As the party drafting the contract, and the party typically with the most leverage, the subcontracts drafted by a general contractor are one-sided affairs prepared to ensure that the subcontractor(s) bears all potential risks and liabilities. This often includes terms whereby compensation that should otherwise be owed by the general contractor to a subcontractor is withheld or denied because of disputes with the project owner.
One type of contractual provision that is often included in a subcontract is known as a “pay if paid” or “pay when paid” provision. The general contractor includes this type of provision to condition its obligation to pay the subcontractor only upon the receipt of a corresponding payment from the project owner. California Courts now preclude a general contractor from refusing to pay a subcontractor the amount owed on a subcontract, plus any approved change orders, because the general contractor has not been paid by the owner. But California Courts may allow a general contractor to delay payment to the subcontractor for a “reasonable time” after completion of the subcontract’s scope of work so long as the clause is clear that payment will ultimately be made and will not be withheld for more than a reasonable amount time.
Another contractual provision that a general contractor will often include in a subcontract is one that limits a subcontractor’s right to additional compensation for extra work or delays upon the condition that the general contractor first recover a change order from the owner for said damages. The law in California is not as clear on the legality of this type of provision. With regard to delays caused by the owner, several California cases have approved contractual provisions that require a subcontractor to present pass-through claims for the general contractor to make against the owner. As for claims related to the performance of additional work, one California Court held that the general contractor could not approve a subcontractor’s change orders and then refuse to pay them unless it received an equivalent change order from the owner. That case did not address whether the general contractor can do so for disputed subcontractor change orders.
Understanding when a general contractor can or can’t deny or delay your payment is one of many important steps to getting timely paid the money that is owed to your company. For more information on the content of this article or other ways to help your company get paid, please contact your regular Murtaugh Meyer Nelson & Treglia LLP attorney or Lawrence A. Treglia, Jr., Jeffery M. Suckiel and/or Matthew W. Johnson at (949) 794-4000.
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Lawrence A. Treglia, Jr.
Matthew W. Johnson
Jeffery M. Suckiel
Murtaugh Treglia Stern & Deily LLP
2603 Main Street, Penthouse, Irvine, CA 92614
Telephone: (949) 794-4000 Fax: (949) 794-4099