Hard Hat Case Notes

• Author: By Christopher M. Burke and Lauren P. McLaughlin
• Pages: 35-37

THE CONSTRUCTION LAWYER 35Fall 2020

Published in The Construction Lawyer, Volume 40, Number 4, Fall 2020. © 2020 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion

thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

hard hat Case Notes

By Christopher M. Burke and Lauren P. McLaughlin

Christopher M. Burke is a partner with Varela, Lee, Metz

& Guarino LLP in Tysons Corner, Virginia. Lauren P.

McLaughlin is a partner with Smith, Currie & Hancock

LLP in Tysons Corner, Virginia.

California Court of Appeal Nullies Pay-When-Paid

Provision Temporally Tied to Conclusion of Dispute

Resolution

A signicant amount of case law exists addressing the

application of pay-if-paid and pay-when-paid clauses in

construction contracts. In Crosno Construction, Inc. v. Trav-

elers Casualty. and Surety Company of America, a California

Court of Appeal ruled that a surety could not rely on a pay-

when-paid subcontract clause where that clause permitted

payment to a subcontractor to be delayed until after the

conclusion of dispute resolution between the prime contrac-

tor and owner. 261 Cal. Rptr. 3d 317 (Cal. Ct. App. 2020).

The court reasoned that the potential time period in ques-

tion for payment was unreasonable, effectively forcing the

subcontractor to waive its right to payment.

Crosno Construction was a subcontractor to Clark Bros.,

Inc. in connection with Clark’s construction of two steel res-

ervoir tanks for California’s North Edwards Water District.

Because the project was a public work, Clark was required

to secure a payment bond, and he secured one from Travel-

ers Casualty and Surety Company of America (Travelers).

Crosno began work in March 2014 but was ordered to stop

work in November 2014 due to a dispute between Clark

and the District (which ultimately led to the District’s ter-

mination of Clark’s contract). By that time, Crosno had not

been paid for $562,435 for work performed and for which

invoices had been supplied.

Crosno led a claim under the Travelers payment bond,

but the surety rejected the bond claim as premature. Stat-

ing that the monies owed Crosno were subject to a dispute

between the District and Clark, Travelers relied upon the

following pay-when-paid clause in the subcontract to deny

Crosno’s claim for payment:

If Owner or other responsible party delays in mak-

ing any payment to Contractor from which payment

to Subcontractor is to be made, Contractor and its

sureties shall have reasonable time to make payment

to Subcontractor. “Reasonable time” shall be deter-

mined according to the relevant circumstances, but

in no event shall be less than the time Contractor

and Subcontractor require to pursue to their legal

remedies against Owner or other responsible party

to obtain payment, including (but not limited to)

mechanics’ lien remedies.

Crosno led suit against Travelers in state court and

sought summary judgment on the unenforceability of the

pay-when-paid clause. Crosno argued that the pay-when-

paid provision should be unenforceable because Crosno

never executed a waiver that would have impacted rights

under the payment bond. Crosno cited California Civil Code

§8122, which states:

An owner, direct contractor, or subcontractor may

not, by contract or otherwise, waive, affect, or

impair any other claimant’s rights under this part,

whether with or without notice, and any term of a

contract that purports to do so is void and unen-

forceable unless and until the claimant executes and

delivers a waiver and release under this article.

The trial court awarded summary judgment in favor of

Crosno, and Travelers appealed. Travelers’s argument before

the trial and appeals courts was that Crosno’s rights under

California Civil Code §8122 were not impaired by the sub-

contract’s pay-when-paid clause because Crosno had not

waived its right to payment; rather, Crosno merely agreed

to a timing structure for receipt of payment.

The court of appeals focused its analysis on the reason-

ableness of the timing structure in the pay-when-paid clause.

The court rst noted that, under California law, pay-if-paid

clauses are not enforceable and are void as against pub-

lic policy. However, pay-when-paid clauses are enforceable

because they “merely [x] the usual time for payment to

the subcontractor, with the implied understanding that the

subcontractor in any event has an unconditional right to

payment within a reasonable time.” (Emphasis in original).

The court deemed the linkage between Crosno’s right

to payment and the resolution of Clark’s dispute with the

District to be unreasonable. The court reasoned as follows:

“If Travelers could invoke the subcontract’s pay-when-paid

clause to postpone its payment bond obligation until some

Christopher M. Burke Lauren P. McLaughlin