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

• Decision Date: 26 June 1997
• Docket Number: No. S050148,S050148
• Citation: 938 P.2d 372,64 Cal.Rptr.2d 578,15 Cal.4th 882
• Court: California Supreme Court
• Parties: , 938 P.2d 372, 97 Cal. Daily Op. Serv. 5063, 97 Daily Journal D.A.R. 8247 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.

Page 578

64 Cal.Rptr.2d 578

15 Cal.4th 882, 938 P.2d 372, 97 Cal. Daily Op. Serv. 5063,

97 Daily Journal D.A.R. 8247

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.

No. S050148.

Supreme Court of California.

June 26, 1997.

Rehearing Denied Sept. 3, 1997.

Crawford, Bacon, Bangs & Briesemeister, Crawford & Bangs, William J. Crawford, Orville O. Orr, Jr., E. Scott Holbrook, Jr., Daniel Colner, West Covina, Case, Knowlson, Mobley, Burnett & Luber, Ginsburg, Stephan, Oringher & Richman and Gary S. Mobley, Costa Mesa, for Plaintiffs and Appellants.

Haight, Brown & Bonesteel, Roy G. Weatherup, Armando M. Galvan, Santa Monica, Rivers & Bower, Hornberger & Criswell, David E. Bower, David Berry and Michael C. Denlinger, Los Angeles, for Defendants and Appellants.

Bryan Cave, Farella, Braun & Martel, Alan E. Harris, Norma G. Formanek, San Francisco, Busch & Berger, Clark H. Cameron, Calabasas, Knecht, Haley, Lawrence & Smith, John L. Condrey, San Francisco, Bevington, Jackl & Gropman, Bevington, Jackl & Haas and Anne M. Bevington, Walnut Creek, as Amici Curiae on behalf of Defendants and Appellants.

Tyre, Kamins, Katz & Granof, Herman S. Palarz, Richard J. Kamins, Los Angeles, Negele & Gropman and Ted R. Gropman, Los Angeles, for Plaintiffs and Respondents.

Abdulaziz & Grossbart, Sam K. Abdulaziz, North Hollywood, Hendrick, Phillips, Schemm & Salzman, Cook, Brown, Rediger & Prager, Ronald W. Brown, Mantalica & Treadwell and Mark A. Treadwell, Los Angeles, as Amici Curiae on behalf of Plaintiffs and Respondents and Plaintiffs and Appellants.

KENNARD, Justice.

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.

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 Power 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, 462-463, 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 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 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. (West-Fair Elec. v. Aetna Cas. & Sur. Co. (1995) 87 N.Y.2d 148, 157, 661 N.E.2d 967, 971, 638 N.Y.S.2d 394, 398.) 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 question of first impression in this court.

We granted review in this case to determine whether a subcontractor may collect on a general contractor's payment bond for work it has performed under a contract containing a pay if paid provision when the owner has not paid the general contractor. We conclude that pay if paid provisions like the one at issue here are contrary to the public policy of this state and therefore unenforceable because they effect an impermissible indirect waiver or forfeiture of the subcontractors' constitutionally protected mechanic's lien rights in the event of nonpayment by the owner. Because they are unenforceable, pay if paid provisions in construction subcontracts do not insulate either general contractors or their payment bond sureties from their contractual obligations to pay subcontractors for work performed.

I. FACTS

In 1990, the owner of a commercial building in Los Angeles entered into a contract with Keller Construction Co., Ltd. (Keller), as general contractor, for rehabilitation work on the building. Keller in turn entered into subcontracts for this project with, among others, Wm. R. Clarke Corporation, Barsotti's, Inc., Garvin Fire Protection Systems, Inc., and Church and Larsen, Inc. (collectively, the subcontractors). Each subcontract contained a pay if paid provision and three of the four subcontracts also included an addendum reiterating the pay if paid limitation yet also purporting to preserve the subcontractors' mechanic's lien rights and to make those rights the subcontractors' "sole remedy" in the event the owner failed to pay Keller. ³

At the owner's insistence, and pursuant to the terms of the general contract, Keller obtained a labor and material payment bond from defendant Safeco Insurance Company of America (Safeco) to protect the owner from mechanic's lien claims by subcontractors and material suppliers. The bond recited that it was a payment bond as defined in Civil Code section 3096 ⁴ and that it had been executed to comply with title 15 (Works of Improvement) of the Civil Code. ⁵ The bond stated that Keller, as principal, and Safeco, as surety, "are held and firmly bound unto any and all persons who perform labor upon or bestow skill or other necessary services on, or furnish materials or lease equipment to be used or consumed in, or furnish appliances, teams, or power contributing to the work described in [the general contract between the owner and Keller], a copy of which contract is or may be attached hereto, and is hereby referred to, in the sum of" $16.5 million. The bond further stated: "NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH, That if the Principal shall pay, or cause to be paid in full, the claims of all persons performing labor upon or bestowing skill or other necessary services on, or furnishing materials or leasing equipment to be used or consumed in or furnishing appliances, teams or power contributing to such work, then this obligation shall be void; otherwise to remain in full force and effect." In the final provision relevant here, the bond stated: "No suit, action or proceeding may be maintained on this bond unless the person claiming hereunder shall previously have either, recorded a mechanic's lien claim pursuant to Title 15, Works of Improvement, of the Civil Code of the State of California or given notice to the Surety on this bond before the expiration of the time prescribed in said statute for recording a lien." The bond was duly executed by the authorized agents of Keller and Safeco, and it was duly recorded.

After substantial work had been completed on the project, the owner stopped making payments to Keller, apparently as a result of the owner's insolvency. Keller then declined to pay the subcontractors, which recorded mechanic's liens and filed separate actions against Safeco seeking recovery under the payment bond. The actions were deemed related and were assigned to the same judge for all purposes. Three of the actions were resolved by summary judgment, the fourth by trial to the court. In each action, the trial court granted judgment for the subcontractors and against Safeco. Safeco appealed from each judgment. After consolidating the appeals, the Court of Appeal affirmed each judgment against Safeco. ⁶

II. ANALYSIS AND RESOLUTION

Safeco argues here, as it did in the trial court and in the Court of Appeal, that its obligation under the payment bond never matured because the liability of a surety on a private works payment bond is no greater than that of its principal, and Keller, the principal on the payment bond issued by Safeco, never incurred any obligation to pay the subcontractors for their work because a condition precedent to Keller's contractual obligation to pay the subcontractors--that Keller receive payment from the owner for the subcontractors' work--was never satisfied. Safeco's argument thus assumes the validity of the pay if paid provisions in the subcontracts, under which payment from the owner to Keller was a condition precedent to Keller's obligation to pay the subcontractors. As will appear, we conclude that the assumption is false.

Our state Constitution provides: "Mechanics, persons furnishing materials, artisans, and laborers of every class, shall have a lien upon the property...