California Supreme Court Declares “Pay If Paid” Void
Kegler Brown Construction Newsletter November 1, 2007
The California Supreme Court has invalidated "pay if paid" clauses in construction subcontracts in that State. A "pay if paid" clause provides that the subcontractor will be paid if, and only if, the contractor is paid by the owner for that work, shifting the risk of owner non-payment from the contractor to the subcontractor.
The Court in the case of Wm. Clarke Corp. v. Safeco Insurance, ruled that the contract language making payment by the owner to the contractor a "condition precedent" to the contractor's obligation to pay the subcontractor for work performed, is no longer enforceable in California. Additionally, the Court ruled that a bonding company could not use the owner's non-payment as an excuse for not paying a subcontractor's payment bond claim.
This decision adds to the growing legislative and judicial trend finding "pay if paid" provisions against public policy and unenforceable. It means that contractors must pay subcontractors within a reasonable period of time for their work in California and should cause prudent contractors to increase their financial scrutiny of owners to assure adequate financing for projects.