Contracts & ExecutionQuestion 658 of 690
On a private construction project, a direct contractor wants to enforce a 'pay-when-paid' clause to delay payment to a subcontractor by 90 days while waiting for the owner to pay. Under California prompt-payment law, this clause is generally:
a.Enforceable only as a reasonable timing mechanism — but California courts have construed 'pay-when-paid' clauses NOT to shift the risk of owner nonpayment to subs (Wm. R. Clarke v. Safeco), so the prime must still pay within the prompt-payment windows of Civil Code §8800/§8814 (generally 7 days of receipt of progress payment) regardless of owner payment
b.Fully enforceable as written, including a 'pay-if-paid' condition precedent that excuses payment if the owner defaults
c.Void in all circumstances
d.Enforceable only on public works projects, never on private projects
Explanation
Under Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882 and Civil Code §8800, §8814, and §8820, California courts construe 'pay-when-paid' clauses as a reasonable-time provision, NOT as a condition precedent shifting the risk of owner insolvency to subcontractors. True 'pay-if-paid' conditions are unenforceable as contrary to the mechanics' lien protections in Article XIV §3 of the California Constitution. The prime must still pay subs within 7 days of receiving the corresponding owner payment, with 2%-per-month penalties for wrongful withholding. The clause is not categorically void, but it cannot be used to indefinitely defer payment.
Law Reference: Civil Code §8820Practice all 690 questions free — no signup required.
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