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ConstructionWebLinks.com
In
July 1997 the California Supreme Court declared that "pay
if paid" clauses commonly found in construction subcontracts
on private works projects are unenforceable. Wm.
R. Clarke Corporation v. Safeco Insurance Company of America
(1997) 15 Cal.4th 882. That decision was recently
extended to public works jobs by the California Court of
Appeals in Capitol Steel Fabricators, Inc. v. Mega Construction
Co., Inc. (October 28, 1997) D.A.R. 13399.
The dispute in this case arose out of a project on which
Mega Construction Co., Inc. was acting as the general
contractor for the Long Beach Unified School District.
Capitol Steel Fabricators, Inc. performed work on
the project as a subcontractor to Mega. After completion
of its work, Capitol Steel filed a lawsuit in 1992 claiming
Mega had failed to pay amounts due under its subcontract.
Capitol Steel's complaint included a public works stop notice
claim and statutory payment bond claim. In response
to Capitol Steel's claims, Mega, which still was negotiating
claims with the owner related to Capitol Steel's work, asserted
that Capitol Steel's claims were premature in light of "pay
when paid" provisions in the subcontract.
In 1995 Mega settled with the owner, and before receiving
the settlement proceeds, paid Capitol Steel the principal
amount of its claim. Capitol Steel still maintained
that it was entitled to interest because payment was deferred
for three plus years and to attorneys' fees as the prevailing
party. Mega countered that the timing of its payments
complied with the "pay when paid" provisions in
Capitol Steel's subcontract. As a result, the case
proceeded to trial to resolve Capitol Steel's interest and
attorneys' fees claims. The trial court found in favor
of Mega, ruling that the "pay when paid" provisions
were enforceable. The Court of Appeal initially affirmed
this judgment in an unpublished opinion but then granted
rehearing in light of the Clarke decision.
The Court of Appeal initially addressed whether three provisions
in the subcontract were "pay when paid" clauses
as Mega contended. The Court ultimately concluded
that the "pay when paid" provisions in the subcontract
not only deferred payment until money was received from
the owner but allowed Mega to never pay Capitol Steel if
payment was never received from the owner. The Court
thus concluded that the "pay when paid" clauses
had the effect of a "pay if paid" condition precedent
provision.
Because the "pay when paid" clauses were viewed
to have the same legal effect as a "pay if paid"
clause, the Court next proceeded to determine if the provisions
were enforceable in light of the Clarke decision.
Mega argued that Clarke was not controlling because
it involved a private works project. The Court of
Appeal disagreed, finding that the strong public policy
against waiver of mechanic's lien rights embodied in Civil
Code section 3262 applied equally to stop notice and payment
bond claims on a public works job. Thus, the Court,
based on the Clarke holding, concluded that a "true
pay when paid condition precedent clause" is not enforceable
on a public works project.
In an unpublished portion of the opinion, the Court touched
on a variety of issues left in the wake of its ruling invalidating
the "pay if paid" aspect of Mega's subcontract
provisions. Finding that there were factual issues
to be resolved, the Court remanded the case to the trial
court for further proceedings.
Presumably on remand, the trial court will address issues
such as (1) whether the "pay when paid" aspects
of the subcontract still are enforceable as merely timing
provisions; (2) when delay in payment by Mega converts the
timing provision to a condition precedent; (3) whether payment
could be delayed while the general contractor addressed
claims related to Capitol Steel's work with the owner; and
(4) whether the subcontractor could be required to participate
in the claims process with the owner as a condition of payment.
As the law governing application of pay when paid clauses
continues to develop, general contractors and subcontractors
alike will want to review and update subcontract provisions
pertaining to payment and claims resolution.
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