Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
California courts recognize the validity of arm’s-length agreements limiting liability and enforce such agreements in a variety of contexts, including construction contracts. See Markborough Cal., Inc. v. Superior Court, 227 Cal. App. 3d 705, 716-17 (Ct. App. 1991); Cal. Civ. Code §§ 2782-2782.9 (West 2020). In CAZA Drilling (California), Inc. v. TEG Oil & Gas U.S.A., Inc., 142 Cal. App. 4th 453 (2006), the court of appeals upheld a limitation of liability in a drilling contract, explaining that “where the only question is which of two equal bargainers should bear the risk of economic loss in the event of a particular mishap, there is no reason for the court to intervene and remake the parties’ agreement.” Id. at 475.
California courts distinguish between limitations of liability addressing active and passive negligence. “For an agreement to be construed as precluding liability for ‘active’ or ‘affirmative’ negligence, there must be express and unequivocal language in the agreement which precludes such liability. An agreement which seeks to limit generally without mentioning negligence is construed to shield a party only for passive negligence, not for active negligence.” N. Star Gas Co. v. Pac. Gas & Elec. Co., No. 15-cv-02757, 2016 WL 5358590, at *17 (N.D. Cal. Sept. 26, 2016).
While Cal Civ. Code § 1668 (West 2021) provides that contract provisions seeking to exempt liability for fraud or willful injury are unenforceable, California courts have inconsistently applied this to limitations of liability. In Peregrine Pharm., Inc. v. Clinical Supplies Mgmt., Inc., No. SACV 12-1608 JGB ANX, 2014 WL 3791567 (C.D. Cal. July 31, 2014), the court expressed its view that Section 1668 is inapplicable to limitations of liability, since limitations of liability do not seek to “exempt” a party from responsibility. Id. at *7-8. The court, however, recognized that other California courts have analyzed limitations of liability in light of the restrictions in Section 1668. Id. (conceding that Section 1668 may be applicable to limitations of liability but does not per se invalidate such limitations). Similarly, the Ninth Circuit Court of Appeals narrowly construed Section 1668’s effect to limitations of liability that attempt to exempt a person’s own fraud or willful injury to another. Darnaa, LLC v. Google LLC, 756 Fed. App’x 674, 676 (9th Cir. 2018).
Pursuant to Section 1668 of the California Civil Code, exculpatory provisions are only enforceable when not involving “the public interest.” Tunkl v. Regents of Univ. of Cal., 383 P.2d 441, 443 (Cal. 1963) (en banc). The public interest, however, cannot lend itself easily to definition because “the social forces that have led to such characterization are volatile and dynamic. No definition of the concept of public interest can be contained within the four corners of a formula.” Tunkl, at 444. California courts determine whether a contract implicates a public interest by evaluating whether: (1) the transaction concerns a business generally considered suitable for public regulation; (2) the party seeking exculpation performs a service of great importance to the public, which is often a matter of practical necessity for some members of the public; (3) the party holds himself out as willing to perform this service for any member of the public who seeks it; (4) the party invoking exculpation has a bargaining strength advantage; (5) the party invoking exculpation uses a standardized adhesion contract of exculpation, without any option to pay additional fees to obtain protection against negligence; and (6) as a result of the transaction, the purchaser’s person or property is placed under the seller’s control and subjected to the seller’s carelessness. Id.; see also Arneson v. Motorcycle Safety Found., Inc., No. B270206, 2017 WL 3575186, at *3 (Cal. Ct. App. Aug. 18, 2017) (applying Tunkl factors and upholding exculpatory clause).
Exculpatory clauses must be explicit and plainly written. “California courts require a high degree of clarity and specificity in [an exculpatory clause] to find that it relieves a party from liability for its own negligence. The release must ‘clearly, explicitly and comprehensibly set forth to an ordinary person untrained in the law that the intent and effect of the document is to release his claims for his own personal injuries . . . .’” Cohen v. Five Brooks Stable, 159 Cal. App. 4th 1476, 1488 (Ct. App. 2008).
