Filed 4/17/20

CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

CROSNO CONSTRUCTION, INC., D075561, D075562

Cross-complainant and Respondent,

v. (Super. Ct. No. CIVDS1511273)

TRAVELERS CASUALTY AND SURETY

COMPANY OF AMERICA,

Cross-defendant and Appellant.

APPEALS from a judgment and postjudgment order of the Superior Court of San

Bernardino County, Gilbert Ochoa, Judge. Affirmed.

SMTD Law, Jonathan J. Dunn, Teresa L. Polk and Ravpreet K. Bhangoo for

Defendant and Appellant.

Barnick | Hodges Law Corporation, John F. Hodges and Whitney Northington

Barnick for Plaintiff and Respondent.

Rutan & Tucker, Paul Aherne and Alyssa Roy for Construction Employers'

Association as Amicus Curiae on behalf of Defendant and Appellant.

Crawford & Bangs and E. Scott Holbrook, Jr. for American Subcontractors

Association as Amicus Curiae on behalf of Plaintiff and Respondent. North Edwards Water District (the District) selected Clark Bros., Inc. (Clark) as its

general or direct contractor on a public works project to build an arsenic removal water

treatment plant. Clark hired subcontractor Crosno Construction (Crosno) to build and

coat two steel reservoir tanks. The subcontract contained a "pay-when-paid" provision

that stated Clark would pay Crosno within a reasonable time of receiving payments from

the District, but that this reasonable time "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 party to obtain payment . . . ." After Crosno completed most

of its work, a dispute arose between the District and Clark halting the project. As Clark

sued the District, Crosno sought to recover payments owed under the public works

payment bond that Clark had obtained for the project.

This appeal involves Crosno's payment bond claim against the bond surety,

Travelers Casualty and Surety Company of America (Travelers). At issue is whether the

pay-when-paid provision in Crosno's subcontract precludes Crosno from recovering

under the payment bond while Clark's lawsuit against the District remains pending.

Relying on Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882 (Wm. R.

Clarke), the trial court found the pay-when-paid provision here unenforceable because it

affects or impairs Crosno's payment bond rights in violation of Civil Code section 8122.1

With the facts largely undisputed, the court granted Crosno's motion for summary

judgment and entered judgment in its favor for principal due plus prejudgment interest.

1 Further statutory references are to the Civil Code unless otherwise indicated. 2 Travelers asserts the trial court misconstrued Wm. R. Clarke and erred in failing to

enforce the pay-when-paid provision against the bond claim. After carefully considering

the parties' arguments, we agree with the trial court's sound analysis. Enforcing the pay-

when-paid provision found in Crosno's subcontract would postpone Crosno's right to

recover under the payment bond for an indefinite time period until Clark's litigation

against the District concludes. Such a result would unreasonably affect or impair

Crosno's statutory payment bond remedy (§ 8122) and is unenforceable for the same

reasons expressed in Wm. R. Clarke, supra, 15 Cal.4th 882. Because Travelers may not

invoke this particular pay-when-paid provision as a defense to payment bond liability, we

affirm the judgment. Travelers raises no separate argument as to the postjudgment award

of attorney's fees; accordingly, we likewise affirm that order.

FACTUAL AND PROCEDURAL BACKGROUND

The District sought lump sum bids for a public water system improvement project

funded by the State. The specifications required general contractors submitting bids to

secure a payment bond providing coverage if it or any of its subcontractors failed to make

payments due. Clark obtained a public works payment bond from Travelers to secure the

payment of subcontractors and suppliers. As the surety, Travelers became obliged upon

Clark's failure to make payments due. In addition, the payment bond covered reasonable

attorney's fees. Clark listed Crosno as a subcontractor in its bid. The District selected

Clark as its direct contractor (§ 8108).

Thereafter, Clark executed a subcontract agreement with Crosno. Crosno agreed

to fabricate, erect, and coat two 250,000-gallon welded steel water reservoir tanks for the

3 sum of $630,000. Among other terms, the subcontract required Crosno to be paid for

labor and material in monthly progress payments, subject to a retention, upon receipt of

payments from the District.2 Critical to this case, the subcontract further contained the

following pay-when-paid provision in the event the District delayed making payments to

Clark:

"If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. 'Reasonable time' shall be determined according to the relevant circumstances, but 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 party to obtain payment, including (but not limited to) mechanics' lien remedies."

Crosno began work in March 2014. On November 6, it was ordered to halt work

because a dispute had arisen between Clark and the District. By that point, Crosno had

supplied and fabricated the steel, shop-primed the steel, transported the steel to the site,

2 "Construction contracts often call for payment in installments—known commonly as progress payments—due when a project reaches various stages of completion. [Citation.] By arranging for progress payments, participants in a construction-related transaction build in an incentive for contractors to complete work and provide an owner some protection against the risk of nonperformance [citation], while permitting contractors to obtain an essential cash flow. As an additional hedge against nonperformance and incentive for completion, an owner may withhold a small percentage of the money due at each stage—typically 5 to 10 percent—until the project is finished. [Citations.] If the contractor defaults, or subcontractors assert mechanics liens for nonpayment, the owner can use this retention fund to make payment or seek substitute performance. [Citations.] Once work is done to the owner's satisfaction and the period for filing liens has expired, the owner will release the retention." (United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2018) 4 Cal.5th 1082, 1087−1088, fn. omitted (United Riggers).) 4 erected the two 250,000-gallon tanks, and almost completed field coating work. Most of

the submitted invoices remained unpaid, with a total of $562,435 owed to Crosno for the

work completed to that point.

The next day (November 7) Crosno filed a stop payment notice with the District.

Two weeks later, Clark told Crosno the District had terminated its contract. This meant

that Clark could not pay Crosno the $562,435 owed for completed work.

