Last week I discussed the potentially onerous legislation that essentially made contractors the employers of all employees of their subcontractors and suppliers on a job site. That was only one of the impactful statutes that was passed by the General Assembly and that will take effect in July of 2020. While the above mentioned legislation may be a negative for the efficient and cost effective provision of construction services in the Commonwealth, not all of the news out of the Virginia legislature is bad for contractors, subcontractors and suppliers.
The first of the “good news” bills is one that seeks to address what has become known as the “Hensel Phelps” issue.
HB130 provides that an action against the surety on a performance bond shall be brought within five years after the completion of the contract. The bill further provides that the statute of limitations on construction contracts and architectural and engineering contracts performed for the Commonwealth and its agencies and subdivisions is 15 years after completion of the contract. The bill specifies that completion of the contract is the final payment to the contractor pursuant to the terms of the contract, but that if a final certificate of occupancy or written final acceptance of the project is issued prior to final payment, the period to bring an action shall commence no later than 12 months from the date of the certificate of occupancy or written final acceptance of the project. This seeks to address what has become known as the “Hensel Phelps” issue.
This bill is a good, though not ideal, compromise that should at least provide some certainty for general contractors and their subcontractors relative to indemnity and statues of limitation on projects performed for the Commonwealth and its agencies. Prior to this statute being passed, general contractors could be exposed to potential liability for construction on state project for an indefinite or potentially infinite period of time while being held to a statute of limitation for any action to recoup any potential losses from subcontractors that may have been the actual cause of the liability.
While we construction attorneys have tried to work with our clients to deal with this issue contractually, the possible infinite nature of the indemnity obligation for subcontractors remained a sticking point. This latest legislation at least puts an end date on that exposure. 15 years is a long time, but it is much less than forever. In short, this legislation does not give construction professionals the same statutes of limitation on state jobs as private ones, but it is better than before.
The second “good news” bill is a boon for subcontractors and suppliers that perform multiple projects simultaneously for the same general contractor or subcontractor.
SB208 specifies that the use of funds paid to a general contractor or subcontractor and used by such contractor or subcontractor before paying all amounts due for labor performed or material furnished gives rise to a civil cause of action for a party who is owed such funds. The bill further specifies that such cause of action does not affect a contractor’s or subcontractor’s right to withhold payment for failure to properly perform labor or furnish materials and that any contractual provision that allows a party to withhold funds due on one contract for alleged claims or damages due on another contract is void as against public policy.
This bill seeks to assure that the money flow on a particular project is not affected by other projects. The first way it does so is through the requirement that money paid from the owner or general contractor to a general contractor or subcontractor on a project is first used to pay bills to those that contracted with that general contractor or subcontractor to perform labor or provide materials to that project. The second way is to hold that the all too common clause of many construction contracts allowing withholding of funds from Project B for alleged damages due to work on Project A.
These two “prongs” of the statute should work in concert to keep the contractual flow of money on a project cleaner than in the past. It will further work to keep job cost accounting in place in a way that should allow issues on one project to be resolved without ripple effects that can expand payment issues between contractors and subcontractors beyond a single construction job. Hopefully, this will encourage stronger relationships between construction companies and where necessary allow payment disputes to be resolved more simply and efficiently.
As with all analysis of cases or statutes here at Construction Law Musings, I recommend that you read the legislation yourself and consult a Virginia construction attorney for advice on how these legislative changes affect your construction business.
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