A California Court of Appeals opinion published earlier this month brings a change to payment bond claims brought by unpaid subcontractors and suppliers. The decision (Crosno Construction, Inc. v. Travelers Casualty and Surety Company of America) places limitations on a payment bond surety’s ability to rely on subcontract “pay-when-paid” language, stating that a payment provision typically found in subcontracts is contrary to the “reasonable time” statutory requirement and will not be enforced. This represents a major shift in California construction payment bond claim rights.
Plaintiff Crosno Construction, Inc. (“Crosno) was a subcontractor to general contractor Clark Brothers (“Clark”), who was principal on a public works payment bond issued by Travelers. The owner was a public agency district (“District.”) Crosno had completed most of its subcontract work when a dispute between District and Clark arose, causing the project to stop. Crosno then sought payment through a payment bond claim against Travelers. Travelers denied the claim, relying on the subcontract’s payment provisions and asserting the defense that it had no obligation to pay on the bond claim because the litigation between Clark and the District had not yet reached its conclusion.
Subcontract. The subcontract between Clark and Crosno contained a “pay-when-paid” provision stating that Clark would pay Crosno within a reasonable time after receiving payment from the District. In defining “a reasonable time,” the subcontract language provided that the time for payment “in no event shall be less than the time [Clark] and [Crosno] require to pursue to conclusion their legal remedies against [District] or other responsible party to obtain payment.”