On December 18, 2014, Crosno gave Travelers a written notice of its claim under

the payment bond. The following month, Travelers replied by letter rejecting the bond

claim as premature. Invoking the pay-when-paid provision in Crosno's subcontract,

Travelers asserted that no funds were due until Clark's then-pending lawsuit against the

District concluded. Specifically, Travelers was referring to a lawsuit filed just days before

in which Clark had sued the District for breach of contract, breach of implied warranty,

and declaratory relief.3

Crosno initially filed suit in Kern County to recover the $562,435 due (No. S-

1500-CV-284661). The first two causes of action, alleging breach of contract as to Clark

and enforcement of the stop notice as to the District, are not relevant to this appeal.

Crosno's third cause of action was against Travelers for recovery on the payment bond.

Travelers filed an answer, asserting among its affirmative defenses any defense held by

3 Originally filed in Kern County in January 2015 (No. S-1500-CV-283924 SPC), Clark's action against the District was transferred to San Bernardino County and assigned a new case number (No. CIVDS1511273). In early 2016, Clark amended its complaint to add allegations and causes of action against the State of California, Water Resources Control Board. 5 bond principal Clark. Crosno's action was later transferred to San Bernardino County

and consolidated for all purposes with Clark's pending action against the District.

Roughly a year later Crosno filed a motion for summary judgment or summary

adjudication as to its payment bond cause of action against Travelers. It argued that the

pay-when-paid provision in the subcontract was void and unenforceable because Crosno

had never executed a waiver and release required under section 8122 to validly "waive,

affect, or impair" its payment bond rights. It further asserted that Travelers could not rely

on the subcontract provision given the independent nature of the payment bond remedy.

Opposing the motion, Travelers did not dispute the essential facts underlying

Crosno's right to payment. It instead focused on the fact that litigation in Clark's lawsuit

against the District remained pending. Travelers argued (as it does on appeal) that

section 8122 was not implicated because the pay-when-paid clause simply set the time

for payment and did not waive Crosno's bond rights. It further relied on suretyship

principles to argue that the subcontract defined its obligation as surety under the payment

bond.

The trial court granted Crosno's motion. In a detailed statement of decision, it

explained that although the payment clause in the subcontract was a "pay-when-paid"

provision, rather than a "pay-if-paid" provision, the question remained whether applying

the provision would impermissibly affect or impair Crosno's statutory payment bond

6 rights under the antiwaiver statute, section 8122.4 Based on Wm. R. Clarke and other

authorities, the court found the pay-when-paid provision void because it violated the

policies underlying section 8122. Accordingly, it awarded judgment in favor of Crosno

against Travelers of $562,435, while staying enforcement of its ruling for 60 days to

allow settlement.

After the ruling, Crosno filed a motion for prejudgment interest (§ 3287, subd.

(a)). Crosno urged the court to assess statutory prejudgment interest from December 18,

2014, the date that it submitted its payment bond claim to Travelers. Accepting Crosno's

claim, in August 2017 the court entered judgment in favor of Crosno against Travelers

for $562,435 in principal, together with 10 percent prejudgment interest from December

18, 2014. Travelers appealed the judgment.

Meanwhile, Clark, Crosno, and other entities continued settlement negotiations in

Clark's still-pending action against the District. The District interpleaded funds to satisfy

the outstanding principal judgment in favor of Crosno on its bond claim. Crosno later

requested and received an award of $22,500 from Travelers in attorney's fees. Travelers

filed a second notice of appeal from that postjudgment attorney's fee award. The two

appeals were consolidated. Because the judgment itself has since been satisfied,

Travelers's appeal concerns its liability for prejudgment interest and attorney's fees under

the payment bond.

4 The remedial scheme for payment in public works projects and the trial court's ruling are detailed in the discussion. 7

DISCUSSION

The central question in this appeal is whether a surety may defend a public works

payment bond action by invoking an expansive "pay-when-paid" provision in the

construction subcontract that defers payment for an indefinite period of time.

Specifically, may a payment bond surety turn to a "pay-when-paid" provision in a

subcontract to delay its bond obligation to a subcontractor until some unspecified point at

which litigation between the direct contractor and project owner concludes? The trial

court rejected that argument on summary judgment, applying the reasoning in Wm. R.

Clarke to find the specific pay-when-paid provision at issue unenforceable. Applying de

novo review to this question of law on undisputed facts, we agree with the trial court's

reasoning and affirm both the judgment and the postjudgment order.

1. Legal Framework

a. Statutory Payment Remedies for Construction Projects

The right to a mechanics lien derives from California's constitution. "Mechanics,

persons furnishing materials, artisans, and laborers of every class, shall have a lien upon

the property upon which they have bestowed labor or furnished material for the value of

such labor done and material furnished; and the Legislature shall provide, by law, for the

speedy and efficient enforcement of such liens." (Cal. Const., art. XIV, § 3.) Thus, "[a]

mechanics lien gives a claimant (e.g., a contractor, supplier, or laborer) a real property

security interest in a private work of improvement to secure the right to be paid for work

and material." (4 Witkin, Summary of Cal. Law (11th ed. 2017) Security Transactions in

Real Property, § 27, p. 820.) A lien claim is enforced by service, recordation, and

8 foreclosure. (Ibid.) Because they are constitutionally derived, statutes governing liens

and other relief are remedial in nature and liberally construed. (Wm. R. Clarke, supra, 15

Cal.4th at p. 889.)

Part 6 of division 4 of the Civil Code (§§ 8000−9566) lays out a comprehensive

statutory scheme to resolve payment disputes in construction projects. Different

remedies are available in public versus private construction projects. (Compare § 8160 et

seq. with § 9000 et seq.) Sovereign immunity principles prevent mechanics liens from

being asserted on public works projects. (N.V. Heathorn, Inc. v. County of San Mateo

(2005) 126 Cal.App.4th 1526, 1535; Liton Gen. Engineering Contractor, Inc. v. United

Pacific Insurance (1993) 16 Cal.App.4th 577, 584 (Liton).) Accordingly, the principal

statutory remedies for claimants who have furnished labor, services, equipment, or

material on a public works project are stop payment notices and payment bonds. (§ 9100,

subd. (a)(1).) Nevertheless, the statutes dealing with both private and public works "deal

with the same specific subject, and are to be construed together." (Globe Indemnity Co.

v. Hanify (1933) 217 Cal. 721, 730, accord Capitol Steel Fabricators, Inc. v. Mega Const.

