In a recent victory for California subcontractors, the Appellate Court in Crosno v. Travelers clarified the limitations of “pay-when-paid” clauses in public works projects involving payment bonds.
Crosno involved a “pay-when-paid” provision in a contract between a general contractor and subcontractor. The clause stated that the general contractor would pay the subcontractor within a reasonable time of receiving payments from the public entity, but that this reasonable time “in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment . . . .” The Court held that this clause did not prevent the subcontractor from recovering under a payment bond executed by the general contractor, even though the general contractor had not been paid by the public entity.
Subcontractor Wins Court Ruling!
Prior to Crosno, “pay-if-paid” clauses in contracts between general contractors and subcontractors were unenforceable as against public policy. However, pay-when-paid” clauses were allowed, so long as they allowed the subcontractor a right to be paid within a reasonable time. The Court in Crosno pointed out that the “pay-when-paid” clause at issue did not actually provide for payment within a reasonable time because it postponed payment until an undefined point in time when the general Contractor’s litigation with the public entity concluded.
The ruling in Crosno clarifies that a general contractor cannot simply create an expansive definition of the phrase “reasonable time” in order to avoid the fact that a subcontractor is entitled to be paid under a performance bond within an objectively reasonable time. Although Crosno is currently limited to the enforceability of “pay-when-paid” clauses in the context of litigation between subcontractors and the surety for a public works payment bond, the reasoning can arguably be expanded and applied to render a clause containing similar language as unenforceable in litigation between a general contractor and subcontractor.