Virginia Joins 11 Other States Prohibiting Pay-If-Paid Clauses in Construction Contracts

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If you have Googled, “Virginia Pay If Paid” or “Virginia Pay When Paid” or “Pay if Paid Enforceable” or “best construction lawyer ever“, then you likely have found your way here (that last one is mere puffery). Let’s cut to the chase—Virginia has joined 11 other states that have expressly prohibited “pay if paid” clauses in construction contracts. If you have construction projects in Virginia, then read on. If you want know whether your state prohibits these clauses, then read on. If you want to know the difference between the words “if” and “when”, then read on.

What’s the difference? There are a lot of resources out there explaining the difference between the two types of construction contract provisions, but I like to make it a little simpler:

  • pay when paid is simply a function of the timing of payment (i.e., when you are going to get paid…”Contractor shall pay Subcontractor within 15 days after receipt of payment from the Owner.”);
  • pay if paid is a function of whether you get paid (i.e., shifting the risk of nonpayment … “Payment from the Owner to the Contractor is a condition precedent to payment from the Contractor to the Subcontractor.”)

Generally, most states that have addressed the issue allow “pay if paid” clauses so long as there is clear and unambiguous language shifting the risk of non-payment to the subcontractor. Many require more than just “pay-if-paid” language in the parties’ contract. For instance, you may be required to include the magic words “condition precedent” or “risk of nonpayment” as outlined below. In these tight times, you can understand how important payment provisions are to the parties’ transaction, particularly where costs are escalating and projects may stall mid-performance due to financing issues or owner-default.

Does my state prohibit pay-if-paid clauses? Again, there are a lot of resources out there providing summaries on the current status of the law. One of the best I have found was created by Levelset, which has a 50-State-Guide on pay-if-paid clauses. According to Levelset, the following states have prohibited pay-if-paid clauses:

  • California
  • Kansas
  • Illinois
  • Indiana
  • Nevada
  • Montana
  • North Carolina
  • New York
  • South Carolina
  • Utah
  • Wisconsin

You can now add Virginia to that list! On April 27, 2022, Virginia Governor Youngkin signed into law SB550, which expressly prohibits “pay-if-paid” clauses in construction contracts. The law goes into effect January 1, 2023.

What does the Virginia law say? The new law will require prime contractors to pay subcontractors within 60 days from receiving an invoice, or seven days after receiving payment from the owner, whichever is earlier. Interest penalties apply for late payment. The law is codified as party of Virginia’s Prompt Pay Act (Va. Code 2.2-435) and Virginia’s wage theft statute (Va. Code 11-4.6). The law has more application than simply prohibiting “pay-if-paid” clauses—it addresses numerous other items best summarized by Virginia’s LIS bill-tracking site:

  • the law applies to both public contracts and private contracts where there is at least one general contractor and one subcontractor;
  • The law requires a payment clause that obligates the contractors to be liable for the entire amount owed to any subcontractor with which it contracts;
  • the law provides that a contractor shall not be liable for amounts otherwise reducible due to the subcontractor’s noncompliance with the terms of the contract;
  • however, the contractor must notify the subcontractor in writing of the contractor’s intent to withhold all or a part of the subcontractor’s payment with the reason for such nonpayment;
  • the law states that payment by the party contracting with the contractor shall not be a condition precedent to payment to any lower-tier subcontractor (i.e., this is the “pay if paid” prohibition); and
  • in the owner-contractor agreement, there must be a payment clause that requires (i) the owner to pay the general contractor within 60 days of receipt of an invoice following satisfactory completion of the work, and (ii) a higher-tier contractor to pay a lower-tier subcontractor within the earlier of 60 days of satisfactory completion of the work for which the subcontractor has invoiced or seven days after receipt of amounts paid by the owner to the general contractor for work performed

So what? Some states have attempted, but failed, to enact similar protections, which happened in Tennessee a few years ago. In other states, the prohibition has been decided by the courts, such as the California Supreme Court’s decision in Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997), which held 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.

One major lesson: WORDS MATTER. It is important to understanding lien rights on a project, payment protections, and ultimately the risk of non-payment. Review your contracts and understand your state’s law.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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