Co. (1997) 58 Cal.App.4th 1049, 1061 (Capitol Steel).)

A stop payment notice notifies a project owner (here, the District) to withhold

funds due to the direct contractor sufficient to satisfy the amount of the stop notice claim,

plus reasonable litigation costs. (§ 9358; see generally, §§ 9350−9510.) A payment bond

"guarantees payment to claimants on a construction project to the extent they are not

otherwise paid." (4 Witkin, Summary of Cal. Law (11th ed. 2017) Security Transactions

9 in Real Property, § 27, p. 820; see generally, §§ 9550−9566.) This appeal turns on

Crosno's payment bond action against Travelers, so we focus on those statutes.

As the entity that has a direct contractual relationship with the project owner,

Clark is a "direct contractor." (§ 8018.) Every direct contractor awarded a public works

contract in excess of $25,000 must, before beginning the work, provide a payment bond

to the public entity. (§ 9550, subd. (a).) "In addition to protection of the public entity

from liability for a defaulting contractor, the purpose of the surety bond is to provide a

distinct remedy to public works subcontractors and suppliers of labor or materials to

public works projects." (Liton, supra, 16 Cal.App.4th at p. 584.) If the direct contractor

fails to satisfy its payment obligation to the subcontractor or supplier, the surety must do

so. (§ 9554, subd. (b)(1).)

The statutory scheme carefully protects against the unfair or imprudent waiver of

remedial rights. (See Cal. Mechanics' Liens and Related Construction Remedies

(Cont.Ed.Bar 4th. ed. 2019) § 4.11, p. 4-13.) Section 8122 provides:

"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 unenforceable unless and until the claimant executes and delivers a waiver and release under this article."

A claimant may waive its statutory remedies only by signing a written waiver and

release. (Cal. Mechanics' Liens and Related Construction Remedies, supra, § 4.11, p. 4-

13, discussing Civ. Code, § 8124.) The statutes permit four types of waivers: a

conditional waiver and release upon progress payment (§ 8132); an unconditional waiver

10 and release upon progress payment (§ 8134); a conditional waiver and release upon final

payment (§ 8136), and an unconditional waiver and release upon final payment (§ 8138).

In other words, "waiver and release of [payment bond] rights is permitted only in

conjunction with payment, or a promise of payment, and a conditional release is effective

only if the claimant is actually paid." (Wm. R. Clarke, supra, 15 Cal.4th at p. 889; see

§ 8124, subd. (b).)5

Enforcing these safeguards, section 8126 provides:

"An oral or written statement purporting to waive, release, impair or otherwise adversely affect a lien or claim is void and unenforceable and does not create an estoppel or impairment of the lien or claim unless either of the following conditions is satisfied: [¶] (a) The statement is pursuant to a waiver and release under this article. [¶] (b) The claimant has actually received payment in full for the claim."

b. Defining a Surety's Payment Bond Obligation

A surety bond is governed by general rules of contract interpretation—a court

seeks to discover the parties' intent by examining bond language in its ordinary sense.

(Electrical Electronic Control, Inc. v. Los Angeles Unified School Dist. (2005) 126

Cal.App.4th 601, 612.) As the payment bond surety, Travelers's obligation "is measured

by the terms of the bond and the statutes referenced in the bond." (Wm. R. Clarke, supra,

15 Cal.4th at p. 893.) Reflecting its remedial nature, a payment bond "shall be construed

5 Wm. R. Clarke relied on the prior statutes governing mechanics liens and related remedies (former § 3082 et seq, now § 8000 et seq.). Effective January 1, 2012, those provisions have been relocated without substantive change to newly enacted Part 6 of Division 4 of the Civil Code. (See 4 Witkin, Summary of Cal. Law (11th ed. 2017) Security Transactions in Real Property, § 27, p. 819.) 11 most strongly against the surety and in favor of all persons for whose benefit the bond is

given." (§ 8154, subd. (a).) The sole conditions of recovery are that the person is an

authorized claimant who has not been paid the claim in full. (§ 8154, subd. (c).)

The payment bond at issue here is broadly worded. It obligates Travelers to pay

amounts due up to $6,143,863 with respect "to work or labor under the contract" between

Clark and the District if Clark or its subcontractors failed to pay any person named in

former section 3181, now section 9100. That statute in turn lists among those eligible to

file a stop payment notice or payment bond claim "[a] person that provides work for a

public works contract, if the work is authorized by a direct contractor, subcontractor,

architect, project manager, or other person having charge of all or part of the public

works contract." (§ 9100, subd. (a)(1).) In other words, because Clark failed to pay

Crosno for subcontracting work it completed on the District's public works project,

Crosno is entitled to make a claim under the payment bond.

c. Application of Subcontract Payment Provisions to Bond Recovery

Wm. R. Clarke confronted a then-emerging trend of general contractors inserting

"pay if paid" provisions in their subcontract agreements. (Wm. R. Clarke, supra, 15

Cal.4th at p. 885.) "A pay if paid provision makes payment by the owner to the general

contractor a condition precedent to the general contractor's obligation for work the

12 subcontractor has performed." (Ibid.)6 The question before the court in Wm. R. Clarke

was whether the surety could use such a provision as a defense against a subcontractor's

action under the payment bond. Concluding it could not, the court explained that "pay if

paid" provisions are unenforceable as contrary to public policy. (Id. at p. 886.) Such

provisions effectively waive the subcontractor's mechanics lien rights, violating the

antiwaiver provisions in section 8122. (Ibid.; see Croskey et al., Cal. Practice Guide:

Insurance Litigation (The Rutter Group 2019) ¶¶ 6:3580 to 6:3581.)

