The California Court of Appeal for the Fourth Appellate District upheld a trial court’s decision stating that an undefined delay in payment to subcontractors is not enforceable under pay-when-paid provisions.
In Crosno Construction Inc. v. Travelers Casualty and Surety Company of America, Crosno Construction Inc. sued Travelers Casualty and Surety Company of America for payment on a bond claim after Clark Bros Inc., the prime contract on a public works project in California, filed a suit against project owner North Edwards Water District over nonpayment. Crosno’s subcontract with Clark included a pay-when-paid clause. Crosno sought payment under the surety bond but Clark tried to prevent Crosno from gaining payment while its lawsuit against North Edwards Water District was ongoing.
The central question in the appeal was whether a surety may defend a public works payment bond action by invoking an expansive pay-when-paid provision in the construction subcontract that defers payment for an indefinite period of time. Specifically, may a payment bond surety turn to a pay-when-paid provision in a subcontract to delay its bond obligation to a subcontractor until some unspecified point at which litigation between the direct contractor and project owner concludes?
The trial court found that the provision was void because it violated California Civil Code Section 8122, which prohibits any provision of a contract that waives, affects or impairs a claimant’s rights.
“Here, Crosno is being required to wait until the conclusion of litigation to proceed under the bond. There is no dispute that the provision in the subcontract being enforced by the surety is affecting and impairing Crosno’s right to receive payment under the bond,” reads the trial court’s decision.
The appellate court agreed. Its decision reads, “If Travelers could invoke the subcontract’s pay-when-paid clause to postpone its payment bond obligation until some unspecified and undefined point in time when Clark’s litigation with the district concluded, that would unquestionably and unreasonably affect or impair Crosno’s right to recover under the payment bond without either an express waiver or full payment required by sections 8124 and 8126. Accordingly, the specific pay-when-paid provision before us is ‘void and unenforceable’ (§§ 8122, 8126) against Crosno’s payment bond claim. It attempts to define as ‘reasonable’ an indefinite time period already determined to be unreasonable in Yamanishi, supra, 29 Cal.App.3d 457.”
However, the court states that not all pay-when-paid provisions are unenforceable against a payment bond claim, but this one is.