Final Thoughts on New Pay If Paid Legislation in VA

This past General Assembly session, and after a governor’s amendment and with the convening of a study group, a new statute banning so-called “pay-if-paid” clauses from enforcement was passed.  Some of the key features of the legislation are as follows:

It does not take effect until January 1, 2023, and,

For those construction contracts in which there is at least one general contractor and one subcontractor:

1. It requires payment within 60 days of receipt of an invoice following the satisfactory performance of the work or within 7 days of receipt of payment by the Owner
2. It allows for retainage
3. It allows the higher-tier contractor to withhold money for improper performance
4. It requires that, in the event of withholding of payment, the withholding contractor must provide written notice of both the reason for withholding and the lower-tier subcontractor responsible for the non-compliance
5. It explicitly states that payment by the higher-tier contractor cannot be a condition precedent to payment unless the party that has a payment obligation to the higher-tier contractor is in bankruptcy or is insolvent as defined by state law
6. It Provides that failure to abide by these rules will result in interest penalties pursuant to Va. Code 2.2-4355

In short, as of January 1, 2023, many of the clauses currently in construction contracts will be rendered invalid.

What questions still need to be answered?

One is whether creative construction attorneys can contract around the interest provision of the statute.  While the statute itself does not bar provisions that create a smaller interest obligation, it does have mandatory language referencing the interest provisions of the Virginia Public Procurement Act.  Whether this language can be contracted around and whether the courts here in Virginia would enforce the lower interest rate much like those courts will enforce clauses that purport to shorten the limitations period to bring a contract action will be interesting.  If the courts will, in fact, enforce such smaller interest provisions, the interest and penalties could be rendered essentially zero by a well-drafted contract provision.  I am skeptical that even the Virginia courts with their pro-contract bent will allow for this, but we shall see.

Another is whether notice is required every time retainage is withheld.  While the statute does explicitly allow for retainage provisions, it is unclear as to whether the withholding of retainage constitutes an act that requires notice.

A third question that will need to be answered either through good contract drafting or litigation is what, if any, teeth the provision requiring notice of which lower-tier subcontractor is responsible for any deficiency.  If a general contractor provides a reason for withholding, for instance, the wrong HVAC compressor was installed, but fails to state that the mechanical subcontractor was responsible, is the general contractor still liable for payment and interest?  If so, how far down the contractual chain does this requirement go?  If it is the supplier’s error and the general contractor only names the subcontractor (and not its supplier), is that a violation of the statute?  If this is the case, then the statute requires more, not less, paperwork than before.

To conclude, there are policy arguments to be made on both sides of the pay-if-paid debate and those have seemingly been resolved by this statute.  However, there remain questions to be answered and interpretations to be made as to what contractual provisions are necessary and what particular actions are required by the new legislation.  As always, I highly recommend that all construction professionals affected by this statute consult with an experienced Virginia construction attorney to discuss how the last legislative session affects their business.

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.