Cal. Civil Code § 2782 (West 2021) invalidates provisions in construction contracts that indemnify the promisee against liability for damages arising from the promisee’s sole negligence or willful misconduct or from defects in design the promisee furnished. This section does not prevent a party to a construction contract and the owner “from negotiating and agreeing with respect to the allocation, release, liquidation, exclusion, or limitation as between the parties of any liability for (a) for design defects, or (b) of the promisee to the promisor arising out of or relating to the construction contract.” Cal. Civ. Code § 2782.5 (West 2021).
Under Section 2782.2, a contract may contain a clause indemnifying a professional engineer against liability for the engineer’s negligence only if: (1) the promisor owns the plants/facilities; (2) the promisor is audited annually; (3) the promisor’s net worth exceeds ten million dollars; (4) the promisor is self-insured; and (5) the indemnification only applies to the first $250,000 dollars of liability. Id. § 2782.2 (a)(1)-(5).
Upon meeting certain criteria, professional engineers may indemnify themselves from liability in providing services relating to hazardous materials as described in portions of the Health and Safety Code. Id. § 2782.6.
Section 2782.8 invalidates any provision in a contract with a public agency for design professional services purporting to indemnify the public agency, except for claims based on the design professional’s negligence, recklessness, or willful misconduct. Id. § 2782.8.
An indemnity provision in a construction subcontract providing indemnity to a general contractor for injury claims arising out of the scope of the subcontractor’s work “except to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct” of the contractor does not preclude the contractor from recovering indemnity if its active negligence contributed to the injury. Oltmans Constr. Co. v. Bayside Interiors, Inc., 10 Cal. App. 5th 355. 358 (Ct. App. 2017). Rather, the provision merely limits recoverable indemnity to the portion of liability attributable to the negligence of others. Id. California courts, however, have narrowed the comparative indemnity approach and declined to extend Oltmans ruling where the words “except to the extent of” are not specifically present and where reimbursement is not sought from another entity that may be partly responsible for the damages of the movant. People ex rel. Becerra v. Shine, A155833, 2020 WL 821553, at *4 (Cal. Ct. App. Feb. 19, 2020) (declining to extend comparative indemnity where terms of trust do not state that trustee is indemnified “except to the extent” of his gross negligence and indemnity was sought from the trust itself, not from another entity party responsible for victim’s injuries).
Enforceability of Waiver of Consequential Damages Clauses
California courts recognize the validity of arm’s-length agreements limiting liability, including waivers of consequential damages. Provisions in construction contracts that purport to limit liability are valid and enforceable where they are the result of negotiation and agreement between the parties. Ca. Civ. Code §§ 2782.5, 2782. See U.S. ex rel. Integrated Energy, LLC v. Siemens Gov’t Techs., Inc., 2017 WL 10562969, at *4–6 (C.D. Cal. May 19, 2017) (granting defendants’ motion for partial summary judgment on damages, holding that the subcontracts’ limitation of liability provisions preclude the recovery of lost profits, and rejecting plaintiff’s argument that the waivers were unenforceable); U.S. v. Global Metals Corp., 2015 WL 12661913, at *9–12 (C.D. Cal. Jan. 12, 2015) (declining to grant summary judgment on defendant’s assertion that the limitation of liability clause in a construction contract was unenforceable as a matter of law due to unconscionability); Markborough Cal., Inc. v. Superior Court, 227 Cal. App. 3d 705 (1991) (upholding a provision in a contract limiting liability to the greater of consultant’s fee or $50,000, despite actual repair costs of $5,000,000). But see Cal. Civ. Code § 1668 (contract provisions seeking to exempt liability for fraud or willful injury are not enforceable).
