Are Pay-If-Paid Clauses Enforceable?

What is Pay-If-Paid (“PIP”) Clause in California?

In California, A pay-if-paid clause is a clause in a contract that states that a general contractor is obligated to pay a subcontractor only if the owner pays the general contractor. While this clause may be popular in contractor’s contracts, such a clause is unenforceable in a court of law.

Enforceability of a Pay-If-Paid Clause

The California Supreme Court held in Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882, 885 that pay-if-paid clauses are unenforceable because it essentially forces a subcontractor to waive or forfeit his constitutionally protected mechanics lien rights if the owner fails to pay the general contractor.

The California Supreme Court came to this conclusion based on the following reasons:

First, the California Constitution establishes the right of material men and laborers to record a mechanics lien on property upon which they have performed work or furnished material.

Second, under the Civil Code, a waiver of the right to record a mechanics is void unless it substantially follows specific forms in specific circumstances, i.e. conditional and unconditional waivers and releases upon payment or a promise of payment.

Third, even though a pay-if-paid provision does not explicitly waive a subcontractor’s mechanic’s lien rights, because the law looks at substance over form, the California Supreme Court treated such provision as a waiver of mechanic’s lien rights because it has the same effect as an express waiver of those rights.

Fourth, as it relates to the right to waive mechanic’s lien rights, the Legislature already determined that policy considerations override the value of freedom of contract.

Fifth, a pay-if-paid clause prevents any amount from becoming due under the contract, which would effectively destroy the subcontractor’s mechanic’s lien rights.

Therefore, based on the foregoing reasons, the California Supreme Court has held that a general contractor’s liability to pay a subcontractor for work performed cannot be contingent on the owner’s payment to the general contractor.