If you’ve searched Google for “Virginia Pay If Paid,” “Virginia Pay When Paid,” “Pay if Paid Enforceable,” or “best construction lawyer ever,” and you’ve come across this page (that the last one is just an exaggeration). Let’s get straight to the point: Virginia has joined the 11 other states that have explicitly prohibited “pay if paid” clauses in construction contracts. If you are involved in construction projects in Virginia, you should read this article. If you’re interested in knowing if your state bans these clauses, then continue reading. If you’re interested in learning what the difference is between “if” and “when” and “when,” then continue reading.
What is the difference? Many websites explain the distinction between these two kinds of construction contract clauses; however, I prefer to make it a bit more straightforward:
- Pay after payment is a simple consequence of the time of the payment (i.e., when you will be paid). …”Contractor will pay Subcontractor within 15 working days after receiving payment from Owner .”);
- Payment when received is a result of the extent to which you receive payment (i.e. shifts the danger of not being paid … “Payment from the Owner to the Contractor is a condition precedent to payment from the Contractor to the Subcontractor.”)
Most states that have dealt with the issue permit “pay if paid” clauses in the event that there is clearly and unambiguously written language shifting the risk of not paying to the subcontractor. Some require more than “pay-if-paid” language in the contract between the parties. For example, you could have to include the magical wordings “condition precedent” or “risk of nonpayment” as described in the following section. In these times of tight budgets, you will be able to appreciate how crucial payment provisions are to the transaction between parties, particularly when cost increases are increasing, and projects can stall mid-performance due to financial problems or owner default.
What state does my law have a ban on clauses that pay if paid? Again, there are many sources available that offer a summary of the present status of the law. One of the most helpful I’ve seen was published by Levelset that has an 50-State-Guideline on the pay-if-paid provision. According to Levelset, these states are forbidden clauses that require payment if they are paid:
- California
- Kansas
- Illinois
- Indiana
- Nevada
- Montana
- North Carolina
- New York
- South Carolina
- Utah
- Wisconsin
It is now possible to add Virginia to the list! On April 27th, 2022, Virginia Governor Youngkin signed into law SB550 that explicitly bans “pay-if-paid” clauses in construction contracts. The law will take force on January 1, 2023.
What is the Virginia law says? The new law requires prime contractors to reimburse subcontractors after 60 days of receiving an invoice or seven days following receipt of an invoice from their owner, whichever comes sooner. Penalties to late payments. It is established in the form of a part of the Virginia Prompt Pay Act (Va. Code 2.2-435) as well as Virginia’s statute against wage theft (Va. Code 11-4.6). The law is more comprehensive than just prohibiting “pay-if-paid” clauses–it addresses numerous other issues that are best described in Virginia’s LIS bill-tracking website:
- The law is applicable to both public and private contracts in which there is at minimum at least one general contractor as well as a subcontractor.
- The law mandates the use of a payment clause, which obligates contractors to be accountable for the full amount due to any subcontractor with whom they contract;
- The law stipulates that contractors cannot be liable for other amounts reduced due to the subcontractor’s infraction to the clauses of the contract.
- However, the contractor has to notify the subcontractor by writing of the intention of the contractor to withhold all or a portion the subcontractor’s payments, along with the reason;
- The law says that the payments made by the contractor’s partner with the contractor should not be a precondition to payment to a subcontractor of lower tier (i.e., that’s an exception to the “pay if paid” prohibition) as well as
- in the agreement between the owner and contractor, there should be a payment clause in the agreement that is a condition for (i) that the contractor be paid within 60 days after receiving of an invoice after the satisfactory completion of the work and (ii) an upper-tier contractor to pay a subcontractor of lower tier within the first 60 days after the satisfactory completeness of the work the work that the subcontractor invoiced or seven days following the receipt of payments made by the contractor to the owner for the work done
What’s the deal? Some states have attempted, but have failed to adopt similar protections as was the case in Tennessee just a few years ago. Some states also have prohibitions, and the ban was ruled out by courts, like The California Supreme Court’s ruling in the case of Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997), in which the court ruled the “pay if paid” clauses cannot be enforced because it makes a subcontractor give up or surrender his constitutionally guaranteed mechanics lien rights when the owner is unable to make payments due the general contractor.
A key point to remember: WORDS MATTER. It is essential to know the lien rights of projects, protections for payment and, ultimately, the danger of not being paid. Examine your contracts and know the law of your state.