In Chinese Hosp. Ass’n v. Jacobs Eng’r Grp., Inc., 2019 WL 6050758 (N.D. Cal. Nov. 15, 2019), plaintiff alleged that defendant breached its agreement to provide architectural services, and defendant sought partial summary judgment on plaintiff’s right to recover consequential damages. The court granted, in part, defendant’s motion, holding that the contract’s consequential damages waiver – which expressly barred either party from recovering “any damages in the nature of lost profits, lost opportunity or consequential damages of any description, arising directly or indirectly from any breach of duty…” — precluded plaintiff from recovering for lost profits, increased operational costs, and construction delay damages. 2019 WL 6050758, at *1–2.
In CAZA Drilling (California), Inc. v. TEG Oil & Gas U.S.A., Inc., 142 Cal. App. 4th 453 (2006), the court upheld a contractual waiver of consequential damages in an oil drilling contract, and reasoned that “[t]here is nothing to hinder a ‘voluntary transaction in which one party, for a consideration, agrees to shoulder a risk which the law would otherwise have placed upon the other party.’” Id. at 282 (citation omitted). Under California law, however, a limitation of liability provision in a construction contract may be unenforceable if it is unconscionable or in violation of public policy. See Cobb v. Ironwood Country Club, 233 Cal. App. 4th 960, 969 (2015) (acknowledging that a waiver of an award of punitive or consequential damages “could be deemed unconscionable”); Civic Center Drive Apartments Ltd. P’ship v. Sw. Bell Video Servs., 295 F. Supp. 2d 1091, 1105–06 (N.D. Cal. 2003) (“Generally, provisions limiting liability in construction contracts are enforceable under California law so long as the parties negotiated and expressly agreed to the limitations. However, such a provision is unenforceable if it is unconscionable or otherwise contrary to public policy.” (internal citation omitted)).
In the context of transactions for the sale of goods, the California Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Cal. Com. Code §§ 2711-2714, 2715(2). However, California commercial code section 2719 permits the buyer and the seller to contract to limit or exclude consequential damages unless the limitation or exclusion is unconscionable or where the circumstances cause the contractually specified limited or exclusive remedy to fail of its essential purpose. See, e.g., R Power Biofuels, LLC v. Chemex LLC, No. 16-CV-00716-LHK, 2017 WL 1164296, at *14 (N.D. Cal. Mar. 29, 2017) (analyzing Cal. Com. Code § 2719 in the context of a contract for the design, engineering, and construction of a biodiesel production plant and denying the defendant’s motion to dismiss the plaintiff’s prayer for consequential damages where plaintiff had adequately alleged that the particular terms and conditions “failed of their essential purpose”); San Diego Gas & Elec. Co. v. ABB Inc., 2016 WL 6680205, at *5–7 (S.D. Cal. 2016) (declining to enter summary judgment barring plaintiff from recovering consequential damages, notwithstanding a waiver of consequential damages contractual provision, where a reasonable person could find such damages falling within the ambit of plaintiffs’ replacement costs incurred); A&M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 481–82, 492–93 (1982) (affirming that the contractual limitation on consequential damages was unconscionable where defendant was “the only party reasonably able to prevent [the] loss” and also rejecting defendant’s argument that the consequential damages alleged by plaintiff were too speculative to be the basis for an award of damages).
Application of Economic Loss Doctrine
Practitioners in California should always take note of California Rules of Court Rule 8.1115, which states that, with two exceptions cited in the Rule, “an opinion of a California Court of Appeal or superior court appellate division that is not certified for publication or ordered published must not be cited or relied on by a court or a party in any other action.”
California courts adopt an “intermediate” approach to the economic loss doctrine, meaning that the doctrine bars tort recovery for purely economic losses, subject to certain exceptions. See Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 1965) (“Without an agreement, defined by practice or otherwise, [a] defendant should not be liable for … commercial losses.”); see also Kalitta Air, L.L.C. v. Cent. Texas Airborne Sys., Inc., 315 F. App’x 603, 605 (9th Cir. 2008) (citation omitted) (stating that under California law “in actions for negligence, liability is limited to damages for physical injuries and recovery of economic loss is not allowed.”). Where none of the specific exceptions to the economic loss rule apply, the application of the rule has been expansive. The federal courts in California have applied the economic loss rule “when a plaintiff alleges only economic losses, when no personal liability could arise, and when no products liability claims are alleged.” Lennar Mare Island, LLC v. Steadfast Ins. Co., No. 2:12-cv-02182-KJM-KJN, 2016 WL 829210, at *8 (E.D. Ca. Mar. 3, 2016) (citing federal cases). Today, the exceptions to the economic loss rule in California are rooted in both common law and statute.
