{"id":9783,"date":"2022-05-31T14:25:00","date_gmt":"2022-05-31T21:25:00","guid":{"rendered":"https:\/\/essential.construction\/news\/?p=9783"},"modified":"2022-05-31T14:25:00","modified_gmt":"2022-05-31T21:25:00","slug":"the-dotted-line-virginia-bans-pay-if-paid-contract-language","status":"publish","type":"post","link":"https:\/\/essential.construction\/news\/the-dotted-line-virginia-bans-pay-if-paid-contract-language\/","title":{"rendered":"The Dotted Line: Virginia bans ‘pay-if-paid’ contract language"},"content":{"rendered":"
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This feature is a part of \u201cThe Dotted Line\u201d series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series,\u00a0click here<\/a>.<\/em><\/p>\n<\/div>\n

Construction subcontractors in Virginia can now breathe a little easier when it comes to getting paid for their work.\u00a0\u00a0<\/p>\n

In April, Virginia Gov.\u00a0Glenn Youngkin signed into law SB550, which prohibits the use of \u201cpay-if-paid\u201d clauses in construction contracts. In doing so, Virginia joined a handful of states that have some type of statutory ban on a common, but also controversial, legal term of art in construction contracts.<\/p>\n

Pay-if-paid clauses shift the risk of getting paid for completed work on a project from the prime contractor down to its subs, attorneys say. In other words, if the wheels come off a job and the money stops flowing at the top, pay-if-paid clauses let the prime off the hook for any money owed to subs lower on the chain.<\/p>\n

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Shoshana Rothman
\nCourtesy of Smith, Currie & Hancock LLP<\/p>\n

\u201cIf for some reason the owner doesn’t pay the general contractor and you’re a subcontractor, you may never see payment, even if it’s completely unrelated to your work,\u201d said Shoshana Rothman, a partner in the Tysons, Virginia, office of construction law firm Smith, Currie & Hancock LLP.<\/p>\n

While that may not seem fair for subcontractors who have no control over the dealings between a prime and the owner, \u201cin many jurisdictions, it\u2019s absolutely enforceable,\u201d said Judah Lifschitz, principal and co-president of Washington, D.C.-based law firm Shapiro, Lifschitz & Schram, P.C. \u201cIf you\u2019re not in this industry, pay-if-paid might seem a little bit shocking, even draconian,” he said.<\/p>\n

For that reason, Lifschitz says subs usually try to avoid pay-if-paid clauses in contracts. But they may feel compelled to accept them in situations where they don\u2019t have leverage, or during periods when work is scarce.\u00a0\u00a0\u00a0\u00a0<\/p>\n

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Judah Lifschitz
\nCourtesy of Shapiro, Lifschitz & Schram, P.C.<\/p>\n

\u201cMost sophisticated subcontractors know better, and they wouldn\u2019t sign a subcontract with a pay-if-paid clause,\u201d Lifschitz said. \u201cBut when economic times are tough and people need the work, some subcontractors will sign what they need to sign to survive.\u201d<\/p>\n

Virginia\u2019s new law tries to alleviate that situation for subs on both public and private contracts, and puts the onus of payment back on the shoulders of prime contractors, regardless of whether they\u2019re paid by a project owner.<\/p>\n

\u201cSB 550 prohibits the inclusion of pay-if-paid terms in any public or private construction contract,\u201d said Phillip L. Sampson Jr., a partner at Houston-based law firm Bracewell LLP. \u201cThe Virginia legislature took the step that only a few other U.S. states to date have taken to protect subcontractors from the potential unfairness and inequities resulting from pay-if-paid subcontracts.\u201d<\/p>\n

SB550 requires primes to pay subs within 60 days from receiving an invoice, or seven days after receiving payment from the owner, whichever is earlier. Interest penalties apply for late remittance.<\/p>\n

Just six other states have laws on the books that explicitly make pay-if-paid clauses unenforceable by statute, according to a survey by law firm Woods Aitken<\/a>:<\/p>\n

California.
\nDelaware (for private contracts).
\nNew York.
\nNorth Carolina.
\nSouth Carolina.
\nWisconsin.<\/p>\n

