Virginia has joined the ranks of states that ban “pay-if-paid” clauses. Contingent payment clauses, like “pay-if-paid” and “pay-when-paid” clauses, protect contractors: A contractor need not pay its subcontractors or suppliers until the owner pays the contractor.
A “pay-if-paid” clause conditions a subcontractor’s right to payment on the owner paying the contractor. A “pay-when-paid” clause only conditions the timing of payment. Even if the owner does not pay the contractor, the contractor must pay the subcontractor within a “reasonable” time after it performs. Virginia Senate Bill 550, which took effect on January 1, bans “pay-if-paid” clauses in both private contracts (Section 11-4.6) and public contracts (Section 2.2-4354).
Section 11-4.6 of the bill requires higher-tier contractors to pay lower-tier subcontractors within the earlier of either: (1) 60 days from the satisfactory completion of the invoiced portion of work or (2) seven days after receiving amounts paid by the owner to the general contractor (or by the higher-tier contractor to the lower-tier contractor) for work performed by a subcontractor under the contract terms. It similarly requires owners to pay general contractors within 60 days of the receipt of an invoice following “satisfactory completion of the invoiced portion of work.”
The Virginia Public Body Procurement Workgroup issued recommendations to enhance the clarity of Section 11-4.6. The workgroup suggested clarifying that the section only applies to construction contracts. The workgroup also advised using “receipt of invoice” to trigger payments instead of “satisfactory completion of the portion of the work for which the subcontractor has invoiced.”
Section 2.2-4354 of the bill does not mandate a payment timeframe for public contracts, but Subsection (1) provides that such contracts must include a payment clause obligating contractors to be liable for the “entire amount owed” to any subcontractor. The bill bans “pay-if-paid” clauses by stating that contracts may not make an owner’s payment a condition precedent to a contractor paying a subcontractor.
Here the workgroup suggested clarifying how Subsection (1)’s language requiring that a contractor be liable for the “entire amount owed” reconciles with Subsection (2)’s language obligating a contractor to pay the subcontractor “the proportionate share of the total payment.” This difference could give rise to litigation with contractors arguing they paid the “proportionate share,” while subcontractors argue they were not paid the “entire amount owed.”
The workgroup also suggested clarifying the timeframe in which a general contractor must pay a subcontractor. Lastly, Subsection (1) specifically applies to construction contracts; Subsection (2) does not. The workgroup recommended clarifying the type of contract to which each subsection applies.
In light of Virginia Senate Bill 550 and the workgroup’s recommendations (which may be adopted as early as March 2023), subcontractors, contractors, and owners should review their standard contract language. As of January 1, new contracts must comply with these provisions or risk being unenforceable.