Masonry Magazine June 1998 Page. 34
Pay-if-Paid Clauses
Challenged Nationwide
by Brian Pallasch, CAE, ASA Director of Government Relations
Subcontractors continue to benefit from state courts and legislatures that agree that payment to subcontractors should not be contingent upon the general contractor receiving payment from the owner. Despite this growing consensus, the new Associated General Contractors of America (AGC) 655i form, "Standard Form Agreement Between Contractor and Subcontractor (Where the Contractor and Subcontractor Share the Risk of Owner Payment)," contains contingent payment language. The American Subcontractors Association (ASA) is redoubling its efforts to eliminate pay-if-paid clauses. AGC insists that contingent payment clauses are only a "risk-sharing" device; however, in practice, contingent payment clauses shift the risk of owner nonpayment to subcontractors.
According to ASA's 1998 Annual Legislative Survey, the most objectionable contract provision that subcontractors face is pay-if-paid. For the tenth straight year, ASA members ranked the elimination of pay-if-paid clauses as the number one issue for subcontractors at the state and local levels.
In 1997, the courts took the lead on this issue when the California Supreme Court outlawed contingent payment clauses in construction contracts as void and against public policy. The ruling came in the case Wm. Clarke Corp. vs. Safeco Insurance Company of America. ASA participated in the case by filing an amicus brief.
This success is part of ongoing court challenges to pay-if-paid clauses being undertaken by ASA through the Subcontractors Legal Defense Fund, its chapters and members. ASA remains strongly opposed to shifting the risk of owner payment default to subcontractors and is at the forefront of these legal battles.
The California Supreme Court held that a general contractor's liability to a subcontractor for work performed may not be made contingent on the owner's payment to the general contractor. The court said:
"(A)general contractor's liability to a subcontractor for work performed may not be made contingent on the owneris payment to the general contractor" and "We... conclude that a pay if paid provision is void because it violates public policy that underlies that anti-waiver provisions of the mechanic's lien laws."
In a related decision later in 1997, Capitol Steel Fabricators vs. Mega Construction (1997) 97 D.A.R. 13399, the 2nd District of the California Court of Appeals rejected a general contractor's argument that pay-if-paid clauses are enforceable for public works contracts.
In Capitol Steel, the court rejected the general contractor's argument that the Wm. R. Clarke ruling does not apply to public works contracts because no mechanic's lien rights are at stake on public projects. The court ruled that even though a mechanicís lien is not allowed on public works projects, the bond and stop notice rights available are cumulative beyond mechanicís lien rights, and, as a result, pay-if-paid clauses are void on public projects.
Capitol Steel benefits subcontractors because it makes clear that pay-if-paid clauses are unenforceable in private and public works contracts in California.