Today’s Legal Gordian’s Knot: Paid-When-Paid Clauses, Bond Claims, and the Aftermath of Crosno


BY MARK J. RICE, ESQ., MCNEIL SILVEIRA RICE & WILEY M


oney—everyone’s favorite topic. Everyone wants to get paid for their work—to close out the


project, happily, all accounts receivable and accounts payable resolved, and onto the next project. Of course, construction projects, like


life, can have “end of project” controversies. Tis article briefly looks at the legal arena around “paid-when-paid clauses”—an area on which AGC’s Legal Advisory Committee is working and is committed to make the simple—and the not so simple—better.


Paid When Paid Clauses Versus Paid if Paid As a matter of prime contractor cash flow, prime contracts have traditionally had a provision tying the duty to pay a subcon- tractor to when the owner pays the prime contractor for the subcontractor’s work. Fair enough. Te pushback from subcontractors,


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CALIFORNIA CONSTRUCTOR MAY-JUNE 2022


including AGC member subcontractors, is also cash flow. Having done the work, subcontractors don’t want to wait for broader, owner-prime close-out negoti- ations on unrelated issues. As an example, California’s “Prompt


Payment” statutes at Civil Code Section 8800 and elsewhere impose a duty on the prime to either pay over funds received on account of a subcontractor’s work within 10 days of receipt or articulate the grounds for withhold. And they may withhold no more than 150% of the amount reason- ably and in good faith in dispute. Again, fair enough. A series of California Court decisions


interpreting statutes adopted by the Cali- fornia Legislature, have placed guardrails onto the prime contractor’s “paid-when- paid” abilities and rights. Tese can be summarized as follows, leading up to the current 2022 state of legal practicalities. • Cases have invalidated “paid-if-paid” or


“condition precedent” clauses. (Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882.) Instead, courts treat such clauses as “timing devices” permitting some “reasonable” delay in paying a subcontractor while a prime contractor awaits payment from the owner.


• Te recent Crosno v. Travelers (2020) 47 Cal. App. 5th 940 case involved a claim on a statutory public works payment bond. Te “paid-when-paid” clause defined a “reasonable time” as allowing a delay in payment until the prime contractor and its payment bond surety completed its collection remedies and/or lawsuit/arbitration with the owner.


Te Crosno Court found this duration


was not “reasonable”—too open ended to comply with Civil Code Section 8122, which prohibits clauses which “impair” the right of a subcontractor to collect on


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