Legal Question in Construction Law in California

Re: contractor rights

Mr. Whipple's points are well taken, especially regarding circumstances where a sub may have been responsible in some manner for defects.

I suspect you're talking, however, about 2 types of clauses that often appear in subcontracts: "pay-if-paid" and "pay-when paid".

The first type, a clause that says the general doesn't have to pay a sub unless the general gets paid for that sub's work is unenforceable. In 1997, the Cal. Supreme Court ruled that such provisions are against public policy (preserving lien rights of subcontractors and suppliers). The case name is Wm. R. Clarke Corp. v. Safeco

"Pay-when-paid" clauses are a bit trickier. In this case, the general claims the right to withhold payment for the sub's work until the general is paid for that work. Note the difference between "unless" and "until".

Although I believe the same logic should apply here as with a pay-if-paid clause, some courts have enforced pay-when-paid, and others have not. One case in particular (Capitol Steel v. Mega Construction), decided also in 1997, but after the Clarke case held a pay-when-paid clause unenforceable, using the same reasoning as the Supreme Court in Clarke.

The normal interpretation of pay-when-paid clauses has been to read them as requiring payment to the sub within a reasonable time. Unless very specifically drafted otherwise, the clause won't allow a contractor to refuse payment forever solely because of ongoing delay in payment from the owner.

I'd recommend you have a lawyer in your area give you an opinion regarding the enforceability of the provision as written in the particular contract at issue. Make sure the lawyer is well-versed in construction law.

Best of luck. Let me know if you have any further questions.

Regards,

Tom Newton

Re: contractor rights

The relationship between the contractor and the subcontractor is governed by the contract between the contractor and the subcontractor, and the business relationship between the owner and the contractor has no impact on any of the contract terms or performance times unless the contractor-subcontractor agreement specifically makes some reference to the owner-contractor agreement.

In other words, the subcontractor doesn't care what the deal is between the owner and the general. The sub expects to get paid when HIS contract says his bill is due.

Nevertheless, some subcontracts do have provisions that make the duty to pay the sub dependent on the owner paying, and these can be roundabout and not too obvious, maybe involving prior approval of the work or submission of certificates and designed so that if the owner is holding up payment the general can also hold up payment to certain subs who might be responsible in some way for the general not getting paid.