Following Wm. R. Clarke, an appellate court applied the same principles to

preclude enforcement of a pay-if-paid provision in a public works project. (Capitol Steel,

supra, 58 Cal.App.4th at p. 1062.)7 As the Capitol Steel court concluded, "the general

contractor's liability to its subcontractor for work performed on a public works project

may not be made contingent on the governmental entity's payment to a general contractor

. . . ." (Ibid.) "A contract provision that makes payment by the public entity to the

6 "In contract law, a 'condition precedent' is 'either an act of a party that must be performed or an uncertain event that must happen before the contractual right accrues or the contractual duty arises.' " (Wm. R. Clarke, supra, 15 Cal.4th at p. 885, fn. 1.) The pay-if-paid provision in the Wm. R. Clarke subcontracts read: " 'Receipt of funds by Contractor from Owner is a condition precedent to the Contractor's obligation to pay Subcontractor under this Agreement, regardless of the reason for Owner's nonpayment, whether attributable to the fault of the Owner, Contractor, Subcontractor or due to any other cause.' " (Id. at pp. 886−887 & fn. 3.) Each of the subcontracts also included an addendum reiterating the pay-if-paid clause and yet purporting to preserve the subcontractors' mechanics lien rights. (Ibid.)

7 The deferred payment language in Capitol Steel had the same effect as the "pay if paid" clause in Wm. R. Clarke, "unambiguously defer[ring] payment until there ha[d] been a transfer of moneys from the district to the general contractor." (Capitol Steel, supra, 58 Cal.App.4th at pp. 1058, 1060, fn. 5.) 13 contractor a condition precedent to the contractor's obligation to pay a subcontractor for

its work—that is, a 'pay if paid' clause—is void as against public policy and

unenforceable as a matter of law." (Cal. Mechanics' Liens and Related Construction

Remedies (Cont.Ed.Bar 2019) § 4.149, p. 4-105 [discussing Capitol Steel].)

This case considers the effect of a "pay-when-paid" provision in a construction

subcontract. As distinguished from a pay-if-paid provision, a pay-when-paid provision is

not a true condition precedent and instead "merely [fixes] 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." (Wm. R. Clarke, supra,

15 Cal.4th at p. 885, italics added.) As an example of a pay-when-paid provision, Wm. R.

Clarke cites Yamanishi v. Bleily & Collishaw, Inc. (1972) 29 Cal.App.3d 457

(Yamanishi), an older case with parallels to this appeal.

The subcontractor in Yamanishi helped construct a public park. A dispute arose

between the city redevelopment agency and the direct contractor. (Yamanishi, supra, 29

Cal.App.3d at pp. 459, 461.) When the direct contractor later stopped paying its

subcontractor, the subcontractor sued it and the bond surety to recover the balance due

and attorney's fees. (Id. at p. 460.) The contractor and surety defended the claim by

pointing to the subcontract, which stated the direct contractor would pay the

subcontractor "upon receipt of each payment received from the Owner." (Id. at p. 461.)

Relying on this subcontract language, the trial court ruled that until the "condition

precedent" occurred, no payment obligation accrued. (Id. at p. 462.)

14 The appellate court reversed. As reasonably construed, this provision was not a

condition precedent and merely provided the time in which the subcontractor would

ordinarily be entitled to progress payment for its work. (Yamanishi, supra, 29

Cal.App.3d at pp. 462−463.) If the contractor was denied payment through no fault of

the subcontractor, no specific time for payment was provided in the subcontract, and the

default rule was that payment was due within a reasonable time upon the subcontractor's

performance. (Ibid.) As the court explained, a contrary interpretation was unreasonable:

"Defendants' interpretation of paragraph (r) would postpone payments earned by a subcontractor, itself without fault, until a dispute between the contractor and the owner is resolved, perhaps months or even years later. Indeed, it gives no reasonable assurance that such a dispute would ever be resolved. While the question is unsettled the contractor continues unobligated to the subcontractor. On the other hand, if the dispute be lost because of the contractor's fault, then surely the contractor must pay his subcontractor creditor from other funds; if won, he must apply all or a substantial part of the money he receives toward his subcontractual obligations. His interest would seem more likely to benefit from avoidance of any settlement with the owner. It is unlikely that such a result was intended by the contracting parties." (Id. at p. 463.)

In short, these cases lay out the broad framework for evaluating whether

subcontract payment provisions unreasonably affect or impair a claimant's payment bond

recovery. The subcontract between Crosno and Clark includes a slightly different

payment timing provision than that found in Wm. R. Clarke, Capitol Steel, and

Yamanishi. Nevertheless, as we explain below, the trial court properly extended the

principles set forth in those cases to conclude that Travelers could not rely on the

subcontract's definition of "reasonable time" to argue that no payment bond obligation

accrued until Clark's litigation with the District concluded.

15 2. The Trial Court Properly Rejected Travelers's Defense.

As the trial court found, and the parties do not dispute, the payment timing

provision in Crosno's subcontract is a pay-when-paid provision. Regardless of whether

Clark is successful in its litigation with the District, it remains obligated to pay. The

provision merely fixes the time upon which Clark's payment becomes due. This

distinguishes the facts from those in Wm. R. Clarke and Capitol Steel, where the

subcontract provision set a condition precedent for a subcontractor's right to payment to

accrue.

Under the subcontract, Clark was required to pay Crosno within 10 days after it

received payment from the District. If the District delayed paying Clark, Clark would

have a reasonable time to pay, which "in no event" would be less than the time required

"to pursue to conclusion [its] legal remedies against [the District]." This latter clause

distinguishes the facts here from the general contractor's argument in Yamanishi. But the

effect is the same: "reasonable time" is defined to include an indefinite timeframe that

Yamanishi held was unreasonable. (Yamanishi, supra, 29 Cal.App.3d at pp. 462–463.)

California courts have yet to decide whether an expansive "pay-when-paid"

subcontract provision similar to the one here can be invoked as a defense by a surety to a

payment bond claim. Extending the reasoning in Wm. R. Clarke, the trial court

concluded that the provision was void and unenforceable because it impaired or affected

Crosno's payment bond rights in violation of section 8122. Even though the subcontract

provision was not a pay-if-paid provision, the court reasoned that the same antiwaiver

safeguards applied:

16 "The issue is whether application of the subcontract provision unreasonably affects or impairs right sunder the bond contrary to the policy of [Civil Code,] § 8122. In other words, whether under the circumstances and consideration of the policy underlying the Wm. R. Clarke and Capitol Steel decisions, the provision is void as applied to the surety's obligation under the bond.

