Source: http://www.lexology.com, June 30, 2015
By: Matthew T. Hawk, Gordon & Rees LLP
In the wake of the recent balcony collapse that killed six people in Berkeley, California, questions have been raised regarding past claims made against the general contractor of that building, Segue Construction, particularly those regarding improperly waterproofed balconies at previous projects. Several news stories have discussed past lawsuits and settlements involving Segue in which allegations of improperly waterproofed balconies were made on several projects in the bay area. While it is difficult to draw any conclusions as to what occurred in Berkeley from any of these past claims, the question that is now being raised in the media is whether the California State License Board (CSLB) should be tracking claims made against contractors in an effort to keep events like these from occurring in the future.
Currently, there are no reporting requirements in California for contractors who are named as defendants in construction defect litigation matters. The only construction-related entities who have reporting requirements in California are architects (settlements, arbitration awards, or civil judgments in excess of $5,000; California Business and Professions Code section 5588, et seq.) and engineers (settlements in excess of $50,000, or judgments/arbitration awards in excess of $25,000; California Business and Professions Code sections 6770, et seq, and 8776, et seq.).
The real question is whether reporting requirements for all contractors will have the desired effect of reducing defective construction on future projects. Unlike design professionals whose design, if defective, could be used/repeated on multiple, future projects, contractors are generally faced with an entirely new set of circumstances on each new project. From location, to design drawings, to the subcontractors utilized to perform the work, to the materials used and/or specified, each project presents an entirely new set of facts to work within. For general contractors in particular, who more often than not do not self-perform any of the work on a given project, the question is whether a reporting requirement will have the desired effect of deterring defective workmanship when they are not the party actually performing the work.
For the subcontractors who actually perform the work, it’s possible that a reporting requirement may be justified, particularly if a given subcontractor is shown to have a history of defective workmanship. From a practical standpoint, however, one issue will be exactly what each subcontractor is required to report. Unlike design professionals, most contractors do not have a consent clause in their insurance policies, and therefore the insurance carrier defending the claim can resolve the case anyway it sees fit, which may mean paying more money to resolve a case to avoid the uncertainties of trial. As well, there may be numerous non-defect related components to a given settlement such as contractual defense and indemnity obligations as well as the potential threat of joint and several liability with other joint tortfeasors who may have no assets and no insurance. As such, the amount a subcontractor pays to resolve a case may have little correlation to the overall quality of their work. Given the complexity of any potential contractor reporting requirement, for such a requirement to be effective and not negatively impact the building industry, significant resources would need to be added to CLSB to allow the degree of investigation that would be necessary to assure that contractors are treated fairly.
The question has also been posed regarding how confidentiality provisions that appear in many settlement agreements in construction defect cases may affect potential reporting requirements for contractors where the terms of the settlement are to remain confidential. In light of the tragedy that occurred in Berkeley, the media has questioned whether the legislature should ban such confidentiality provisions under to the guise of a greater public safety concern. However, unlike in the narrow situations where the legislature has taken such a drastic step (i.e. medical device claims), it is the rarest of circumstances where construction defects result in significant personal injury, and therefore the public safety argument may not be as strong. In the event the legislature or CSLB does take action to require reporting requirements for contractors, however, a simple carve out in the confidentiality provision allowing the contractor to report only the information required may still allow for the use of such provisions.
Given the international attention the Berkeley balcony collapse has received, the debate is just beginning on this subject and it is likely that the state legislature will have the final say on whether reporting requirements will be extended to contractors.