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).
While pay-if-paid 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 remedies.
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 clause.
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 practice attorneys.