When SB550 goes into effect Jan. 1, 2023, Virginia will become the seventh state to have such a statute. The prohibition will apply to contracts from that date forward, according to Rothman.<\/p>\n

Nine other states \u2014 Illinois, Indiana, Kansas, Maryland, Massachusetts, Montana, Nevada, Ohio and Utah \u2014 have language on the books or legal precedent that make pay-if-paid clauses unenforceable under certain conditions, according to the Woods Aitken survey.<\/p>\n

In most of these jurisdictions, pay-if-paid clauses become void when they undermine a sub\u2019s right to file a mechanic\u2019s lien against a private project for non-payment. (On public projects, subs can usually make a payment bond claim.)<\/p>\n

Liens, which put a claim on physical property by a third party, have long been used in construction by subs to get paid. They\u2019re effective because subsequent financing \u2014\u00a0for example, a construction loan converting to a long-term mortgage after a job is done \u2014 is often subject to an asset being free of any third-party claims.<\/p>\n

In other words, subs can still remedy nonpayment for a job by pursuing the owner of a private project directly via a lien. Indeed, pay-if-paid supporters highlight the lien option as a reason why laws like Virginia\u2019s are unnecessary.<\/p>\n

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Phillip L. Sampson, Jr.
\nCourtesy of Bracewell LLP<\/p>\n

\u201cMost states have strong lien and fund trapping statutes that help protect subcontractors\u2019 right to payment within a reasonable time,\u201d Sampson said. \u201cProponents of pay-if-paid provisions \u2014\u00a0contractors \u2014\u00a0routinely point to those types of statutes as providing adequate protection for subcontractors.\u201d\u00a0\u00a0\u00a0<\/p>\n

At the same time, the lien process is often complex, onerous and time consuming.\u00a0Texas overhauled its lien laws<\/a> recently, for example, to help make them more streamlined. What SB550 and laws like it provide, attorneys say, is another avenue for subs to get paid the money they are rightly owed.<\/p>\n

\u201cA lien is always a good bargaining chip for a subcontractor who hasn’t been paid on a private project,\u201d Rothman said. \u201cBut with this law in place now, it adds an extra level of protection. Now, the general contractor is bound to issue payment regardless of any upstream dispute between the owner and the general contractor.\u201d<\/p>\n

While the new law applies only within Virginia, attorneys say there is potential for other states to follow suit. One reason why is Virginia\u2019s historic view of contract law, where legally agreed upon contracts usually supersede other provisions.<\/p>\n

\u201cIt is a big change for us here in Virginia because a contract\u2019s terms are historically king,\u201d said Rothman.<\/p>\n

That said, any new pay-if-paid changes would likely come on a case-by-case basis.<\/p>\n

\u201cIt\u2019s not the COVID of construction contract law, where it\u2019s just going to be contagious across state borders,\u201d Lifschitz said. \u201cI think it will be a state-by-state situation.\u201d<\/p>\n

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____________________________________________________________<\/em>
The Dotted Line series is brought to you by AIA Contract Documents\u00ae, a recognized leader in design and construction contracts. To learn more about their 200+ contracts, and to access free resources, visit their website here<\/a>.\u00a0AIA Contract Documents has no influence over Construction Dive’s coverage within the articles, and content does not reflect the views or opinions of The American Institute of Architects,\u00a0AIA Contract Documents or its employees.<\/em><\/p>\n<\/div>\n

This item was originally posted here: Read More<\/a><\/p>","protected":false},"excerpt":{"rendered":"

This feature is a part of \u201cThe Dotted Line\u201d series, which takes an in-depth look at the complex legal landscape … Read more<\/a><\/p>\n","protected":false},"author":0,"featured_media":9784,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1066,457],"tags":[],"class_list":["post-9783","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-all-posts","category-construction-dive","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"_links":{"self":[{"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/posts\/9783","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/comments?post=9783"}],"version-history":[{"count":0,"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/posts\/9783\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/media\/9784"}],"wp:attachment":[{"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/media?parent=9783"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/categories?post=9783"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/essential.construction\/news\/wp-json\/wp\/v2\/tags?post=9783"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}