By Larry Lubka

In a decision issued a few days ago, a California Appeals Court determined in Crosno v. Travelers that a pay-when-paid clause stating that where the subcontract defines that a reasonable time to make payment “in no event shall be less than the time the Contractor and Subcontractor require to pursue to conclusions their remedies against Owner or other responsible party to obtain payment ….” is not enforceable.  As those of you who have me review their contracts and subcontracts over the years, I often warn that many pay-when-paid clauses could result in delays to payment of several years.  In 1997 the California Supreme Court rules that “pay-if-paid” clauses were not enforceable.  This was the next step.  What is a reasonable time period for a pay-when-paid subcontract provision?

The Crosno case involved a dispute between the owner and a public entity (here a water district) where the direct contractor was ordered to halt work.  Crosno, acting as a subcontractor, fabricated and delivered two 250,000-gallon water tanks.  Most of Crosno’s invoices were unpaid and there was a balance of $563,435 due and owing when the dispute between public entity and direct contractor stopped payments.  No issues were raised regarding Crosno’s work or product.  By the time the case reached the appeals court, the principal balance had been paid, but a judgment for interest and attorney’s fees was outstanding and still in issue.  It had been three years since invoicing when the principal balance was paid.

The court held that an open-ended pay-when-paid clause, like the one in Crosno’s subcontract, was unenforceable.  There is an interesting discussion of the arguments for and against.  If you wish to read the case, just email me and I’ll send it over.

Before there is too much celebration by subcontractors regarding the court’s decision, let me caution that the ruling only applies to public works payment bonds where there is no dispute regarding the work by the subcontractor.  This was not a court decision which would apply to a private work. It does not apply where there is a dispute between the contractor and subcontractor based on allegations of improper subcontractor work.

More significantly, the court cautions a number of times in its decision that it only applies to an open-ended clause, like the one quoted at the outset of this article.  While a delay to a subcontractor’s rights are to be given due consideration, there seems to be room for a finite pay-when-paid clause.  By example only, using a random number of months, the court might have ruled differently if the general contractor had a limited time period, such as 18 months, in which to collect from the owner.  While there is reason to argue that even 18 months might not be deemed a reasonable period for non-payment, that determination of how long a term is unreasonable could require a further court test.  It has been almost 25 years since the death of pay-if-paid contract clauses, and it may be 25 more years before direction is given regarding how long a delay in payment is an unreasonable delay in payment in a pay-when-paid contract clause.            

Clearly, this was a victory for subcontractors.  The question is whether it will apply to only a narrow type of dispute.

Laurence P. Lubka
Lubka & White LLP
Tel: (626) 301-0700

Copyright © 2017 Lubka & White, LLP. All Rights Reserved.