California Supreme Court holds "pay-if-paid" unenforceable. In a 4-3 decision announced June 26, 1997, the California Supreme Court has held that "pay-if-paid" clauses are unenforceable. Many commonly used construction industry form subcontracts include the clauses.

A "pay-if-paid" clause requires a general contractor to pay subcontractors if and only if the owner pays the general contractor.

The Court, in a closely watched case, held that "pay-if-paid" clauses are contrary to public policy because they result in an impermissible waiver of a subcontractor's constitutionally protected mechanic's lien rights in the event the owner fails to pay.

The California Constitution includes a provision that guarantees the right to a mechanic's lien to those who furnish materials and/or labor to a construction project. It has long been held that a waiver of the right to a mechanic's lien is against public policy unless the waiver is one approved by the legislature. The waivers in common use in the construction industry are described in detail in the Civil Code.

The Court also held that a surety who issues a payment bond on a construction project may be held liable for subcontractor claims even where those subcontractor claims arise under a subcontract containing a pay-if-paid clause. This position was sharply criticized by the threemember minority.

The minority argued that after this case a surety's duties will be greater than the surety's principal. That situation would violate the provisions of a long-standing principal of surety law. However, the majority pointed out that its holding brings California in line with a majority of the State courts who have considered the same issue. Those states generally hold that "pay-if- paid" clauses violate public policy.

Disclaimer: The foregoing is not intended as legal advice. The facts and circumstances of any case requires the review of an attorney familiar with real estate and/or construction law. Before taking any action, please consult with your counsel.