New Legislation Bans Contingent Payment Provisions in Virginia

BY?JACKSON S. NICHOLS,?NICHOLAS F. MORELLO

The Virginia Legislature passed a bill that, if signed into law by Governor Youngkin, would amend VA ST §§ 2.2-4354 and 11-4.6 to prohibit the use of contingent payment provisions in public and private construction projects. It states that “[p]ayment by the party contracting with the contractor 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.”

Virginia has a reputation for allowing parties to negotiate and agree to almost any terms in a contract. This deviation from that policy will remove a contractor’s and higher-tiered subcontractor’s ability to use “pay-if-paid” or “pay-when-paid” provisions to shift the risk of an owner’s non-payment downstream to lower-tiered subcontractors. It is still uncertain whether or not this will apply only to projects moving forward or if it will also apply retroactively to projects that are in progress as of the law’s effective date. On April 11, 2022, Governor Youngkin sent a proposed amendment to the bill back to the legislature proposing that the new bill “shall apply to construction contracts executed on or after January 1, 2023.”

In addition to the ban on contingent payment provisions, the revision to VA ST § 2.2-4354 requires any public contract contain a provision that obligates a contractor to be individually liable for the entire amount owed to the subcontractor, except for “amounts otherwise reducible due to the subcontractor’s noncompliance with the terms of the contract.” If withholding funds for non-compliance, the contractor must provide the reason for withholding the funds in a written notice. The revision to VA ST § 11-4.6 addresses private contracts and states that in prime contracts, the owner shall pay the contractor within 45 days of an invoice of any undisputed portion of the work invoiced. Similarly, in a subcontract, the contractor must pay a subcontractor for undisputed portions of invoices “within the earlier of (i) 45 days of the satisfactory completion of the portion of the work for which the subcontractor has invoiced or (ii) seven days after receipt of amounts paid by the owner to the general contractor or by the higher-tier contractor.”

If the bill is signed into law, the main takeaway for contractors and higher-tiered subcontractors is that it will be more important than ever to evaluate the financial condition and reliability of an owner on a project since, in the event of non-payment by the owner, contractors will now be liable for payment to lower-tiered subcontractors. Additionally, all contractors and subcontractors will need to review and revise their contracts to remove any contingent payment provisions.

The attorneys at Cohen Seglias will continue to follow any developments in the legislation. If you are a contractor or subcontractor operating in Virginia and would like more information and help in determining how this bill affects your business, contact Jackson Nichols at 202.587.4756 or?[email protected], Nicholas Morello at 267.238.4720 or?[email protected], or the Cohen Seglias attorney with whom you work.