"After considering the case law and arguments at [the] hearing, the court finds the provision void as a violation of the underlying public policy of the anti-waiver provision of [Civil Code,] § 8122. Section 8122 prohibits any provision of a contract that 'waive[s], affect[s], or impair[s] claimants rights,' unless such provision is accompanied by a valid release and waiver. To be valid, a release and waiver must be accompanied by payment. ([Civil Code,] § 8124.)

"Here, Crosno is being required to wait until the conclusion of litigation to proceed under the bond. There is no dispute that the provision in the subcontract being enforced by the surety is affecting and impairing Crosno's right to receive payment under the bond."

As the trial court explained, although a pay-when-paid provision might properly allow

payment to be delayed for a reasonable period of time after completion of work,

enforcing the provision here "does not provide for payment within a reasonable time."

We agree with the trial court's thoughtful analysis. If Travelers could invoke the

subcontract's pay-when-paid clause to postpone its payment bond obligation until some

unspecified and undefined point in time when Clark's litigation with the district

concluded, that would unquestionably and unreasonably affect or impair Crosno's right to

recover under the payment bond without either an express waiver or full payment

required by sections 8124 and 8126. Accordingly, the specific pay-when-paid provision

before us is "void and unenforceable" (§§ 8122, 8126) against Crosno's payment bond

claim. It attempts to define as "reasonable" an indefinite time period already determined

to be unreasonable in Yamanishi, supra, 29 Cal.App.3d 457. As the Supreme Court

17 explained in Wm. R. Clarke, "[t]he Legislature's carefully articulated anti-waiver scheme

would amount to little if parties to construction contracts could circumvent it by means of

pay if paid provisions having effects indistinguishable from waivers prohibited under

Civil Code [former] section 3262 [, now section 8126]." (Wm. R. Clarke, supra, 15

Cal.4th at p. 890.)

As the trial court observed, the purpose behind the public works payment bond is

to provide subcontractors like Crosno " 'a quick, reliable and sufficient means of

payment.' " (Cooley v. Freeman (1928) 204 Cal. 59, 62 (Cooley).) The filing deadlines

for payment bond actions reflect this aim. An action against a surety on the payment

bond must be filed within six months of when a stop notice may be filed (§ 9558), which

in turn may be filed 90 days after cessation of work (§ 9356, subd. (b)). As Crosno

suggests, enforcing the pay-when-paid clause as written could effectively nullify the bond

whenever the direct contractor's litigation with the owner extended beyond the limitations

period.8 Indeed, relying on these same timing requirements, courts have refused to apply

subcontract provisions in a manner that restricts statutory payment bond recovery.

(Pneucrete Corp. v. U.S. Fid. & Guarantee Co. (1935) 7 Cal.App.2d 733, 740 [arbitration

clause did not preclude bond claim] (Pneucrete); see also United States ex rel Walton

Technol., Inc. v. Weststar Eng'g, Inc. (9th Cir. 2002) 290 F.3d 1199, 1208 [pay " 'when

and if' " paid clause did not preclude federal claim under parallel Miller Act] (Walton).)

8 For instance, at the time judgment was entered in Crosno's favor on the payment bond action, litigation between Clark and the District had been pending for two and a half years. 18 Travelers responds that statute of limitations concerns could be resolved by filing

and immediately staying the payment bond action pending resolution of Clark's litigation

against the District. Amicus curiae Construction Employers' Association (CEA) suggests

that a payment bond action filed after Clark's litigation concludes could avail of equitable

tolling to overcome a limitations bar. But as the American Subcontractors Association

points out in its amicus curiae brief, either procedure delays the payment bond action for

an indefinite period, thereby unreasonably affecting or impairing Crosno's payment bond

rights in violation of section 8122. Open-ended delay likewise conflicts with the purpose

behind the payment bond of providing subcontractors like Crosno an expedient means of

recovery. (Cooley, supra, 204 Cal. at p. 62.)

Also supporting the trial court's view, section 8152, subdivision (d) prevents a

surety from avoiding liability on a bond based on "[a] condition precedent or subsequent

in the bond purporting to limit the right of recovery of a claimant otherwise entitled to

recover pursuant to a contract, agreement, or bond." As the trial court explained,

"If the provision at issue was included in the payment bond, there would be no dispute it would be unenforceable as against the policy underlying payment bonds. However, this is exactly the result of enforcement of the provision; it results in Crosno having to wait until legal remedies are pursued, albeit by Clark, until [it] can recover on the bond. Travelers has effectively imposed an unreasonable limit on the terms of payment on the bond. It is seeking to do indirectly what it cannot do directly."

Pursuant to section 8152, Travelers could not insert a condition in the bond limiting a

subcontractor's bond recovery to those claims as to which litigation against the owner had

concluded. It follows that Travelers may not indirectly achieve the same result by

19 applying the subcontract's definition of "reasonable time" to avoid its bond obligation

while Clark's lawsuit against the District remained pending.

3. Travelers's Counterarguments Are Unpersuasive.

Travelers and amicus curiae CEA raise four broad counterarguments as to why the

pay-when-paid provision in Crosno's subcontract should provide a defense to its liability

under the payment bond. As we explain, none of the arguments is persuasive.

a. Permissibility of pay-when-paid clauses

Travelers argues that pay-when-paid clauses, in contrast to pay-if-paid clauses, are

enforceable because they merely fix "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." (Wm. R. Clarke, supra, 15 Cal.4th at p. 885.)

True enough. We do not suggest that all pay-when-paid provisions are unenforceable

against a payment bond claim—just that this one is. The provision is in effect an attempt

to define as "reasonable time" as a period previously construed by courts as unreasonable.