Common Law Exception: Products Liability for Damage to “Other Property”
On the common law front, the first exception provides that a claimant may recover for economic loss in tort if there is harm to other property or persons resulting from the defendant’s product or action. See Robinson Helicopter Co. v. Dana Corp., 102 P.3d 268, 272 (Cal. 2004) (“The economic loss rule allows a plaintiff to recover in strict products liability in tort when a product defect causes damage to ‘other property,’ that is, property other than the product itself.”) (citation omitted); see also Black & Veatch Corp. v. Modesto Irrigation Dist., 827 F. Supp. 2d 1130, 1139 (E.D. Cal. 2011).
Common Law Exception: “Special Relationship”
In conjunction with its intermediate approach to the economic loss doctrine, California courts have also barred the doctrine from applying in cases where a “special relationship” exists between the parties. California courts recognize that this “special relationship” exists where the economic loss is “clearly foreseeable,” and so a duty of care is owed. J’Aire Corp. v. Gregory, 598 P.2d 60, 63 (Cal. 1979) (citing Biakanja v. Irving, 320 P.2d 16 (Cal. 1958)); see also Ales-Peratis Foods Int’l, Inc. v. Am. Can Co., 164 Cal. App. 3d 277, 285 (Ct. App. 1985) (“[T]he California Supreme Court … allow[s] recovery in negligence actions where the economic loss is especially foreseeable despite the absence of physical injury or property damage.”). To determine whether a special relationship exists between any particular set of parties, giving rise to a duty of care, the following criteria are evaluated: “(1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant’s conduct and the injury suffered; (5) the moral blame attached to the defendant’s conduct; and (6) the policy of preventing future harm.” J’Aire Corp., 598 P.2d at 63. It should be noted, however, that federal courts in California have interpreted the “special relationship” exception to apply only in cases where there is no privity of contract between the parties. See, e.g., Frank M. Booth, Inc. v. Reynolds Metals Co., 754 F. Supp. 1441, 1449–50 (E.D. Ca. 1991); San Diego v. Amoco Chem. Co., No. CIV. 98–0474–E(LSP), 1999 WL 33548157, at *4 (S.D. Ca. Sep. 9, 1999).
The Supreme Court of California declined to find a lender had a duty to “process, review, and respond carefully and completely to [a person’s] loan modification,” nor could one be justified by the Biakanja factors, where a loan borrower brought an action against a mortgage lender, the successor lender, and a loan servicing entity alleging negligent mortgage modification and other claims. See Sheen v. Wells Fargo Bank, N.A., No. S258019, 2022 WL 664722, at *1-2, 6-21 (Cal. Mar. 7, 2022) (engaging in an extensive review of the economic loss doctrine in California, as well as case law from other jurisdictions discussing the doctrine in the lender-borrower context).
Construction Cases and the Statutory Exception Under the Right to Repair Act
The old common law rule was not favorable to tort claims in construction cases. See Aas v. Superior Court, 12 P.3d 1125, 1136 (Cal. 2000) (“[T]his court recently rejected the argument that the negligent performance of a construction contract, without more, justifies an award of tort damages.”) (citation omitted). Instead, consistent with the common-law exceptions discussed above, a physical injury was required to allow for common-law tort recovery. See San Francisco Unified Sch. Dist. v. W.R. Grace & Co., 44 Cal. Rptr. 2d 305, 311 (Cal. Ct. App. 1995) (“Physical injury resulting from asbestos contamination, not the mere presence of asbestos, must have occurred before a cause of action for strict liability or negligence can accrue in an asbestos-in-building case.”). Alternatively, the special relationship exception has been applied to construction cases. See, e.g., J’Aire Corp., 598 P.2d at 63 (finding contractor liable to lessee for significant construction delays where shopping complex owner, not lessee, hired contractor because contractor had duty to those on the premises not to injure businesses); Beacon Residential Cmty. Assn. v. Skidmore, Owings & Merrill LLP, 327 P.3d 850, 852 (Cal. 2014) (holding that an architect “owes a duty of care to future homeowners in the design of a residential building where … the architect is a principal architect on the project”).
