Pay-When-Paid Clauses Unenforceable

In the recent case of Crosno Construction Inc. v. Travelers Casualty, the Fourth District California Court of Appeals decided that an industry standard “pay-when-paid” contract clause (part of the AGC Short Form Subcontract) was ruled void and unenforceable. The ruling was based on the grounds that the pay-when-paid clause violated state public policy because it did not provide for payment to the subcontractor within a reasonable time since payment was delayed indefinitely for as long as it took the general contractor to pursue its claim against the project owner.

 

Practical Considerations:

 

  • Subcontractors of public works projects should review existing subcontracts to determine whether pay-when-paid provisions in their contract complies with the Crosno ruling.
  • If subcontractors on public works projects have been waiting for payment for an extended period of time due to nonpayment by the owner, recovery on a payment bond claim prior to the resolution of the dispute between the general contractor and the owner may be a feasible option. Sub-contractors in this situation may wish to first send a demand for payment to the general con-tractor citing the Crosno case.

 

Before taking action, it is recommended that public works subcontractors consult with their firm’s attorney to ask about their remedies under Crosno and what avenues to payment may be available to them.

 

As an LAPFCA member, you have access to our legal counsel. Please respond to this email if you’d like to utilize this option.

 

Click here to read the memo from legal on the case.

Click here to read the case itself.

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