CONSTRUCTION LAW ALERT: WHAT IS A PAY-WHEN-PAID CLAUSE?

Construction Law Alert – Recent Court Decision on Enforceability of Pay-When-Paid Contract Clauses

On April 17, 2020, the CA Court of Appeal handed down a decision that will have major implications for construction industry players including general contractors, subcontractors, and sureties.

In Crosno Construction v. Travelers Casualty and Surety Company, the Court held that an open-ended “pay-when-paid” clause in a subcontractor’s contract was unenforceable. The clause allowed delaying of the payment until after general contractor’s litigation concluded against the owner.

What is a pay-when-paid clause?

A “pay-when-paid” clause addresses the timing of a contractor’s payment obligation to a subcontractor, by usually stating that a subcontractor will be paid within a certain time period after the contractor’s receipt of payment from the public entity owner.

Crosno Decision

The Court in Crosno ruled that a bond surety could not use a “pay-when-paid” clause as a defense to payment of a bond claim where payment could be delayed for an indefinite period of time.

The subcontractor’s agreement contained a “pay-when-paid” clause that allowed for payment to the subcontractor to be delayed until the general contractor’s litigation concluded against the owner, a public district.

What does Crosno mean for Construction industry players?

Crosno only applies to public works payment bonds where a subcontractor agreement contains an open-ended “pay-when-paid” clause that defers payment for an indefinite period of time.

The Court did not elaborate on what is deemed a “reasonable” period of nonpayment in a “pay-when-paid” contract clause, other than suggesting that a payment duration of more than 3 years is not reasonable.

In practical application, a general contractor may now have to pay subcontractors for amounts owed before they have been paid by the owner.A subcontractor may no longer need to wait for payment until a general contractor resolves a dispute with an owner.

In light of the recent Crosno ruling, we recommend that to avoid any payment issues, both general contractors and subcontractors contact Ghassemian Law Group to review your “pay when paid” contract clauses.