New Statutory Payment Regime For Public And Private Works In Virginia

• Jurisdiction: Virginia,United States
• Law Firm: Seyfarth Shaw LLP
• Subject Matter: Real Estate and Construction, Construction & Planning
• Author: Mr Anthony LaPlaca
• Published date: 10 January 2023

For general contractors working in Virginia, 2023 marks the end of one of the more prolific contractual rights available-the pay-if-paid defense. Until now, pay-if-paid clauses were a valid means of shifting to subcontractors the risk of owner insolvency or wrongful withholding. In the spirit of freedom of contract, Virginia courts historically held that unambiguous language rendering owner payment a condition precedent to the contractor's duty to pay subcontractors was enforceable.¹ Not any more. Under the new statutory regime, contractors must pay subcontractors regardless of whether the owner has timely made payment to them. Notably, however, contractors retain general withholding rights arising out of subcontractor default and, on private projects, have been afforded a new 60-day pay period in which the owner is obligated to deliver progress payment or notify them of withholding.

Senate Bill 550

Virginia Senate Bill 550 went into effect on January 1, 2023. This legislation modifies existing statutes to prohibit, for both public and private subcontracts, contingent pay clauses for all subcontracts entered into in 2023 and onward; though, as discussed below, the legal effect of Senate Bill 550 differs somewhat between public and private works of improvement.

Absolute prohibition on pay-if-paid in public works

The operative statutory amendment compels general contractors to include in all public contracts a payment clause that obligates the contractor to "be liable for the entire amount owed to any subcontractor with which it contracts."² The statute further states that payment by the public owner "shall not be a condition precedent to payment to any lower-tier subcontractor, regardless of that contractor receiving payment for amounts owed to that contractor."³ Thus, any attempt to shift risk to subcontractors for the Commonwealth's payment default violates public policy moving forward.

Notice of withholding on public works

To be certain, the new legislation preserves the general contractor's right to withhold payment from subcontractors for amounts "otherwise reducible due to the subcontractor's non-compliance with the terms of the contract." However, general contractors have a statutory duty to notify subcontractors, in writing, of their intent to withhold part or all of an invoice, and the reasons for withholding. Such notice of withholding must be sent to both the subcontractor and the agency of the Commonwealth or the municipality awarding the prime...