Almost every subcontract contains a provision saying the subcontractor will get paid for its work when the general gets paid. But what happens when the general is in dispute with the owner that holds up the money?

An April 17th decision out of California’s Fourth Court of Appeals looks like it provides at least a partial answer favorable to subcontractors.

The case, Crosno Construction, Inc. v. Travelers Casualty, etc., originated in the tiny Kern County hamlet of North Edwards, population 1,058, which is seven miles northeast of Edwards Air Force Base, the “Center of the Aerospace Testing Universe.” 

North Edwards Water District selected Clark Bros., Inc. as its general contractor on a public works project to build an arsenic removal water treatment plant. Clark hired subcontractor Crosno Construction to erect and coat two steel reservoir tanks. 

The subcontract contained the usual “pay-when-paid” provision, stating Clark would pay Crosno within a “reasonable time” of receiving payments from the District. In this case, reasonable time included the disclaimer “in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible parties to obtain payment . . . .”

After Crosno completed most of its work, a dispute arose between the District and Clark halting the project and progress payments. As Clark sued the District, Crosno sought to recover amounts owed under the public works payment bond that Clark had obtained for the project. 

The issue presented for the Court of Appeal’s review involved Crosno’s claim against the bond surety provided Clark by Travelers Casualty and Surety Company of America (Travelers). At issue was whether the pay-when-paid provision in Crosno’s subcontract precluded Crosno from recovering under the payment bond while Clark’s lawsuit against the District was pending.

Using precedent from Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal.4th 882 (1997), the trial court found the pay-whenpaid provision here unenforceable because it affected or impaired Crosno’s payment bond rights in violation of Civil Code section 8122.

With the facts mostly undisputed, the trial court granted Crosno’s motion for summary judgment and entered judgment in its favor for principal due plus prejudgment interest. Travelers argued the trial court misconstrued Wm. R. Clarke and erred in failing to enforce the pay-when-paid provision against the claim. 

The appeals court affirmed the lower court decision; no news yet on further appeals. If you have similar issues, consult with your attorney. 

By Ray Baca Executive Director Email: [email protected]