Similar to its neighbors in Maryland and the District of Columbia, Virginia has analyzed its treatment of the “pay-if-paid” or “pay-when-paid” clauses in construction contracts. Virginia previously allowed pay-if-paid clauses in construction contracts that allowed a general contractor to defer payment to its subcontractors until the general contractor was paid by the owner of the project. This changed with the passage of amendments to Virginia Code § 11-4.6 that became effective in 2023.
A typical pay-if-paid clause in a subcontract might read: “The Parties agree that any payment by the General Contractor to the Subcontractor is subject to the condition precedent that the General Contractor is first paid by the Owner for the underlying work.” This type of condition precedent leaves the subcontractor at risk of not being paid for reasons that may be beyond the subcontractor’s or the general contractor’s control.
To address this issue, Virginia enacted amendments to Virginia Code § 11-4.6, “Required contract provisions in construction contracts”, which went into effect on January 1, 2023. The statute now prohibits the use of “pay-if-paid” clauses in most construction contracts in Virginia and limits the time and circumstances under which payments can be delayed from owner to general contractor and from general contractor to subcontractor. For purposes of its application, the statute defines “construction contract” as “a contract for the construction, alteration, repair, or maintenance of a building, structure, or appurtenance thereto, including moving, demolition, and excavation connected therewith, or any provision contained in any contract relating to the construction of projects other than buildings, except for contracts awarded solely for professional services….” The professional services referred to include architecture, land surveying, landscape architecture, and professional engineering.
The statute requires that, for construction contracts between the owner and general contractor, the parties shall include a provision that requires the owner to pay such general contractor within 60 days of the receipt of an invoice following satisfactory completion of the portion of the work for which the general contractor has invoiced. Virginia Code § 11-4.6(B)(1). In the event that an owner withholds all or a part of the amount invoiced by the general contractor, the owner must notify the general contractor in writing within 45 days of the receipt of the invoice of the owner’s intention to withhold all or part of the general contractor's payment with the reason for nonpayment, specifically identifying the contractual noncompliance and the dollar amount being withheld. Id.
Similarly, concerning subcontracts, where there is at least one general contractor and one subcontractor, the contract will be deemed to include a provision under which any general contractor is liable to any subcontractor with whom the general contractor contracts for satisfactory performance of the subcontractor's duties under the contract. Virginia Code § 11-4.6(B)(2). “Such contract shall require such general contractor to pay such subcontractor within the earlier of (i) 60 days of the receipt of an invoice following satisfactory completion of the portion of the work for which the subcontractor has invoiced or (ii) seven days after receipt of amounts paid by the owner to the general contractor or by the contractor to the subcontractor for work performed by a subcontractor pursuant to the terms of the contract. Id.
Similar to the circumstance noted above, where an owner withholds payment from the general contractor, in the event that a contractor withholds all or a part of the amount invoiced by any subcontractor under the contract, the contractor shall notify the subcontractor within 50 days of the receipt of such invoice, in writing, of his intention to withhold all or a part of the subcontractor's payment with the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount being withheld, and the subcontractor responsible for the contractual noncompliance. Id. By its terms, the statute does not apply to or prohibit the inclusion of any retainage provisions in a construction contract.
The statute also provides that “[P]ayment by the party contracting with the contractor shall not be a condition precedent to payment to any subcontractor, regardless of that contractor’s receiving payment for amounts owed to that contractor, unless the party contracting with the contractor is insolvent or a debtor in bankruptcy….” Virginia Code § 11-4.6(B)(2). Any provision in a contract contrary to this section is unenforceable under the terms of the statute. Id.
Virginia’s amendments to Virginia Code § 11-4.6 should reduce the uncertainty in applying “pay-if-paid” or “pay-when-paid” clauses in construction contracts and should help reduce the risk of nonpayment or delayed payments for general contractors and subcontractors.
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