The application of the economic loss rule in construction cases changed dramatically in 2002. That year, the California State Legislature passed the “Right to Repair Act.” Stats. 2002, ch. 722, principally codified at Cal. Civ. Code §§ 895–945.5. The Act creates a comprehensive prelitigation and litigation regime for specifically defined construction defects. See id. The Supreme Court of California has explicitly found the Act to supersede the common law rule, stating that “a party suffering economic loss from defective construction may now bring an action to recover these damages under the [Right to Repair Act] without having to wait until the defect has caused property damage or personal injury.” McMillin Albany LLC v. Superior Court, 408 P.3d 797, 802–03 (Cal. 2018). The Court held that “the Act was designed as a broad reform package that would substantially change existing law by displacing some common law claims and substituting in their stead a statutory cause of action with a mandatory prelitigation process.” Id. at 805 (finding the Act to supersede the holding in Aas).
Economic loss recoverable under the Act includes “the reasonable value of repairing any violation of the standards set forth in [the Act], the reasonable cost of repairing any damages caused by the repair efforts, … the reasonable cost of removing and replacing any improper repair by the builder, reasonable relocation and storage expenses, lost business income if the home was used as a principal place of business licensed to be operated from the home, [and] reasonable investigative costs for each established violation.” Id. at 802 (citing Cal. Civ. Code § 944).
The “Right to Repair Act” specifically applies only to “original construction intended to be sold as an individual dwelling unit” and does not apply to “condominium conversions.” Cal. Civ. Code § 896. Thus, the default common-law rules still apply outside of this context.
Exception for Bad Faith and Fraud
California law also allows tort recovery for purely economic losses when there is a “breach of the covenant of good faith and fair dealing in insurance contracts; for wrongful discharge in violation of fundamental public policy; or where the contract was fraudulently induced … [because] in each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.” Robinson Helicopter Co. v. Dana Corp., 102 P.3d 268, 273 (Cal. 2004) (quotations omitted). However, the Supreme Court of California has not clarified if the economic loss rule further does not apply to negligent misrepresentations claims, which the lower court found was barred by California’s economic loss rule. Certain subsequent court decisions have found such claims are barred by the doctrine. See, e.g., Astrium S.A.S. v. TRW, Inc., 197 F. App’x 575, 577 (9th Cir. 2006); Mod Craft, Inc. v. Am. Ready Mix, Inc., No. F038907, 2003 WL 1090376, at *5 (Cal. Ct. App. Mar. 12, 2003) (unpublished). Alternatively, there is a line of decisions reaching the opposite conclusion and finding negligent misrepresentation falls within the exception. See, e.g., Hannibal Pictures, Inc. v. Sonja Prods. LLC, 432 F. App’x 700, 701 (9th Cir. 2011); Kalitta Air, L.L.C., 315 F. App’x at 607; Grouse River Outfitters Ltd v. NetSuite, Inc., No. 16-cv-02954-LB, 2016 WL 5930273, at * 11 (N.D. Ca. Oct. 12, 2016).
Exception for Other Intentional Conduct
California courts have also exempted from the economic loss rule tort claims for intentional torts and for contract breaches that are committed “intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.” Dante Valve Co. v. Republic Brass Sales, Inc., No. 17-cv-2582-AJB-WVG, 2019 WL 1406583, at *6 (S.D. Cal. Mar. 28, 2019) (citing cases).
