The Dotted Line: Virginia bans ‘pay-if-paid’ contract language

Building subcontractors in Virginia can now breathe a minor simpler when it comes to obtaining paid for their operate.  

In April, Virginia Gov. Glenn Youngkin signed into law SB550, which prohibits the use of “pay-if-paid” clauses in building contracts. In executing so, Virginia joined a handful of states that have some style of statutory ban on a widespread, but also controversial, lawful phrase of artwork in construction contracts.

Shell out-if-paid out clauses shift the chance of finding paid for finished do the job on a challenge from the key contractor down to its subs, lawyers say. In other terms, if the wheels arrive off a career and the revenue stops flowing at the top, shell out-if-paid clauses permit the prime off the hook for any income owed to subs lower on the chain.

“If for some rationale the proprietor will not spend the typical contractor and you happen to be a subcontractor, you may never ever see payment, even if it is really completely unrelated to your perform,” reported Shoshana Rothman, a husband or wife in the Tysons, Virginia, business office of design regulation business Smith, Currie & Hancock LLP.

When that could not appear good for subcontractors who have no control in excess of the dealings in between a prime and the proprietor, “in lots of jurisdictions, it is totally enforceable,” claimed Judah Lifschitz, principal and co-president of Washington, D.C.-based legislation business Shapiro, Lifschitz & Schram, P.C. “If you are not in this field, pay-if-paid out could possibly look a minor little bit shocking, even draconian,” he reported.

For that reason, Lifschitz claims subs normally attempt to stay clear of pay out-if-compensated clauses in contracts. But they may feel compelled to acknowledge them in circumstances wherever they really don’t have leverage, or throughout periods when do the job is scarce.    

“Most advanced subcontractors know far better, and they would not signal a subcontract with a spend-if-compensated clause,” Lifschitz stated. “But when economic times are rough and individuals will need the get the job done, some subcontractors will sign what they need to indication to survive.”

What SB550 does                           

Virginia’s new law tries to relieve that problem for subs on equally public and personal contracts, and puts the onus of payment back on the shoulders of key contractors, no matter of whether or not they are compensated by a undertaking owner.

“SB 550 prohibits the inclusion of pay out-if-paid out phrases in any public or private design agreement,” mentioned Phillip L. Sampson Jr., a companion at Houston-based legislation organization Bracewell LLP. “The Virginia legislature took the action that only a couple other U.S. states to date have taken to shield subcontractors from the likely unfairness and inequities ensuing from pay-if-paid subcontracts.”

SB550 involves primes to pay back subs within 60 times from obtaining an invoice, or seven times following getting payment from the proprietor, whichever is previously. Interest penalties use for late remittance.

Just 6 other states have rules on the books that explicitly make pay out-if-compensated clauses unenforceable by statute, according to a study by legislation organization Woods Aitken:

• California.
• Delaware (for non-public contracts).
• New York.
• North Carolina.
• South Carolina.
• Wisconsin.

When SB550 goes into influence Jan. 1, 2023, Virginia will turn out to be the seventh condition to have such a statute. The prohibition will apply to contracts from that day forward, according to Rothman.

Protection outside of liens

9 other states — Illinois, Indiana, Kansas, Maryland, Massachusetts, Montana, Nevada, Ohio and Utah — have language on the textbooks or authorized precedent that make spend-if-compensated clauses unenforceable underneath selected circumstances, in accordance to the Woods Aitken survey.

In most of these jurisdictions, shell out-if-compensated clauses come to be void when they undermine a sub’s right to file a mechanic’s lien in opposition to a personal venture for non-payment. (On public assignments, subs can typically make a payment bond declare.)

Liens, which set a assert on physical property by a 3rd occasion, have extended been applied in building by subs to get paid. They’re helpful since subsequent financing — for case in point, a development mortgage converting to a extended-term mortgage soon after a task is accomplished — is typically subject to an asset being cost-free of any third-social gathering statements.

In other words, subs can nevertheless cure nonpayment for a career by pursuing the proprietor of a non-public venture right through a lien. In truth, fork out-if-compensated supporters highlight the lien alternative as a explanation why guidelines like Virginia’s are pointless.

“Most states have solid lien and fund trapping statutes that assistance shield subcontractors’ ideal to payment in just a acceptable time,” Sampson reported. “Proponents of pay-if-paid out provisions — contractors — routinely place to people kinds of statutes as supplying satisfactory protection for subcontractors.”   

At the exact time, the lien system is generally advanced, onerous and time consuming. Texas overhauled its lien rules just lately, for example, to assistance make them additional streamlined. What SB550 and legal guidelines like it provide, lawyers say, is a further avenue for subs to get paid out the cash they are rightly owed.