“Pay-when-paid” clauses in subcontracts stipulate that the prime contractor will pay the subcontractor for its work when the prime receives payment for that work from the project owner. State law on the enforceability of these clauses varies, but they generally pass muster if they are read to give the prime a reasonable time to attempt to collect payment from the owner. What happens, however, if the clause purports to define reasonableness?
A clause in a subcontract in California defined “reasonable time” as the time required for the prime contractor to pursue its legal remedies against the project owner to conclusion. Several years after the subcontractor’s last work, litigation between the prime and the owner was still ongoing. This, said a California appeals court, was not a reasonable time for subcontractor payment. The clause violated public policy and was unenforceable.
The other case in this issue also involves reasonableness. A subcontractor should not have cleared its schedule in anticipation of work to which a prime contractor had not firmly committed. Reliance on proposed subcontracts and a letter of intent had not been reasonable.