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Wm. R. Clarke Corp. v. Safeco Ins. Co.

Supreme Court of California

June 26, 1997, Decided

No. S050148.

Opinion

 [*885]  [**579]   KENNARD, J. 

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.

 [***3]  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 F.2d 655.) This approach has been followed in California. ( Yamanishi v. Bleily & Collishaw, Inc. (1972) 29 Cal. App. 3d 457, 462463 [105 Cal. Rptr. 580]; see also Rubin v. Fuchs (1969) 1 Cal. 3d 50, 53 [81 Cal. Rptr. 373, 459 P.2d 925] [stating that "provisions of a contract will not be construed as conditions precedent in the [***4]  absence of language plainly requiring such construction"].) A contract clause that has been construed in this fashion is sometimes referred to as a "pay when paid" rather than a "pay  [*886]  if paid" provision. (See Kirksey, "Minimum Decencies"--A Proposed Resolution of the "Pay-When-Paid"/"Pay-If-Paid" Dichotomy (Jan. 1992) Construction Law. 1.)

If it is not reasonably possible to construe the contractual provision as other than a condition precedent, then courts must decide whether public policy permits enforcement of a contractual provision that may result in the subcontractor's forfeiting all right to payment for work performed. The high court of New York has concluded that a true pay if paid provision in a subcontract for construction work is void as against public policy.  [**580]  ( West-Fair Elec. v. Aetna Cas. & Sur. Co. (1995) 87 N.Y.2d 148, 157 [638 N.Y.S.2d 394, 398, 661 N.E.2d 967, 971].) In Illinois, North Carolina, and Wisconsin, pay if paid provisions have been declared void and unenforceable by statute. 2 ( 770 Ill. Comp. Stat. Ann. 60/21; N.C. Gen. Stat. § 22C-2 (1991); Wis. Stat. § 779.135.) The validity of a true pay if paid provision presents a [***5]  question of first impression in this court.

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15 Cal. 4th 882 *; 64 Cal. Rptr. 2d 578 **; 1997 Cal. LEXIS 2969 ***; 938 P.2d 372; 97 Daily Journal DAR 8247; 97 Cal. Daily Op. Service 5063

WM. R. CLARKE CORPORATION, Plaintiff and Respondent, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant. CHURCH AND LARSEN, INC., Plaintiff and Respondent, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant. BARSOTTI'S INC., Plaintiff and Appellant, v. KELLER CONSTRUCTION CO., LTD., et al., Defendants and Appellants. GARVIN FIRE PROTECTION SYSTEMS, INC., Plaintiff and Appellant, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant.

Subsequent History:  [***1]  Rehearing Denied September 3, 1997, Reported at: 1997 Cal. LEXIS 5547.

Prior History: Court of Appeal of California, Second Appellate District, Division One. Nos. B077931, B078686, B081092 and B082264. Superior Court of Los Angeles County, Super. Ct. Nos. BC046221, BC036801, BC027587 and BC052675. David P. Yaffe, Judge.

Disposition: The judgment of the Court of Appeal is affirmed, and the matter is remanded for further proceedings consistent with this opinion.

CORE TERMS

subcontractors, surety, mechanic's lien, contractor, rights, default, payment bond, general contractor, subcontracts, provisions, claimant, public policy, contractual, Addendum, italics, waive, parties, liens, condition precedent, perform work, void, terms, furnish material, obligations, nonpayment, bestowed, obligation to pay, unenforceable, partnership, insolvency

Business & Corporate Compliance, Contracts Law, Contract Conditions & Provisions, Conditions Precedent, Real Property Law, Construction Law, Contracts, Real Property Law, Contractors & Subcontractors, Liens, Nonmortgage Liens, Mechanics' Liens, Types of Contracts, Releases, Civil Procedure, Bonds, Sureties, Procedural Matters, Contracts Law, Negotiable Instruments, Enforcement, Proof of Signature, Remedies, Execution of Bonds, Liability, Discharge & Payment, Discharge of Secondary Obligors, Joint & Several Instruments, Indorsements, Qualified Indorsements, Secured Transactions, Default, General Overview