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“PAY WHEN PAID“ CONSTRUCTION CONTRACT CLAUSE UNENFORCEABLE

By James J. Reynolds of Shustak Reynolds & Partners, P.C. posted on Monday, June 8, 2020.

In the recent appellate case Crosno Construction Inc v. Travelers (2020), the Fourth District Court of Appeal (which includes San Diego, Orange and Riverside counties) determined a “paid when paid” contract clause, asserted by a payment bond surety as a defense to paying the claimant subcontractor, was unenforceable.  This clause, found in the general contract, allowed the general contractor to delay payment to its subcontractor in the event the public works entity failed to pay the general contractor, until such time the general contractor was paid.  The general contractor in Crosno sued the public entity for payment and the litigation stretched for several years.  The surety adopted the clause as applicable to the payment bond and refused to pay the sub.

This issue is tied to the “pay if paid” clause, a once common contract clause, which calls for a general contractor to avoid payment to its subs should the owner not pay the general contractor. The California Supreme Court determined some time ago “pay if paid” clauses were void and unenforceable because they transferred to the subcontractor the risk of payment for work the sub performed. (Wm. R. Clarke Corp v. Safeco Ins. Co. (1997) 15 Cal 4th 882.)

The “pay when paid” clause at issue in Crosno found its footing when the subcontractor sought payment from the payment bond surety for almost $600,000.00 in unpaid work and materials.  The trial court determined although it was dealing with a “paid when paid” and not a “paid if paid” clause, the question remained whether allowing the clause to be enforced would impermissibly impair the subcontractor’s statutory payment bond rights under the anti-waiver statute Civil Code 8122.  The trial court found the “paid when paid” clause void and awarded the subcontractor $562,435.00 plus interest and costs.

The Appellate Court upheld the trial court’s ruling.

It determined while a “paid when paid” clause is not a true condition precedent, as is a “paid if paid” clause, it unreasonably impaired the sub’s recovery under the payment bond and therefore was “void and unenforceable.”

While the case did not directly rule on whether a “pay when paid” clause is enforceable by a general contractor against one of its subcontractors, a reasoned interpretation of this case is that its holding is broad enough to include general contractors as well as sureties.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Partner James J. Reynolds can be reached in the firm’s San Diego office at (619) 696-9500 or [email protected] 

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