(Yamanishi, supra, 29 Cal.App.3d at pp. 462−463; see Wm. R. Clarke, supra, 15 Cal.4th

at p. 885 [citing Yamanishi]; Capitol Steel, supra, 58 Cal.App.4th at p. 1057 ["This body

of law only permits payment to be delayed for a reasonable time after the completion of

the work under the subcontract."].) To permit Travelers to enforce the pay-when-paid

clause to postpone payment for an indefinite timeframe under the bond would

unreasonably affect or impair Crosno's remedial rights under the payment bond.

Although Travelers is right that Crosno was eventually repaid its full principal, that

happened more than three years after Crosno sought recovery under the payment bond.

20 Crosno has yet to recover any prejudgment interest, which remains the subject of this

appeal. This protracted delay conflicts with the remedial purpose behind the statutory

scheme, which we construe "most strongly against the surety and in favor of all persons

for whose benefit the bond is given." (§ 8154, subd. (a).)

Striving to recast Wm. R. Clarke as supporting its view, Travelers claims the case

"held" that pay-when-paid clauses in subcontracts are enforceable as not violative of

public policy. Wm. R. Clarke did not so hold. It merely distinguished pay-if-paid clauses

from pay-when-paid clauses as a general matter, explaining that the former operate as a

condition precedent for payment whereas the latter merely set the usual time for payment,

"with the implied understanding that the subcontractor in any event has an unconditional

right to payment within a reasonable time." (Wm. R. Clarke, supra, 15 Cal.4th at p. 885,

italics added.) The court then proceeded to explain why the pay-if-paid provision at issue

had the same effect as an impermissible waiver of payment bond rights under current

sections 8122, 8124, and 8126. As the trial court reasoned here, the principles underlying

the Wm. R. Clarke decision support a conclusion that the particular pay-when-paid clause

in Crosno's subcontract is unenforceable because it has the effect of delaying payment to

the subcontractor for what may be—and in this case was—an unreasonably long period

of time.

Travelers and CEA suggest that the Legislature's enactment of prompt payment

statutes demonstrate approval of contractual arrangements that require direct contractors

to first pursue payment from project owners. But we agree with Crosno that this is an

"apples to oranges argument." Enacted in 1990, the prompt payment statutes sought to

21 address industrywide problems with payment delays to subcontractors. They impose

comprehensive deadlines for progress and retention payments, enforced by statutory

penalties and fee-shifting provisions "intended to discourage owners and direct

contractors from withholding monies owed as a way of granting themselves interest-free

loans." (United Riggers, supra, 4 Cal.5th at p. 1088.) These statutes simply create a

mechanism to facilitate prompt progress and retention payments in the usual course.

They bear no relation to whether the pay-when-paid provision in Crosno's subcontract

can forestall accrual of Travelers's payment bond obligation for an indefinite period until

Clark's litigation with the District concludes.

b. Scope of section 8122

Next, Travelers protests that the trial court "twisted the statutory language into

something it is not," by extending section 8122 to a contract provision that merely affects

or impairs Crosno's remedial rights. In its view, section 8122 reflects "the Legislature's

concern that owners and direct contractors may use superior bargaining power to extract

claim waivers from subcontractors without paying for them." According to Travelers,

"the Trial Court erred because the subcontract's 'pay-when-paid' provision does not in any

way waive or release Crosno's right to payment on its claim." As we explain, Travelers

reads section 8122 too narrowly.

Although commonly called an "anti-waiver" statute (see Wm. R. Clarke, supra, 15

Cal.4th at p. 889), the text of section 8122 constrains not only actual waiver of a

claimant's remedial rights, but also actions that affect or impair such rights. (§ 8122.)

Likewise, section 8126 renders unenforceable not only those contract provisions that

22 purport to waive a claimant's rights but also those that "impair or otherwise adversely

affect" such rights. (§ 8126.)

In this respect, California's statutory scheme offers broader protection than its

federal analog, the Miller Act. (40 U.S.C. §§ 3131−3134). (See Coast Electric Co. v.

Industrial Indemnity Co. (1983) 144 Cal.App.3d 879, 883 [Miller Act is "similar in

content to the California public works statute," which is "commonly referred to as the

'Little Miller Act' "].) Like its California counterpart, the Miller Act is "highly remedial

in nature" and entitled to liberal construction. (United States ex rel. Sherman v. Carter

(1957) 353 U.S. 210, 216; Walton, supra, 290 F.3d at p. 1205.) Before a federal

construction contract exceeding $100,000 may be awarded, a private contractor must

furnish both a performance bond and a payment bond. (40 U.S.C. § 3131(a)−(b).) A

waiver of payment bond rights is void unless it is in writing, signed, and executed after

completion of work. (40 U.S.C. § 3133(c).) To be enforceable, there must be a " 'clear

and explicit' " waiver of a subcontractor's Miller Act rights. (Walton, at p. 1208.) In

other words, whereas federal law prohibits waiver of bond rights unless such waiver is

clear and explicit, California's counterpart also prohibits measures that affect or impair

those rights.

And even construing this more limited statutory language, federal courts have

reasoned that allowing a surety to avoid liability on a payment bond based on an

unsatisfied " 'pay when paid' " provision in the subcontract would prevent the

subcontractor from enforcing its Miller Act rights, thereby amounting to an

impermissible implied waiver. (United States ex rel McKenney's, Inc. v. Government

23 Technical Services, LLC (N.D. Ga. 2008) 531 F.Supp.2d 1375, 1380; see also Walton,

supra, 290 F.3d at p. 1208 [construing " 'pay when and if paid' " clause].)9 It follows that

the pay-when-paid provision here, which indefinitely postpones Crosno's right to recover

under the payment bond until Clark's litigation with the District concludes, is

unenforceable under California's broader antiwaiver statute.

