New Virginia Law Prohibits “Pay-When-Paid” and “Pay-If-Paid” Provisions in Construction Contracts – JD Supra

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Enchancment contracts routinely set cost phrases as “pay-when-paid” or “pay-if-paid.” These phrases shield the prime contractor from bearing All of the hazard of noncost by the proprietor. In Virginia, however, That will not be true for For a lot longer. Final month, Virginia regulationmakers handed Senate Invoice 550, which makes “pay-when-paid” and “pay-if-paid” clauses unenforceable in most circumstances. Particularly, The mannequin new regulation applies to each public construction contracts and sure private construction contracts that contain A minimal Of 1 widespread contractor and one subcontractor. Enchancment corporations In any respect tiers ought to understand the scope of this new regulation earlier than Getting into any construction contract in Virginia on or after January 1, 2023.

The new regulation amends the Virginia Immediate Payment Act (Va. Code § 2.2-4354) and Virginia’s wage theft statute (Va. Code § 11-4.6), as relevant to each Private and non-private construction contracts respectively.  This is what Virginia construction contractors Want to know Regarding The mannequin new regulation:

For Public Enchancment Contracts

  • Contracts should embrace a cost clause that requires a contractor to be individually Responsible for The complete quantity owed to any subcontractor.
  • The contractor Will not be Responsible for quantitys that stem from the subcontractor’s noncompliance with the phrases of the contract.
  • If the contractor withholds all or An factor of The quantity promised to the subcontractor, the contractor should notify the subcontractor, in writing, of its intention to withhold with The rationale for noncost.
  • Payment by the celebration contracting with the contractor should not be a situation precedent to the contractor’s cost to its subcontractor(s), Regardless of whether or not the contractor acquired cost for quantitys owed. (This primarily Signifies that “pay-if-paid” or “pay-when-paid” clauses are Not enforceable.)
  • These cost requirements should circulate Proper down to the contractor’s subcontractors.

For private Enchancment Contracts

  • Contracts between an proprietor and The general contractor should embrace a provision that requires the proprietor to pay The general contractor inside 60 days of receiving an bill following passable completion.
  • Contracts between a widespread contractor and a subcontractor should embrace a provision that makes The greater-tier contractor Responsible for the decrease-tier subcontractor’s duties beneath the contract.
  • The greater-tier contractor should pay the decrease-tier subcontractor Contained in the sooner of (i) 60 days of the passable completion of the work or (ii) 7 days after receiving quantitys paid.
  • If the proprietor or contractor withholds all or An factor of The quantity promised to The general contractor or subcontractor, the proprietor or contractor should notify The general contractor or subcontractor, in writing, of its intention to withhold and The rationale for noncost.
  • Payment by the proprietor or greater-tiered contractor should not be a situation precedent to the contractor’s cost to its subcontractor(s), Regardless of whether or not the contractor acquired cost for quantitys owed, till the celebration contracting with the contractor is insolvent or a debtor in chapter. (This primarily Signifies that “pay-if-paid” or “pay-when-paid” clauses are Not enforceable.)

Contractors Might have A the placeas To rearrange for these modifications. These modifications apply solely to construction contracts executed on or after January 1, 2023. As properly as, The mannequin new regulation defines “subcontractor” to exclude individuals solely furnishing supplies, so these modifications Do not Want to be included into purely current contracts.

At backside, this new regulation shifts The hazard of noncost by the proprietor onto greater-tiered contractors.  Enchancment contractors ought to compensate for this hazard-shifting by taking The subsequent steps:

  • Make constructive That private contracts embrace The mannequin new prompt cost provisions As properly as to curiosity penalties to The utmost extent potential.
  • Modify “pay-when-paid” and “pay-if-paid” clauses To use solely to circumstances the place the enterprise proprietor is insolvent or information for chapter shieldion.
  • Include particular provisions in all subcontracts that permit the prime contractor to withhold cost from subcontractors and set out A clear course of for doing So as that meets the regulation’s new notification requirements.
  • Construction private construction contracts To current extra frequent determinations of satisfactorily accomplished work and mandate cost inside 60 days for that satisfactorily accomplished work.

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