The terms of payment if paid and payment when paid may modify normal (i.e., usual) payment obligations that range from the contractor to its subcontractor (or from subcontractor to its supplier). In the absence of a contractual clause or a State law[i] on payment obligations, payment for construction work is due to the substantial completion of the work. After Crosno Construction completed and invoiced work valued at $562,435, the North Edwards Water District terminated the contractor`s contract, resulting in a lawsuit brought by the general contractor. Crosno Construction then claimed the obligation to pay for the project and demanded full payment of the amounts invoiced to the general contractor. Travelers Casualty, the guarantee of payment guarantee, relied on the payment-at-time clause in the subcontract and dismissed the lawsuit, stating that Crosno Construction should await the resolution of the general contractor`s then-ongoing lawsuit against the North Edwards Water District. Crosno Construction filed a lawsuit. The Court of Appeal was careful to align its position with the precise wording of the payment clause at the time of the payment in question. The court noted that it „did not propose that all payment provisions when paid are unenforceable against a claim for payment security – only that it is.” Although Crosno Construction eventually repaid the entire balance, it took more than three years after first claiming the payment guarantee. In the eyes of the Court of Appeals, this „prolonged delay” was at odds with the remedial objective behind California`s Public Works Act. Has a reasonable period of time to make the payment to the subcontractor. A reasonable period of time will be set depending on the circumstances, but no event will pass less than the time it takes contractors and subcontractors to exercise their remedies against the owner or any other party responsible for obtaining payment, including, but not limited to, the mechanics` privileges.
According to Clarke v. Safeco, an appeals court applied the same principles to exclude the application of a payment-by-payment provision in a public construction project. (Capitol Steel Fabricators, Inc.c. Mega Const. Co. (1997) 58 Cal.App.4th 1049.) In cases where the parties intend to create a payment obligation at the time of payment, the provision of payment at the time of payment (1) should specify what constitutes a reasonable period of time for when a payment is made by the owner and when no payment is made by the owner; and (2) expressly state that payment by the Owner is not a condition precedent of the Contractor`s payment obligation. While these provisions are beneficial to the contractor, they can strain the relationship with the subcontractor. Due to the unbalanced nature of this provision, there are three considerations that every contractor (and their lawyer) must consider before including a „payment if paid” or „payment paid” clause in their subcontract. Confusion as to which clause is actually provided for in the contractual documents has given rise to significant disputes when subcontractors are not paid. Differences in the interpretation and application of these clauses may mean the difference between requiring subcontractors to pay within a reasonable time after receipt of the invoice or withholding payments until disputes with the owner are resolved.
In California, the wording of the „pay-when-paid” contract, typically found in the general contractor`s subcontracting agreement, may no longer be enforceable. A contractual provision requiring a subcontractor to wait for the general contractor to resolve its legal dispute with the owner before it can claim payment of a payment guarantee was introduced in a recent decision of the Court of Appeal of Crosno Construction, Inc. vs. Travelers Casualty and Surety Company of America (2018) WL 4183622 (Cal.App. 4 Dist.), declared unenforceable. California law distinguishes between payment clauses at the time of payment and „payment if paid” clauses. Payment if paid clauses have not been enforceable in California for some time. However, if a clause is a payment clause at the time of payment, it is enforceable, but only for a reasonable period of time. Crosno has now wondered when is appropriate.
It is probably much shorter in Crosno. At trial (and later in both appeals), Safeco argued that it was not required to pay any of the subcontractors because it was protected by the payment clauses if payment in each of the subcontracts. The California Supreme Court upheld the lower court decisions against Safeco. The court concluded that the provisions of payment if paid are contrary to public policy because, in the event of non-payment by the owner, they result in an inadmissible indirect waiver of the mechanical privileges protected by the Constitution of the subcontractors. The California Lower Court found that the payment clause at the time of the subcontractor`s payment was unenforceable because it covered Crosno Construction`s claims for payment under California`s anti-waiver law, Cal. Civ. Code § 8122, unacceptably impaired. This law governs payment rights for public works projects in California and invalidates any provision of a contract that interferes with a contractor`s payment rights.
According to the majority opinion[viii], a payment clause if paid is a condition precedent of payment, and a clause of payment when paid is only a temporal provision. Recognizing the difference between these two types of payment clauses is therefore crucial as they can determine whether the contractor is obligated to make payments to a subcontractor if payment is never received from the owner. A well-worded term „pay-for-pay” will explicitly address this scenario: in contrast, California and New York have completely abolished the pay-as-you-go clause. In other States, the enforceability of these provisions remains uncertain, but courts have tended to strike them down. The following states do not seem to have an unshakable rule on the subject, but tend to discriminate against them and have previously invalidated payment clauses at the time of pay for technical or other reasons: Alabama, Connecticut, Louisiana, Massachusetts, Missouri, Pennsylvania, Tennessee and Washington, D.C. The Federal Courts of Appeals for the First and Fourth Circuits have also struck down such provisions for a variety of reasons. Learn more about the difference between payment terms—if or payment-when—and why they matter. There are some states where „pay if paid” clauses are unenforceable – these include major states such as California, New York and Ohio.
There are many more states where „pay when paid” clauses are allowed, but only as a synchronization mechanism (as described above). Simply put, a „payment at the time of payment” clause is the prime contractor who informs the subcontractor that they will pay it after receiving payment from their client. This is usually the owner, but can also be the developer. Similarly, a „pay-if-paid” clause is the prime contractor, informing the subcontractor that it will be paid if – and only if! – the prime number is paid first. As we mentioned earlier, the decision on how to design the payment provision if/when paid depends on this: At Crosno Construction, a general contractor has been hired by the North Edwards Water District to act as a general contractor for the construction of an arsenic removal water treatment plant. The general contractor entrusted Crosno Construction with the construction and coating of two steel tanks. Crosno Construction`s subcontract included a payment clause at the time of payment that stipulated that the general contractor and its crosno Construction guarantors would pay for its work within „a reasonable time.” however, in no event will it be shorter than the time it takes contractors and subcontractors to exercise their remedies against the owner or any other responsible party in order to receive payment, including (but not limited to) privileges for mechanics. The Crosno case arose from a project to improve the water system that was owned by a public owner. Crosno was a subcontractor to the general contractor for the project and Crosno was the client of a guarantee of payment for the project. .