Other Property and Integrated Systems
California’s approach to defining “other property” and addressing integrated systems focuses on the utility of the property within the system it belongs to:
[I]n determining whether a component manufacturer is strictly liable in tort for harm that its defective product causes to a larger object of which it is a component, the pertinent inquiry is whether the component has been so integrated into the larger unit as to have lost its separate identity. If so, strict liability is improper. But if the component retains its separate identity, so that it may be readily separated from the overall unit, the component manufacturer may be strictly liable for damages to the larger unit.
Jimenez v. Superior Court, 58 P.3d 450, 459 (Cal. 2002) (finding windows not integrated into the house and therefore constituted “other property”). California courts have otherwise described this approach to “component-to-component damage” as “distinguishing between ‘other property’ and the defective product … [in] a determination [of] whether the defective part is a sufficiently discrete element of the larger product that it is not reasonable to expect its failure invariably to damage other portions of the finished product.” KB Home v. Superior Court, 112 Cal. App. 4th 1076, 1087 (2003); cf. Stearman v. Centex Homes, 78 Cal. App. 4th 611, 618, 623 (2000) (holding defective construction of home’s foundation was not “injury to the product itself” after damage contributed to home’s cracked walls and ceilings, and recovery was not barred by the economic loss rule).
Enforceability of No Damages for Delay Clauses
No damages for delay provisions in public construction contracts are unenforceable where the delay is unreasonable under the circumstances and not within the contemplation of the parties. Specifically, California Pub. Con. Code § 7102 provides that, “Contract provisions in construction contracts of public agencies and subcontracts thereunder which limit the contractee’s liability to an extension of time for delay for which the contractee is responsible and which delay is unreasonable under the circumstances involved, and not within the contemplation of the parties, shall not be construed to preclude the recovery of damages by the contractor or subcontractor.” See also Howard Cont., Inc. v. G.A. MacDonald Constr. Co., 71 Cal. App. 4th 38, 51 (1998) (finding city’s no damage for delay clause inapplicable under § 7102 because the delays were caused by the city and “a basis existed for concluding that the delays were unreasonable and not within the contemplation of the parties.”). Otherwise, clear and explicit “no damages for delay” clauses are valid and enforceable. See RAI Indus. Fabricators, LLC v. Fed. Ins. Co., No. 5:16-cv-03674-EJD, 2018 WL 2047789 at *3 (N.D. Cal. May 2, 2018).
Strict Interpretation of Contract
California courts interpret contracts with the fundamental goal of giving effect to the mutual intention of the parties as it existed at the time of contracting. Cal. Civ. Code § 1636. The mutual intention of the parties is to be inferred, if possible, solely from the written provisions of the contract. Id. § 1639. The clear and explicit meaning of these provisions, interpreted in their ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage, controls judicial interpretation. Id. §§ 1644, 1638; see also Palmer v. Truck Ins. Exchange, 988 P.2d 568, 572-73 (Cal. 1999); Mountain Air Enterprises, LLC v. Sundowner Towers, LLC, 398 P.3d 556, 561 (Cal. 2017). Thus, “where contractual language is clear and explicit, it governs.” Powerine Oil Co., v. Superior Court, 118 P.3d 589, 598 (Cal. 2005). When determining whether an ambiguity exists, a court should consider not only the face of the contract but also any extrinsic evidence that supports a reasonable interpretation. See Dore v. Arnold Worldwide, Inc., 139 P.3d 56, 60 (Cal. 2006). If the contract is capable of more than one reasonable interpretation, it is ambiguous. Palmer, 988 P.2d at 573. Parol evidence may be used where the evidence is relevant to prove a meaning to which the contract language is reasonably susceptible, or to interpret ambiguous provisions in a written agreement. Cal. Civ. Proc. § 1856. Further, California courts will interpret the contract provision in question “in context” and will “give effect to every part of the [contract] with each [provision] helping to interpret the other.” Palmer, 988 P.2d at 572-73.
