Conditioning Payment by Owner
Pay When Paid Clauses in California
California courts have refused to enforce provisions requiring that a contractor be paid by the owner before a subcontractor can be paid by the contractor. In Yamanishi v. Bleily and Collishaw, Inc., the court of appeals refused to enforce the following provision as a condition of payment:
Contractor agrees...[t]o pay to the subcontractor upon receipt of each payment received from the Owner the portion of said payment allowed to Contractor on account of Subcontractor's work, to the extent of Sub-contractor's interest therein less any percentage retained under saidGeneral Contract."
The court refused to interpret this provision as requiring payment by the owner before the subcontractor could get paid. Rather, the court held that this provision merely stated the times at which the subcontractor would ordinarily be entitled to progress payments for its work. The court recognized that an interpretation should be avoided which would make a contract unusual, extraordinary, harsh or inequitable.
Furthermore, a contract should not place one party at the mercy of the other. The court rejected the general contractor's interpretation which would postpone payments earned by a subcontractor, itself without fault, until the dispute between the contractor and owner was resolved, perhaps months or even years later. This 1972 case removed a common ploy by general contractors which prevented subcontractors from being paid until the general was paid.