the
state Supreme Court, CELSOC believes this bill is necessary to
ensure "that there be no more Viner cases.
Viner does appear to be a poorly reasoned decision; it
is highly unusual to declare a contract unconscionable when
the party seeking to avoid the contract was represented by
counsel, especially when the other party was not.
Nevertheless, the decision has some merit. The court
was concerned about the fact that the homeowners in the case
were contracting for services which they were being required
to perform by the city because their home was sliding down
the hillside. The court seems to have believed this
compulsion by the city, and the need to save their home, put
the homeowners in the type of "take it or leave it" position
usually associated with unconscionable liability waiver
contracts.
Therefore, if were good precedent, Viner it would stand
for something more complex than the proposition that the
contracts were void because the homeowners and their lawyers
did not understand engineering principles.
b) The proposed amendment to Section 2782.5
The sponsors' proposal for legislatively responding to
Viner is rather extreme.
As drafted, the amendment to Section 2782.5 would
validate any liability waiver provision in a construction
contract, no matter how unfair, no matter how disparate the
bargaining the power. The term "notwithstanding any other
provision of statutory or common law" would even appear to
validate liability limitation provisions procured through
fraud or duress.
The sponsors recognize that the language is overbroad,
and they have indicated a willingness to focus the amendment
to Section 2782.5 to the issue raised by Viner: claims of
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unconscionability based upon differences in the professional
licensure or education of the parties or the parties'
representatives.
Even this more limited approach is problematic, however.
Differences in the educational levels of parties has always
been an element in determining unequal bargaining power,
which is one of the central aspects of the unconscionability
doctrine.
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Declaring contracts, such as ones with liability
limitation provisions, unconscionable or void as a matter of
public policy is one of the classic examples of an activity
which is best left to the courts. It is peculiarly within
the competence of the judiciary to evaluate all of the
nuances of a particular fact pattern, and compare those
nuances to previous cases.
This sponsor's desire to permanently excise the memories
of a single poorly reasoned case which is not even good
precedent does not seem sufficient justification to usurp
this traditional role of the judiciary by formulating
legislative standards of unconscionability.
IS NOT THE DOCTRINE OF UNCONSCIONABILITY BEST LEFT TO
THE DISCRETION OF THE COURTS?
2. Prompt pay provisions
a) SHOULD DESIGN PROFESSIONALS BE GIVEN THE SAME PROTECTION
AS CONTRACTORS?
The sponsors argue that design professionals are just as
important a part of the construction process as are
contractors and subcontractors, and that they therefore
should be accorded the same protection against late payment
by project owners.
According to the American Institute of Architects:
"In this tough fiscal climate, we are seeing an alarming
trend on the part of public owners who are taking advantage
of design professionals by unreasonably delaying payment for
services properly rendered. Architects are being put in an
economic straight jacket where firms are virtually financing
owners' projects while awaiting overdue payments."
The other sponsor, CELSOC, emphasizes that, by allowing
parties to contract for different provisions for payment of
late penalties, the bill adequately protects the rights of
individuals contracting with designers.
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It appears that the only opposition to this prompt pay
provision is from the California Municipal Utilities
Association, which is concerned that 30 days may not be
enough time to verify satisfactory completion of work, and
cites logistical problems like scheduling meetings and
conducting site visits.
The Association of California Water Agencies (ACWA)
appears to have begrudgingly withdrawn its opposition to the
measure:
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"We do not believe there is a problem to be solved here.
In most, if not all cases, specific payment requirements
are spelled out in contracts.... While we do not believe
there is a need for the measure, we would be able to
withdraw our opposition if it were amended to provide that
its provisions apply only if specific payment provisions are
not included in a contract."
In response to ACWA's concern, the bill has been amended
to allow parties to agree to contrary provisions in writing.
These amendments, however, are ambiguous, and should be
re-drafted to clarify the author's intent that the statute
applies unless the parties agree in writing to contrary late
penalty provisions.
SHOULD NOT THIS TECHNICAL AMENDMENT BE ADOPTED?
b) Exemption for owner-occupied residences
This bill's statutory late payment fee could not be
assessed against owners who have contracted with a design
professional for an owner-occupied single-family residence
where the construction costs are less than $ 100,000.
This $100,000 figure seems so low that it might render
this a meaningless provision. Most people who hire an
architect to design a custom home do so for homes that cost
more than $100,000. The committee may wish to solicit
testimony on what a more appropriate amount would be.
SHOULD THE 100,000 FIGURE BE SIGNIFICANTLY INCREASED?
Support: Consulting Engineers and Land Surveyors of California
American Institute of Architects, California Chapter.
Opposition: California Municipal Utilities Association; Consumer
Attorneys of California; Calfornia Bankers Association;
Association of California Water Agencies.
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Prior Legislation: AB 295 (1993) Vetoed (prompt pay provisions)
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