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New Virginia Law Attempts to Prohibit Pay-When-Paid Clauses in Construction Contracts | Fox Rothschild LLP

New Virginia Law Attempts to Prohibit Pay-When-Paid Clauses in Construction Contracts | Fox Rothschild LLP

Virginia has joined a little group of states that prohibit the inclusion of pay-when-paid clauses in private and community development contracts. There are, nonetheless, some crucial ambiguities in the new legislation.

For this cause, organizations that provide expert services as contractors or subcontractors really should very carefully consider the new regulation when negotiating future contracts in Virginia on or right after January 1, 2023, when it requires influence.

What Contractors and Subcontractors Want to Know

Senate Bill 550 was enacted on April 27, 2022 following becoming accepted by the Virginia legislature on March 10, 2022. SB550 amends a portion of the Virginia Prompt Payment Act (Va. Code § 2.2-4354) and a portion of Virginia’s “wage theft” statute (Va. Code § 11-4.6). The legislation prohibits the use of spend-when-paid clauses in development contracts in between normal contractors/bigger-tier contractors and subcontractors and applies to contracts awarded by point out or regional authorities organizations as very well as non-public contracts that include things like at least one typical contractor and a person subcontractor.

Shell out-when-compensated clauses are intended to secure common contractors from the possibility of nonpayment by the operator. They do this by allowing for contractors to wait around to pay out subcontractors until eventually they by themselves have been compensated by the undertaking owner. Underneath Virginia’s new law, however, design contracts will have to include a provision whereby the undertaking proprietor is expected to pay their contractor no later on than 60 times following getting an bill. Similarly, subcontracts have to incorporate a provision that necessitates contractors to fork out their subcontractors in the previously of 60 times just after the subcontractor’s invoice submittal or 7 days soon after receipt of sum paid by the proprietor or increased-tier contractor.

Even though the legislation does not change a contractor or owner’s appropriate to withhold payment owing to nonconforming function and failure to adhere to deal phrases, it does shield subcontractors from the risk involved with nonpayment at concentrations previously mentioned their agreement.

The legislation is poorly drafted, with ambiguities and holes for contractors to get the job done all around the statute. For instance, the penalties involved with violating the statute are established at 1{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a} per thirty day period on the unpaid quantities unless the deal provides or else. This leaves open up the probability that a contractor could insert a ridiculously lower desire price for late payment in its contracts and effectively get rid of the affect of the statute. Additional, when the language of SB550 makes very clear that construction contracts need to incorporate a provision necessitating a contractor to notify their subcontractor of their intent to withhold payment, the language does not specify a timeline for the observe provision or irrespective of whether there should be any consequences for a contractor’s failure to deliver discover. The legislation is also silent when it arrives to its software in contracts with a decision-of-legislation provision. For instance, does the prohibition use to a deal on a Virginia task that is ruled by the rules of a condition that does not demand identical payment provisions.

As generally, shoppers are strongly encouraged to have their contracts reviewed by skilled building counsel – particularly subsequent the enactment of any new laws.

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