By Lauren P. McLaughlin, Shoshana E. Rothman, and Joshua E. Holt of Smith, Currie & Hancock LLP
Published March 11, 2022
Virginia has long been known as a state where “contract is king.” That is, courts in the Commonwealth are much more likely to enforce the terms the parties bargained for, even if harsh or onerous. As of March 2022, however, the Virginia legislature passed a bill banning one of the most commonly used conditional payment clauses in construction contracts – the “pay-if-paid” clause.
Pay-if-paid provisions are intended to protect general contractors from the risk of nonpayment by the owner. These clauses ensure that the duty to make payment to subcontractors or downstream parties is expressly conditioned on receipt of payment from the owner. Subcontractors have long argued that the risk of owner nonpayment should be placed with general contractors, i.e., the party better able to manage and control that risk.
What’s Changing?
On March 3, 2022, the Virginia legislature officially weighed in on this longstanding debate, passing a bill to prohibit the use of “pay-if-paid” clauses in both public and private construction contracts within the Commonwealth. The bill also requires prompt payment on private projects, so owners should especially take note of this new law as well. Governor Youngkin is expected to sign the bill into law by April 15.
The bill, known as “SB550,” prohibits contractors on both public and private construction projects in Virginia from including provisions in their subcontracts that condition payment on the receipt of funds from the owner or higher-tier contractor. It also requires prompt payment of invoices on private projects. Specifically, the bill requires owners of private projects to pay general contractors no later than 45 days after receipt of an invoice. General contractors are required to pay subcontractors by the earlier of 45 days after receipt of an invoice or seven days after receipt of payment from the owner or contractor for the subcontractor’s work. Owners and contractors retain the right to withhold payment from lower-tier contractors for nonconforming work, assuming proper written notice is given stating the specific reasons for the withholding.
What’s Missing?
The legislation is silent on whether the prohibition applies retroactively. That means, if litigated, courts will be left to decide whether a pay-if-paid clause in a subcontract executed prior to SB 550’s enactment would be rendered void. Likewise, if a contract dispute is litigated in Virginia, but the contract is governed by another state’s laws where pay-if-paid is valid, query whether a Virginia court would consider that pay-if-paid clause void. The bill also does not address that scenario.
What’s Next?
Having cleared the final legislative hurdle, SB550 now heads to Governor Youngkin’s desk for review and approval before it is formally signed into law. Only a handful of states in the U.S. ban pay-if-paid clauses outright, so Virginia will be in the minority in this regard. Smith Currie will continue to monitor the status of the bill and will provide updates on any additional amendments offered as part of the review and approval process.