{"id":897496,"date":"2020-05-20T10:03:02","date_gmt":"2020-05-20T16:03:02","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=897496"},"modified":"2020-05-20T10:03:06","modified_gmt":"2020-05-20T16:03:06","slug":"payment-provisions-deemed-unenforceable","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/payment-provisions-deemed-unenforceable\/","title":{"rendered":"General Contractors: The Payment Provisions in Your Subcontracts May Have Just Been Determined to be Unenforceable"},"content":{"rendered":"\n

Scott Halberstadt | TALG<\/a><\/p>\n\n\n\n

While it has been more than\u00a0twenty years since the California Supreme Court determined, in\u00a0Wm. R. Clarke Corp. v. Safeco Ins. Co.<\/em>, that \u201cpay-if-paid<\/a>\u201d provisions in subcontracts were unenforceable, following a recent decision from the Court of Appeal, Fourth Appellate District, general contractors, or any other contractors that contract directly with owners, should review their subcontracts to confirm that they do not contain potentially unenforceable \u201cpay-when-paid<\/a>\u201d provisions.<\/p>\n\n\n\n

Following the California Supreme Court\u2019s Wm. R. Clarke <\/em>decision, many direct contractors (defined by California Civil Code <\/em>\u00a7 8018 as a contractor with a direct contractual relationship with an owner) revised the payment provisions in their subcontracts from \u201cpay-if-paid\u201d (where payment by the owner is a condition precedent for payments to the subcontractor) to \u201cpay-when-paid\u201d (requiring the contractor to pay the subcontractors within a defined period after payment by the owner). In the recent Crosno Construction Inc. v. Travelers Casualty and Surety Company of America<\/em> decision, the Fourth District Court of Appeal determined that such \u201cpay-when-paid\u201d provisions may <\/em><\/strong>be unenforceable if they run afoul of California\u2019s statutory waiver and release statutes (California Civil Code<\/em> \u00a7 8120 et seq<\/em>.).<\/p>\n\n\n\n

In Crosno<\/em>, the subcontract required the direct contractor to pay its subcontractor in monthly progress payments with the following \u201cpay-when-paid\u201d provision should the owner\u2019s payment be delayed:<\/p>\n\n\n\n

If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. \u2018Reasonable time\u2019 shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics\u2019 lien remedies.<\/p>\n\n\n\n

While the Crosno <\/em>court did not appear to question the enforceability of most of this provision, the Court of Appeal determined that the portion of the provision which allowed the direct contractor to delay payment until the conclusion of its mechanics\u2019 lien remedies was unenforceable. The Crosno <\/em>court\u2019s rationale was that this portion of the \u201cpay-when-paid\u201d provision postponed the direct contractor\u2019s obligation to pay for an indefinite period of time and was, therefore, violative of California Civil Code <\/em>\u00a7 8122\u2019s bar against contractual provisions which \u201cwaive, affect or impair\u201d a claimant\u2019s waiver and release rights.<\/p>\n\n\n\n

As pointed out by the Crosno <\/em>court, California law lays out a comprehensive statutory scheme to resolve payment disputes in construction projects (California Civil Code <\/em>\u00a7 8160 et seq.<\/em> for private projects and California Civil Code <\/em>\u00a7 9000 et seq.<\/em> for public projects). This statutory scheme is intended to carefully protect against unfair or imprudent waiver of right to payment and a claimant may only <\/em><\/strong>waive its statutory remedies by signing one of the four types of statutorily required written waiver and releases (California Civil Code <\/em>\u00a7\u00a7 8132 \u2013 8138). In fact, California Civil Code <\/em>\u00a7 8122 makes any contractual provision purporting to modify the statutory waiver and release scheme unenforceable<\/em><\/strong>.<\/p>\n\n\n\n

The Crosno <\/em>court determined that the \u201cbut in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics\u2019 lien remedies\u201d portion of the \u201cpay-when-paid\u201d provision in the subcontract violated California Civil Code <\/em>\u00a7 8122 and, thereby, made the provision, as a whole, unenforceable as a matter of law.<\/p>\n\n\n\n

Like Wm. R. Clarke<\/em>, the Crosno <\/em>case involved a subcontractor\u2019s claims against the direct contractor\u2019s payment bond. Likely, the offending language in the contract (\u201cbut in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics\u2019 lien remedies\u201d) was intended to limit claims against the direct contractor\u2019s payment bond. Unfortunately for the direct contractor and its surety, the payment bond obligated the surety, upon default by the direct contractor, to pay amounts due for \u201cwork and labor under the contract\u201d between the direct contractor and owner. Seizing on the broad nature of the surety\u2019s obligation and the unenforceability of the \u201cpay-when-paid\u201d provision, the Crosno <\/em>court, like the Wm R. Clarke <\/em>court before it, determined that the surety was obligated to pay the subcontractor\u2019s claim regardless of the status of the direct contractor\u2019s mechanic\u2019s lien action against the owner.<\/p>\n\n\n\n

The lesson to be learned from Crosno <\/em>is that, while \u201cpay-when-paid\u201d provisions, in and of themselves, remain enforceable, they must be written in such a way that they neither run afoul of California\u2019s statutory waiver and release scheme nor include patently unreasonable language. As such, we recommend that direct contractors review the payment provision(s) in their subcontractors to confirm that they remain enforceable.<\/p>\n","protected":false},"excerpt":{"rendered":"

Scott Halberstadt | TALG While it has been more than\u00a0twenty years since the California Supreme Court determined, in\u00a0Wm. R. Clarke Corp. v. Safeco Ins. Co., that \u201cpay-if-paid\u201d provisions in subcontracts were unenforceable, following a recent decision from the Court of Appeal, Fourth Appellate District, general contractors, or any other contractors that contract directly with owners,… Continue reading General Contractors: The Payment Provisions in Your Subcontracts May Have Just Been Determined to be Unenforceable<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[9],"tags":[9895,88,224,7568,11156],"class_list":["post-897496","post","type-post","status-publish","format-standard","hentry","category-construction-contracts","tag-advise-consult","tag-california","tag-construction-contract","tag-pay-if-paid-clause","tag-pay-when-paid-clause","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nGeneral Contractors: The Payment Provisions in Your Subcontracts May Have Just Been Determined to be Unenforceable - 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