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Progressive New Legislation in the State of Virginia prohibits “Pay-if-Paid” Clauses

April 4, 2022

By Joseph H. Bucci, Esquire

On March 3, 2022, the Virginia Legislature weighed in on the long-standing problem of the “pay-if-paid” clause in both public and private construction contracts.  We know from prior experiences, that if a “pay-if-paid” provision is inserted in a construction agreement/subcontract/purchase order to protect the upstream party from the risk of non-payment by the owner, there is a possibility that contractors/subcontractors will not receive the payments they have earned.  These clauses have the legal effect of conditioning the duty of the upstream contractor to make payment to a subcontractor, or to downstream parties, on receipt of payment from the owner.  Subcontractors and others who fall subject to this clause have long argued that the risk of owner non-payment should be placed on the shoulders of the upstream party, many times the general contractor, because it is the upstream party who is best able to manage and control the risk of non-payment.

All of that is changing in the Commonwealth of Virginia as of March 3, 2022.  On that date, the Virginia Legislature passed a bill known as “SB550” which prohibits contractors on both public and private construction projects in the Commonwealth of Virginia from including provisions in their subcontracts that condition payment on the receipt of funds from the owner or higher-tier contractors.  It also requires prompt payment of invoices on private projects.  Specifically, Bill SB550 requires owners of private projects to pay general contractors no later than 45 days after receipt of an invoice.  General contractors are required to pay subcontractors by the earlier of 45 days after receipt of an invoice or 7 days after receipt of payment from the owner or contractor for the subcontractor’s work.  Owners and contractors retain the right to withhold payment from lower-tier contractors for nonconforming work, assuming proper and timely written notice is given stating the specific reasons for the withholding.  This new bill is expected to be signed into law by the Governor of Virginia, Governor Youngkin, by April 15, 2022.

If you have any questions on this progressive legislative action, or if you need assistance with negotiating construction agreements that still have these types of “pay-if-paid” clauses inserted, do not hesitate to contact us online or call (412) 338-1149.

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