California Court Rules Pay-When-Paid Clause in Public Works Contract Unenforceable
The California Appellate Court decision is not
binding on Arizona courts, but its rationale is equally applicable, and Arizona
courts may find it persuasive.
In Arizona, pay-when-paid clauses in a construction
contract can be effective provided the clause specifically states that the
subcontractor agrees to be paid only out of a specific fund, and, if that fund
is insufficient or never created, the subcontractor will forfeit payment for
some or all of its work (L. Harvey Concrete, Inc. v. Argo Construction & Supply
Company, 939 P2d 811 (Ariz.App. 1997).
and pay-when-paid clauses are enforceable in Arizona provided, the “magic
language” is used, are these clauses enforceable in public works contracts where
a payment bond exists to protect the unpaid subs and suppliers? This issue was
recently decided by the California Circuit of Appeals in Crosno Construction,
Inc. v. Travelers Casualty & Surety, 47 Cal. App. 5th 940 (2020) (“Crosno”).
The general contractor hired Crosno on a California Public Works project.
Travelers posted the payment bond. The parties’ construction contract contained
a pay-when-paid clause requiring payment to Crosno within a “reasonable time”
but not later than Crosno and the general contractor had to pursue their legal
Crosno performed $562,435 of work which was
accepted when a dispute arose between the general contractor and the public
owner resulting in the termination of the general contractor. Crosno sued
Travelers who denied any amounts were owed Crosno because of the pay-when-paid
California has a specific statute prohibiting a
general contractor from waiving, affecting or impairing the right to make a
payment bond claim. Crosno won at the trial level and Travelers appealed.
The California Appellate Court found that:
[e]nforcing the pay-when-paid provision found in Crosno’s subcontract would
postpone Crosno’s right to recovery under the payment bond for an indefinite
time period until [the general contractor’s] litigation against the [owner]
concludes. Such a result would unreasonably affect or impair Crosno’s statutory
payment bond remedy ... and is unenforceable. ... Accordingly, the specific
pay-when-paid clause before us is void and unenforceable ... against Crosno’s
payment bond claim."
Crosno is a California Appellate
Court decision and thus not binding on Arizona courts but its rationale is
equally applicable and Arizona courts may find it persuasive. Crosno supports
the reasoning that payment bonds on public works projects are intended to ensure
that subcontractors are timely paid for their work performed and accepted.
If you have any questions regarding a pay-if-paid or pay-when-paid clause in
your contract, feel free to contact one of the Sacks Tierney construction