“Pay When Paid” or “Pay if Paid” clauses in subcontracts have long been a thorn in the side of subcontractors. If Governor Youngkin signs into law a new bill that passed in both houses of the Virginia General Assembly, those clauses will be a thing of the past for projects involving the Commonwealth or any local government. Once passed, existing standard construction contracts should be reviewed to ensure compliance with the new bill.
This change in the Commonwealth’s statutory framework has been highly anticipated by downstream contractors and will certainly lessen some of their uncertainty when signing onto a government job. “Pay When Paid” and “Pay if Paid” clauses exist in construction contracts to protect against the potential for the general contractor to not get paid for a project. Without these “contingent” payment clauses, the general contractor will be held liable for payments to subcontractors and suppliers whether she gets paid or not on government projects.
What about contracts for projects that don’t involve the Commonwealth or a local government? Are “Pay When Paid” or “Pay if Paid” clauses still enforceable in Virginia?
Yes. These “contingency” payment clauses will typically be enforced by courts in Virginia as long as it is clear what the intent of the contracting parties was at the inception of the contract. A number of states have legislation and/or common law in place that make these “contingency” payment clauses against public policy. Virginia courts have long taken the position that a subcontractor who is herself a businessperson should know the terms of the agreement that she chose of her own free will to sign. As such, those terms will be enforceable if the requisite intent is demonstrated.
Is there a difference between a “Pay When Paid” clause and a “Pay If Paid” clause?
Absolutely. The “Pay When Paid” clause serves as a mechanism that delays the time that a general contractor must pay a subcontractor or a supplier. The general contractor is still responsible for paying them within a reasonable amount of time once she gets paid. The “Pay If Paid” clause essentially will extinguish the right for a subcontractor or supplier to hold a general contractor responsible for payment as long as the general contractor never receives any money for that project.
Obviously, each state will have its own interpretation of these clauses, but if you contract in Virginia, they will generally be enforceable on private projects. Changing the word “When” to “If” changes the calculus of who bears the risk associated with nonpayment by the owner. If the contingent clause uses the word “When,” the general contractor bears the risk. If she is paid by the owner, she will have to pay the subcontractor or supplier. If she is never paid by the owner, that shifts the risk to the subcontractor or supplier, as they will most likely never get paid.
The takeaway here is that if you are a contractor, subcontractor, supplier, local government, or an agency associated with the Commonwealth or a local government who is about to embark on a new project, it would be a good idea to have experienced construction law counsel review the contracts and provide advice. You will also want to have your standard contracts reviewed to make sure they comply with the new bill that will become law in the Commonwealth on July 1, 2022, assuming Governor Youngkin signs it.
The full text of the bill can be found here.
Contact Terrence Graves or the Sands Anderson Construction Team for assistance with these issues and any others that may come up.