Prompt Payment Requirements (Public/Private)
California Public –Cal. Pub. Cont. Code §§ 10261–10265 (West 2022) (state agencies) (owner to prime 30 days after receipt of payment request; 39 days for state university projects; prime to sub within 7 days of payment (21 days for public utility contracts unless otherwise agreed); penalty of 2% of amount due per month (plus interest in some cases) and contractor may collect attorney’s fees and costs; if good faith dispute over amount due, owner may withhold from prime/prime may withhold from sub no more than 150% disputed amount; interest at 10% per annum unless otherwise provided or exception applies; public entity retention to prime 60 days after completion). Cal. Pub. Cont. Code § 20104.50 (West 2022) (local entities) (owner to prime within 30 days; interest at 10% per annum). See also Cal. Bus. & Prof. Code § 7108.5 (West 2022), which similarly imposes a 7-day payment requirement from primes to subcontractors and applies to all private and public works of improvement except where Cal. Pub. Cont. Code. §§ 10261, 10262 (West 2022) is applicable.
California Private – Cal. Civ. Code § 8800 et seq. (West 2022); Cal. Bus. & Prof. Code § 7108.5 (West 2022) (owner to prime within 30 days of notice demanding payment unless otherwise agreed; prime to sub/sub to lower tier within 7 days after receipt of payment unless otherwise agreed; if good faith dispute over amount due, owner may withhold from prime/prime may withhold from sub no more than 150% disputed amount; 2% penalty per month overdue (plus interest in some cases), and contractor may collect attorney’s fees and costs; retention to prime 45 days after completion date; retention to sub 10 days after receipt).
False Claims Statute
Cal. Gov’t Code §§ 12650-12656 – The California False Claims Act is substantially similar to the FCA. The California Act defines “claim” similarly to the FCA but applies it to the state and its political subdivisions. See Cal. Gov’t Code § 12650. Key distinctions in California’s Act include: (1) a requirement that the act be done “knowingly;” (2) a liability provision applicable to a beneficiary of an inadvertent false claim who later discovers the falsity and fails to disclose within a reasonable time after its discovery; (3) joint and several liability for acts committed by two or more persons; and (4) a penalty that is three times the amount of damages sustained by the state or political subdivision, plus costs of the state or political subdivision’s civil action to recover the damages and a civil penalty range of $5,500 to $11,000 for each false claim. Id. § 12651.
Licensing Requirements for Construction Managers
There are no express specific licensing requirements for construction managers on private projects in California. For public works projects in California, however, the California Government Code § 4525(e) defines “construction project management” as services provided by licensed architects, engineers, or general contractors. Cal. Gov’t Code § 4525(e); see also Cal. Code Regs. tit. 2, § 2980.1. Furthermore, California Government Code § 4529.5 provides that any individual or firm performing construction project management services shall provide evidence of expertise and experience in construction project design review and evaluation, construction mobilization and supervision, bid evaluation, project scheduling, cost-benefit analysis, claims review and negotiation, and general management and administration of a construction project. Cal. Gov’t Code § 4529.5. Accordingly, it follows that for public works projects, individuals or entities performing construction management services should be licensed contractors, architects, or engineers.
There is no explicit requirement that construction managers must be licensed on private projects. See California Contractors’ State License Law, §§ 7000-7191 (“CSLL”). However, the type of work performed by construction project managers may fall under the definition of a “contractor” and, thus, require licensure as such. The statutory chapter defines a “contractor” as:
[A]ny person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof . . . .
Cal. Bus. & Prof. Code § 7026. See also id. § 7057 (broadly defining “general building contractor”). California courts have held that those who enter into construction contracts must be licensed, even when they do not perform the actual work under the contract. Vallejo Development Co. v. Beck Development Co., 24 Cal. App. 4th 929, 940 (1994). On the other hand, a construction manager may avoid the CSLL license requirements when it merely oversees the work of a general contractor. See, e.g., Fifth Day, LLC v. Bolotin, 91 Cal. Rptr. 3d 633, 639-40 (Cal. Ct. App. 2009). For example, the CSLL does not require a license when the construction manager has no authority to perform construction work or to enter into contracts or subcontracts, but assists only in coordinating the activities of construction workers and maintaining records. Id.