Endeavoring to show that the trial court misconstrued section 8122, Travelers

claims that under the court's logic, a host of common subcontract provisions would

become unenforceable. Insofar as subcontract provisions delay ultimate payment due,

Travelers maintains they would affect or impair Crosno's payment bond rights. We need

not dwell on this hypothetical parade of horribles. The effect of pass-through provisions,

prelitigation dispute resolution clauses, notice requirements, retention provisions, and

liquidated damage clauses is not before us. Suffice to say, Travelers misconstrues both

the trial court's ruling and our decision today that affirms it. We do not suggest that every

pay-when-paid provision is unenforceable as an impairment of payment bond rights

under section 8122. Instead, we conclude that this one is unenforceable because it

unreasonably forestalls accrual of Crosno's payment bond rights for an indefinite period

of time while the direct contractor pursues litigation against the owner.

9 Travelers's objection that Walton is a federal case involving the Miller Act is misplaced. (See, e.g., California Electric Supply Co. v. United Pacific Life Ins. Co. (1964) 227 Cal.App.2d 138, 144−146 [interpreting public works payment bond statute by reference to cases construing its Miller Act counterpart]; Union Asphalt, Inc. v. Planet Ins. Co. (1994) 21 Cal.App.4th 1762, 1768−1769 [distinguishing Miller Act as more restrictive than California statutes that extended protection to second-tier claimants].) 24 c. Preferring Subcontractors Over Direct Contractors

Shifting to policy, Travelers claims "[t]here is no policy reason to prefer a

subcontractor claim as deserving faster enforcement than that of the direct contractor."

To the contrary, as Crosno observes, "a public works subcontractor has rights to a

security that a general contractor doesn't." "The law has created a preferred position for

persons who perform labor or supply materials for the improvement of real property." (9

Miller & Starr, Cal. Real Estate (4th ed. 2019) § 32:3, p. 15.) "The stop notice provisions

[citation] protect materialmen and labor claimants by allowing for intercepting funds due

from the public agency to the contractor." (Department of Industrial Relations v.

Seaboard Surety Co. (1996) 50 Cal.App.4th 1501, 1508.) Likewise, payment bond

statutes are "remedial in nature" and are designed "to protect the subcontractors from

defaulting contractors." (Capitol Steel, supra, 58 Cal.App.4th at p. 1062.) Direct

contractors like Clark have no right to file a stop notice nor payment bond claim.

(§ 9100, subd. (b).) Travelers is thus incorrect that Clark and Crosno are "equally

protected" under section 8122. Section 8122 protects the rights of "claimants," and Clark

is expressly excluded from that category here. (§ 9100, subd. (b).)

Although Travelers complains that affirming the trial court's ruling will effectively

make direct contractors and their sureties "financers of public works projects when the

owner delays making payment," that is precisely the point. A payment bond shifts the

risk of nonpayment from subcontractors to direct contractors and their sureties by

affording public works subcontractors the equivalent of a mechanics lien remedy

available in private works projects. (See Capitol Steel, supra, 58 Cal.App.4th at p. 1061;

25 9 Miller & Starr, Cal. Real Estate (4th ed. 2019) § 32:120, p. 380.) In so doing, a surety

bond both protects the public entity from liability for a defaulting contractor and provides

a remedy for subcontractors and material suppliers on public works projects. (Liton,

supra, 16 Cal.App.4th at p. 584.)

By carving out expansive remedial legislation to protect subcontractors like

Crosno, the statutory scheme reflects an express legislative preference to provide

expedient enforcement procedures to subcontractors over direct contractors, who are

required to insure against the risk by means of a payment bond.10 Moreover, Travelers's

construction would not, as it suggests, place Clark and Crosno "on equal footing."

Rather, it would prioritize Clark's litigation rights over Crosno's payment bond rights, in

10 Our review of the record and available legislative history sheds little light on the Legislature's reasons for codifying this preference. Although Travelers suggests a general contractor "may be less able to weather the financial storm occasioned by the owner's delays in making payment than its subcontractor may be," a treatise states the opposite. Unlike the subcontractor, the general contractor controls the entire project and has the direct relationship with the owner, potentially placing it in a better position to resolve payment disputes. (3 Bruner & O'Connor Construction Law (2020) § 8:49.) Moreover, because "subcontractors are smaller and more thinly capitalized than general contractors," they may not be "well equipped to incur the credit risk of an insolvent or unwilling owner." (Ibid.) Ultimately, we draw no conclusion as to who between Clark and Crosno is better able to weather credit risk. Travelers is correct that our record permits no reasonable inference on this matter.

26 conflict with the statutory aim to give subcontractors " 'a quick, reliable and sufficient

means of payment' " under the bond. (Cooley, supra, 204 Cal. at p. 62.)11

d. Suretyship principles

Finally, Travelers contends that a surety's obligation on the bond is coextensive

with the bond principal's obligation, entitling it to assert the same defenses that Clark

possesses as to the underlying obligation. CEA makes this same point in its amicus brief.

(See §§ 2808 [surety's liability upon a conditional obligation "is commensurate with that

of the principal"], 2809 ["The obligation of a surety must be neither larger in amount nor

in other respects more burdensome than that of the principal"].) Wm. R. Clarke addressed

and rejected a surety's similar argument. (Wm. R. Clarke, supra, 15 Cal.4th at

pp. 893−894.) We find its discussion dispositive.

The surety in Wm. R. Clarke argued that no liability accrued under the payment

bond until the direct contractor was in default of its payment obligation under the

subcontract. The subcontract's "pay if paid" provision conditioned payment on the direct

contractor receiving payment from the owner. Because no payment had been received,

the surety argued, no bond liability accrued. (Wm. R. Clarke, supra, 15 Cal.4th at

p. 893.) "The fallacy of this reasoning," our Supreme Court explained, was that it

11 Travelers cites limiting language in Capitol Steel that Wm. R. Clarke "applies to a public works project where there is no pending action against the government entity." (Capitol Steel, supra, 58 Cal.App.4th at p. 1052, italics added.) But as the trial court pointed out, "stop notice and payment bond remedies are cumulative." (Id. at p. 1061.) That Capitol Steel limited its conclusion to the facts before it (id. at p. 1052, fn. 1) does not suggest that Crosno's payment bond remedies may be impaired by Clark's long- pending lawsuit against the District. 27 considered only the direct contractor's obligation under the subcontracts while ignoring

its independent liability under the payment bond. (Ibid.) As an older case explains,

"[t]he action upon the statutory bond is not in any sense based upon the personal liability

of the contractor but is based upon the obligation of the bond, since the bond provides a

separate and distinct statutory remedy. The obligation of the bond, therefore, is

enforceable without reference to any contract between the contractor and the

[subcontractor or] materialman." (Pneucrete, supra, 7 Cal.App.2d at p. 738.)

