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Re: Pay when Paid

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Do you believe that this court ruling is applicable for design
professionals (i.e., engineers contracting with their architectural
clients)?

Regards,
Bill Allen

----------
> From: Brent Koch <brentk(--nospam--at)tdl.com>
> To: seaoc(--nospam--at)seaoc.org
> Subject: Re: Pay when Paid
> Date: Monday, September 15, 1997 4:23 PM
> 
> 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
> 
> 
>