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On April 27, 2022, the Virginia General Assembly passed Senate Bill 550, which renders “pay on pay” and “pay on pay if paid” clauses unenforceable in most circumstances and requires Public and private construction contracts include certain payment clauses that oblige contractors to be liable for all sums due to any subcontractor with whom they contract. The requirements below will apply to all future public and private construction contracts executed from January 1, 2023.
The main provisions of SB 550 are divided into two sets of requirements, one for construction contracts in the private sector and the other for state agencies and local governments. Any provision of a construction contract executed after January 1, 2023 that would conflict with these requirements will be null and void.
Contracts between owners and general contractors on private projects
For any construction contract between an owner (private sector entity) and a general contractor:
- The owner and general contractor shall include a provision requiring the owner to pay such general contractor within 60 days of receipt of an invoice after satisfactory completion of the portion of the work for which the general contractor invoiced.
- A homeowner will not be liable to pay amounts invoiced which are subject to withholding tax under the contract for the general contractor’s “non-compliance with the terms of the contract”. However, in the event that an owner withholds all or part of the amount charged by the general contractor under the contract, the owner must notify the general contractor, in writing and in reasonable detail, of his intention to withhold all or part payment from the general contractor with the reason for non-payment.
- Failure of an owner to make payment within the time periods provided for in this paragraph will result in interest penalties.
- Nothing shall be construed as applying to or prohibiting the inclusion of holdback clauses in a construction contract.
Contracts between upper level contractors and sub-contractors on private projects
For subcontracts between a higher level contractor and a subcontractor on a private sector project:
- All contracts between a higher level contractor and a subcontractor shall be deemed to include a provision under which that higher level contractor is liable to the lower level subcontractor with whom the higher level contractor agrees to ensure the satisfactory performance of the subcontractor’s tasks under the contract.
- This contract shall require such higher tier contractor to pay such lower tier subcontractor no earlier than (i) 60 days after satisfactory completion of the portion of the Work for which the subcontractor has invoiced or (ii) seven days after receipt of monies paid by the owner to the general contractor or by the higher tier contractor to the lower tier contractor for work performed by a sub-contractor in accordance with the terms of the contract.
- Payment by the party contracting with the Contractor (the Contractor’s Customer) shall not be a condition precedent to payment to any lower level subcontractor, whether or not such Contractor has received payment of amounts due to such contractor, unless the contractor’s customer (eg owner) is insolvent or bankrupt debtor. This legal provision prevails over any “pay if paid” or “pay if paid” clause in a subcontract.
- Such contractors shall not be liable for amounts otherwise reducible due to the “non-compliance with the terms of the contract” by the subcontractor. “Non-compliance” is not defined or limited in the new law, but it could include nonconforming or defective work by the subcontractor, or the failure of the subcontractor to provide documentation or lien waivers. required under the contract.
- In the event that a Contractor withholds all or part of the amount charged by a lower level subcontractor under the Contract, the Contractor must notify the subcontractor, in writing, of its intention to withhold all or part of the payment of the subcontractor with the reason for non-payment, specifically identifying the contractual non-compliance, the dollar amount withheld, and the lower level sub-contractor responsible for the contractual non-compliance.
- Note that the definition of “subcontractor” expressly excludes “persons supplying materials only”, so these requirements and limitations, including restrictions on pay-if-paid clauses, do not apply to subcontracts. – contracting with material suppliers.
- Any stipulation of a contract contrary to this article is unenforceable.
Contracts between general contractors and subcontractors on public projects
For any construction contract awarded by a state agency or local authority:
- Contracts between general contractors and subcontractors must include a payment clause that makes a contractor liable for all monies due to any subcontractor with whom it contracts.
- Payment by the party contracting with the Contractor shall not be a condition precedent to payment to any lower level subcontractor, whether or not such Contractor has received payment of amounts due to such Contractor. This legal provision prevails over any “pay if paid” or “pay if paid” clause in a subcontract. Also note that, unlike private projects, there is no exception for insolvent or bankrupt contractors.
- Contractors shall not be liable for amounts otherwise reducible due to the subcontractor’s failure to comply with the terms of the contract.
- In the event that the Contractor withholds all or part of the amount promised to the Subcontractor under the Contract, the Contractor shall notify the Subcontractor, in writing, of its intention to withhold all or part of the payment from the Subcontractor with the reason for non-payment.
A full version of the enacted legislation can be found here.
Although this law has a delayed effective date and applies to all construction contracts executed on or after January 1, 2023, the bill also requires the Department of General Services to convene the Task Force on procurement to examine whether the issue of non-payment between general contractors and subcontractors requires legislative remedies. The task force is required to report its findings and any legislative recommendations to the General Assembly no later than December 1, 2022. Our lawyers will closely follow this task force and attend meetings over the summer. Please be on the lookout for any further updates this summer and after the task force report is released. More information about the working group can be found here.
All main contracts and sub-contracts that contain pay-if-paid or pay-if-paid clauses, or that do not contain the requirements described above, will need to be updated by January 1, 2023.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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