Los Angeles Stone Co. v. National Surety Co. (1918) 178 Cal. 247, a case not cited

by the parties, provides additional guidance. The City of Los Angeles entered a public

works contract to improve a road. A payment bond identified the prime contract and

required the surety to pay for labor and materials provided if the direct contractor failed

to pay. (Id. at pp. 248−249.) The prime contract required the project to be completed by

a specific date. (Id. at p. 249.) Thus, when a material supplier sought to recover on the

payment bond, the surety argued it was not liable as to materials supplied after the

deadline. (Ibid.) The Supreme Court rejected that argument, explaining that the surety's

bond obligation was independent of the contract. (Id. at pp. 250−251.) "The covenant is

that in case the [bond] principal fails, not in the performance of his contract with the city

but in his obligations, express or implied, to pay for materials furnished in doing the work

described in his contract with the city, the surety will pay them." (Id. at p. 250.) Insofar

as the direct contractor incurred debt for labor and materials furnished in performing

work for the project, the surety was liable if it failed to pay. (Ibid.)

28 Here, as in Wm. R. Clarke, the payment bond referred to Clark's prime contract

with the District but did not mention the subcontract executed a few months later between

Clark and Crosno. (Wm. R. Clarke, supra, 15 Cal.4th at pp. 893−894.) The bond

obligation is broad, imposing liability on Clark and Travelers if Clark failed to pay any

claimant (§ 9100) with respect "to work or labor performed under the contract." As in

Wm. R. Clarke, Traveler's obligation as the bond surety is independent of the pay-when-

paid provision in the subcontract. (Wm. R. Clarke, at pp. 893−894.)

As Crosno suggests, Travelers advances an argument favored by the three

dissenting justices in Wm. R. Clarke. (Wm. R. Clarke, supra, 15 Cal.4th at pp. 903−907

(dis. opn. of Chin, J.).) They maintained that the surety was not liable under the payment

bond unless the direct contractor defaulted under the subcontract. (Id. at p. 903 (dis. opn.

of Chin, J.).) Because the owner had not paid the direct contractor, the dissent reasoned

that the direct contractor was not in default. (Ibid.) In the dissent's view, "[t]he bond did

not create an obligation on the part of the principal (or surety) divorced from any

underlying obligation under either the general contract or any of the subcontracts." (Id. at

p. 905 (dis. opn. of Chin, J.).) The dissent also invoked freedom of contract, stating the

"parties validly could and did agree among themselves that each would assume equally

the risk of owner default . . . ." (Id. at p. 908 (dis. opn. of Chin, J.).)

Whatever their merit, the relevant point for our purposes is that the Wm. R. Clarke

majority rejected these arguments, concluding the bond obligation was independent of the

subcontract. (Wm. R. Clarke, supra, 15 Cal.4th at pp. 893−894.) As to Travelers's

contention that Wm. R. Clarke "expressly recognized that the lien or bond claimant

29 must—without reference to the lien or bond—establish a right to payment," the majority

explained that this simply requires proof of a valid compensation claim, not "a separate

payment obligation, contractual or otherwise" for payment by the bond principal. (Wm.

R. Clarke, at p. 896.) The majority likewise rejected a "freedom of contract" argument as

overridden by the Legislature's careful efforts to constrain subcontractors' ability to waive

remedial rights. (Id. at pp. 891−892.) The majority's reasoning in Wm. R. Clarke is

dispositive of Travelers' suretyship and freedom of contract arguments.

Because a public works payment bond is statutory in nature, specific statutory

protections apply. Pursuant to sections 8122 and 8126, the particular pay-when-paid

provision in Crosno's subcontract is void and unenforceable in any action to recover

under the payment bond, whether as to bond principal Clark or its co-obligor Travelers.

As Crosno points out, Travelers could still assert other defenses to the bond claim if, for

example, "Crosno failed to timely and properly perform its scope of work." Our

interpretation does not, as CEA suggests, "allow subcontractors whose work is disputed

to recover from [a] surety before merit is finally determined by the owner and the general

contractor." Here, Crosno's right to payment is undisputed. We simply conclude that

30 Travelers cannot convert a broad obligation under the payment bond to an unreasonably

narrow one via the pay-when-paid provision in Crosno's subcontract.12

In sum, as the trial court properly found on the facts of this case, the expansive

pay-when-paid provision in Crosno's subcontract may not be invoked by Travelers as a

defense to a payment bond action given the policies underlying the antiwaiver statute,

section 8122. There being no other defense raised, the court did not err in finding no

triable issue of material fact, granting Crosno's motion for summary judgment, and

entering judgment in Crosno's favor for the undisputed $562,435 owed with prejudgment

interest. Because Travelers raises no other basis to challenge the attorney's fees awarded,

we also uphold the postjudgment order.

12 Fed. Ins. Co. v. Superior Court (1998) 60 Cal.App.4th 1370, cited by Travelers is not to the contrary. It merely stands for the proposition that where the bond claim "necessarily involves the determination of whether [the subcontractor] is entitled to be paid for labor and materials," the subcontractor must arbitrate its right to payment before it can pursue a claim against the surety under the payment bond. (Id. at p. 1373; see also Walton, supra, 290 F.3d at p. 1207 [although courts look to the underlying subcontract to determine the measure of sums justly due, they do not enforce terms affecting the timing or right of payment bond recovery].) As we have emphasized, Crosno's right to payment is not disputed in this case. 31

DISPOSITION

The judgment and postjudgment order are affirmed. Crosno is entitled to recover

its costs on appeal.

DATO, J.

WE CONCUR:

BENKE, Acting P. J.

IRION, J.

32