Virginia Passes Law that Prohibits the Use of Paid-if-Paid Clauses in Public and Private Construction

The State of Virginia recently passed a law which helps ensure that construction subcontractors get paid for their work. Historically, “paid-if-paid” clauses in construction contracts have been enforceable in Virginia if the contract language is unambiguous.[1] A paid-if-paid clause creates a condition precedent where the prime contractor is only required to pay its subcontractors if the project’s owner first pays the prime contractor. Therefore, if a construction job falls through and/or the owner otherwise stops paying, paid-if-paid clauses free the prime contractor from having to pay its subcontractors. Virginia’s new law shifts the risk of getting paid for completed work from subcontractors back to the prime contractor.

In April 2022, Virginia passed into law SB550, which prohibits the use of paid-if-paid clauses in any public or private construction contract; the law goes into effect on January 1, 2023. SB550 requires a prime contractor to pay its subcontractors, regardless of whether the project owner pays the prime contractor. Under SB550, prime contractors are obligated to pay a subcontractor within sixty days from receiving an invoice from the subcontractor, or seven days after receiving payment from the owner, whichever is earlier.

Virginia’s new law is unique because paid-if-paid clauses are enforceable in most jurisdictions. Virginia will be the seventh state to make paid-if-paid clause unenforceable.[2] Nine other states only prohibit paid-if-paid clauses under certain conditions.[3] In most of these jurisdictions, paid-if-paid clauses are void when they weaken the subcontractor’s ability to file a mechanic’s lien. A mechanic’s lien is a claim against the project owner’s physical property to secure payment for labor or materials supplied for a private construction project. An argument against laws like SB550 is that subcontractors can remedy nonpayment for a job by filing a mechanic’s lien and directly pursue the private project’s owner. Most states also have lien and fund trapping statutes that help subcontractors get paid. However, filing mechanic’s liens is a complex and time-consuming process, and SB550 gives subcontractors additional protection.

It is uncertain whether other states will follow Virginia’s lead and ban paid-if-paid clauses. SB550 is a significant bill because Virginia’s historic view on contract law is that a contract’s terms usually supersede other provisions. Any new paid-if-paid laws throughout the country will likely result on a state-by-state basis, rather than states coming together to pass new legislation. WFJ will continue to stay up to date on paid-if-paid laws and all other mechanic’s lien and payment bond laws in the United States and Canada to ensure our clients are protected and fully informed of their rights.

[1] See Galloway Corp. v. S.B. Ballard Const. Co., 464 S.E.2d 349 (Va. 1995); see also Universal Concrete Products v. Turner Const. Co., 595 F.3d 527 (4th Cir. 2010).

[2] The other six states are California, Delaware (for private contracts), New York, North Carolina, South Carolina, and Wisconsin.

[3] The nine states include Illinois, Indiana, Kansas, Maryland, Massachusetts, Montana, Nevada, Ohio, and Utah.