A California Court of Appeals opinion published earlier this month brings a change to payment bond claims brought by unpaid subcontractors and suppliers. The decision (Crosno Construction, Inc. v. Travelers Casualty and Surety Company of America) places limitations on a payment bond surety’s ability to rely on subcontract “pay-when-paid” language, stating that a payment provision typically found in subcontracts is contrary to the “reasonable time” statutory requirement and will not be enforced. This represents a major shift in California construction payment bond claim rights.
Plaintiff Crosno Construction, Inc. (“Crosno) was a subcontractor to general contractor Clark Brothers (“Clark”), who was principal on a public works payment bond issued by Travelers. The owner was a public agency district (“District.”) Crosno had completed most of its subcontract work when a dispute between District and Clark arose, causing the project to stop. Crosno then sought payment through a payment bond claim against Travelers. Travelers denied the claim, relying on the subcontract’s payment provisions and asserting the defense that it had no obligation to pay on the bond claim because the litigation between Clark and the District had not yet reached its conclusion.
Subcontract. The subcontract between Clark and Crosno contained a “pay-when-paid” provision stating that Clark would pay Crosno within a reasonable time after receiving payment from the District. In defining “a reasonable time,” the subcontract language provided that the time for payment “in no event shall be less than the time [Clark] and [Crosno] require to pursue to conclusion their legal remedies against [District] or other responsible party to obtain payment.”
Trial Court Ruling; Court of Appeals Agreement.The trial court granted summary judgment (judgment without a trial, based on facts and briefs) to Crosno against Travelers and Travelers appealed. The Court of Appeals affirmed the trial court’s ruling, finding that, in effect, requiring a subcontractor’s bond claim to be delayed for months or years while litigation between the parties proceeds is the equivalent to an impermissible “pay-if-paid” provision, which the California Supreme Court rejected in a 1997 decision (Wm. R. Clarke Corp v. Safeco Ins. Co.) The Court of Appeals reasoned 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 anti-waiver statute [Civil Code Section 8122].”
Recommendation. We are frequently asked by our clients to review and edit subcontract agreements. One of the common provisions that we seek to revise is the one similar to that in the Clark-Crosno subcontract. (See Number 1 on my “Killer Subcontract Provisions” list at KSP Article. While the Crosno opinion does not prohibit such provisions as to the general contractor’s duty to pay its subcontractors and suppliers, it does now prohibit such time limitations for payment bond claims. In light of the Crosno decision, it is advisable that general contractors as well as subcontractors and material suppliers (of any tier) draft the agreements to comply with the Crosno decision, certainly as to payment bond claims, and to specify what a “reasonable time” will be.
Article by Patrick G. McNamara, Esq., in 2020. Mr. McNamara is part of Porter Law Group, Inc. in Sacramento, California, and specializes in Construction and Real Estate Litigation, <and can be reached by phone at (916) 381-7868, and by email at, [email protected]. Visit the firm’s website at www.porterlaw.com and www.AppliedLegal.com.
