Wm. R. Clarke Corp. v. Safeco Insurance of America

In recent years, general contractors in California have begun to insert “pay if paid” provisions into their agreements with subcontractors. A pay if paid provision makes payment by the owner to the general contractor a condition precedent 1 to the general contractor’s obligation to pay the subcontractor for work the subcontractor has performed.

In other jurisdictions, the majority view is that, if reasonably possible, clauses in construction subcontracts stating that the subcontractor will be paid when the general contractor is paid will not be construed as establishing true conditions precedent, but rather as merely fixing 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. (See, e.g., Koch v. Construction Technology, Inc. (Tenn. 1996) 924 S.W.2d 68 ; Power & Pollution Svcs. v. Suburban Piping (1991) 74 Ohio App.3d 89 [ 598 N.E.2d 69 ]; OBS Co., Inc. v. Pace Const. Corp. (Fla. 1990) 558 So.2d 404 ; Southern St. Masonry v. J.A. Jones Const. (La. 1987) 507 So.2d 198 ; Thos. J. Dyer Co. v. Bishop International Engineering Co. (6th Cir. 1962) 303…

I dissent. The contractor and the subcontractors agreed that they would assume equally the risk the owner would not be able to pay for their work. The majority voids this agreement and forces the contractor to bear the risk not only that it will receive no payment for its own work but also that it will have to pay the subcontractors out of its own pocket. The majority accomplishes this end by (1) declaring the contractual provision at issue—the “pay if paid” clause—invalid as against public policy because it supposedly indirectly waives mechanic’s lien rights, even though the subcontractors expressly did not waive those rights; and (2) finding, for the first time, a surety may be liable under a surety bond even though the principal has breached no contract or otherwise defaulted on any underlying obligation. I disagree. The parties entered into these agreements freely. We should not allow the subcontractors to repudiate them now.

The pay if paid clause is not contrary to public policy for the reason that, unlike a mechanic’s lien, which provides a remedy against the property, the pay if paid clause only regulates the relationship between the contractor and the subcontractors. The…