In April, the California Supreme Court issued a crucial ruling on the legality of “pay-when-paid” provisions in construction subcontracts. The Supreme Court’s opinion in Crosno Construction, Inc. v. Travelers Casualty and Surety Co. (2020) 47 Cal. App. 5th 940 [“Crosno”] has wide ranging implications for subcontractors. In particular, the ruling clarifies the law on the subcontractor’s enforcement of construction payment bonds when “pay-when-paid” provisions are included in the underlying subcontract.
In Crosno, Clark Bros., Inc. was selected as the general contractor on a public works project to build an arsenic removal water treatment plant. Clark hired subcontractor Crosno Construction, Inc. to build and coat two steel reservoir tanks. The subcontract contained a “pay-when-paid” provision that stated Clark would pay Crosno within a reasonable time of receiving payments from the project owner. After Crosno completed most of its work, a dispute arose between the owner and Clark which halted the project. As Clark sued the owner, Crosno sought to recover payments owed under the public works payment bond that Clark had obtained for the project. However, the payment bond surety, Travelers, refused to pay Crosno’s claim. Travelers argued that the pay-when-paid provision in Crosno’s subcontract postponed Crosno’s right to payment until Clark’s litigation against the owner concluded.
The Supreme Court disagreed with Travelers. The Court ruled that the “pay-when paid” provision in Crosno’s subcontract was unenforceable because it unreasonably forestalled accrual of Crosno’s payment bond rights for an indefinite period of time while Clark pursued litigation against the project owner. The Court concluded that allowing the subcontract provision to stand would have unreasonably affected or impaired the subcontractor’s statutory payment bond remedy under Civil Code § 8122.
The Take Away
“Pay when paid” provisions are common in construction subcontracts. Such provisions are permitted when they allow payment to be delayed to a subcontractor for a reasonable period of time. However, the specific wording of the provisions in each subcontract is crucial. Expansive “pay-when-paid” provisions which postpone payment until some unspecified and undefined point in time are invalid because they impair a subcontractor’s statutory right to recover under a payment bond. The specific language of a subcontract’s “pay-when-paid” provision needs to be carefully considered after Crosno to determine whether it is enforceable or a restraint on a subcontractor’s available remedies for non-payment.
A contractor who is unsure of how to enforce a payment bond or whether the “pay-when-paid” provisions in its subcontract are prohibited should seek legal counsel on how to best preserve its rights. Here at Cummins & White, LLP, we specialize in counseling and representing design professionals, subcontractors and materials suppliers on both private and public works of improvement.