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Re: Pay when Paid

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A June 1997 ruling by the California Supreme Court invalidated the "pay if
paid" clause found in most construction subcontracts in California. This
clause was found to be against public policy and to cause an indirect
waiver or forfeiture of lien rights in the event of non-payment by the
owner.

The ruling rose from a suit brought against Keller Construction and its
payment bond surety, Safeco, by subcontractors to Keller for a 1990 remodel
project of the MGM-Pathe Communications headquarters in L.A.

Keller entered a general contract with the owner, 6420 Wilshire Partners.
They obtained a payment bond from Safeco, as required by the owner. Keller
had all the "pay if paid" boiler plate legalese incorporated into their
subcontract payment provisions.

It was reported that Keller became aware early on that the owner had
insufficient financing in place for the project and attempted to position
themselves so as to attempt to shift the risk of nonpayment to their
subcontractors. [Long interesting story.]

Well, Keller ended up not getting paid for large portion of the contract.
They told their subs that they had no obligation to pay for the
subcontracted work as, per the payment provisions of the subcontracts.
Keller brought an action against the owner and received a part payment
settlement of its claim. They then offered pro-rata payments to the subs
with the moneys received from the owner as the basis. The subs rejected the
offer and filed suit to collect from the payment bond. Safeco, the bond
surety, argued that they too were not obligated to pay the subs as Keller
had not been paid. 

Anyway the subs prevailed in trial court, then the California Court of
Appeals, and finally the State Supreme Court. Pay if/when paid clauses are
invalid and unenforceable.

"A general contractor's liability to a subcontractor for work performed may
not be made contingent upon the owner's payment to the general
contractor..."  "We...conclude that a pay if paid provision is void because
it violates public policy that underlies the anti-waiver provisions of the
mechanic's lien laws" - California Supreme Court 6/27/97.

Regards,

Brent Koch, P.E.
Willis Construction Company
San Juan Bautista, CA

P.S. No, I had no involvement direct or indirect with the above noted case
or its parties. I did learn of the details in the course of the preparation
of our claim against Kellers' payment bond for the unpaid portions of
subcontract work at Lynwood High School. We anticipate claim settlement
(about $1M) within the next three months.  We definitely use the precedent
during the review and negotiation of new subcontracts.


----------
> From: Bill Allen, S.E. @ ALLEN DESIGNS <BAllenSE(--nospam--at)pacbell.net>
> To: seaoc(--nospam--at)seaoc.org
> Subject: Pay when Paid
> Date: Monday, September 15, 1997 2:25 PM
> 
> I was talking to a colleague today about a "pay when paid" clause in
> contracts. He told me that this was an illegal clause and is therefore
not
> enforceable (sp?). Does anyone have any legal experience with this?
> 
> Regards,
> Bill Allen