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General Contractor Risk Increases with New Virginia Law Are Pay When Paid Provisions now Void in Virginia?

 

The Virginia Code was amended effective July 1, 2015. A contract provision is now null and void if it waives or diminishes a subcontractor's, lower-tier subcontractor's, or material supplier's lien rights, right to assert payment  bond claims, or right to assert claims for demonstrated additional costs in a contract executed prior to providing any labor, services, or materials. This brings Virginia in line with Maryland and many other states that have made contract or pre-work lien and bond waivers void or unenforceable.

Subcontractors and suppliers are understandably pleased with the new language but where does it leave general contractors? General contractors are notably missing from these new Virginia Code provisions.  Accordingly, a general contract can still waive a general contractor’s lien rights before work begins.  General contractors must still be vigilant to identify and strike out lien waivers in their contracts.  Such a waiver in a subcontract, however, is simply void and unenforceable.  As a result, we will more often see projects in which the general contractor has no lien rights, but their subcontractors and suppliers do. This scenario may actually help general contractors more than it hurts them.  However, other consequences of this amendment may place more risk on general contractors.

It is significant that the amendments void contract provisions that waive or diminish lien or bond rights.  A “pay when paid” or “pay if paid” clause may diminish lien or bond rights of subcontractors. Are “pay if paid” clauses now null and void in Virginia? We will need some court opinions to know the answer to this, but we should expect these arguments regularly until court case law provides clarity.

The counter argument would be that “pay if paid” clauses have no impact on lien or bond rights and are therefore not void under the new Virginia Code amendments. This is probably true of lien rights in Virginia, although we do not have complete certainty on this question. Owners, title companies and general contractors still often make the argument that a subcontractor has no lien rights because of a pay if paid clause in the subcontract. In any event, this argument is now lost to owners, title companies and general contractors. If the pay if paid clause would have diminished the subcontractor’s lien rights, then that pay if paid clause is now null and void.

Some courts have held that a payment bond is an independent obligation and that a “pay if paid” clause in a separate contract has no impact on the payment bond obligation. Other courts have recognized the “pay if paid” defense to a payment bond claim, especially if the bond “incorporates by reference” the pay if paid clause. It is more likely that a pay if paid clause diminishes bond rights than lien rights. We may get greater finality to these questions in decisions regarding these new Virginia Code amendments. In any event, however, this argument is now also lost to general contractors and sureties. If the pay if paid clause would have diminished the subcontractor’s bond rights, then that pay if paid clause is now null and void.

General contractors may now be without lien rights, if waived in the general contract, while that general contractor still has exposure to subcontractor and supplier bond claims.  A general contractor may also still be contractually obligated to defend and indemnify the owner against the subcontractor and supplier mechanic’s lien claims.  The pay if paid clause in the subcontract may no longer provide the general contractor relief. This could add significantly greater risk to general contractors.

The Virginia Code amendments also void any pre-work subcontract provision that waives or diminishes a right to assert claims for demonstrated additional costs.  The conduit relationship and notice and claim requirements in a subcontract may do exactly this. The most common defense to a subcontractor’s claim for extras is that the subcontractor failed to give notice of the claim within the time and in the manner required in either the subcontract or the general contract. These conduit, notice and claim provisions may now be void in subcontracts, at least in diminishing subcontractor rights to assert claims. A general contractor may be barred by the general contract from passing on to an owner a late claim on behalf of a subcontractor, while the subcontractor still has a claim against the general contractor. This would significantly alter the relationship of subcontractors and general contractors and add greater risk to general contractors.

What if the subcontractor signs a waiver in a contract amendment or a separate document after the subcontract is signed and after work begins? What if a subcontract is simply not executed until after work begins?  The new Virginia Code amendments do not seem to void such waivers, as long as work has begun. General contractors may start to employ these techniques to reduce their new risk.

As many of you know, mechanic’s lien and bond claim waivers can appear in waiver forms for both progress and final payments.  These waivers can permanently eliminate lien or bond rights under Virginia law, for retention and even for future work. General contractors, subcontractors and suppliers must still be careful to identify and eliminate waivers for future work in progress payment waivers. However, general contractors may no longer be able to require such progress payment waivers in advance by adding them as an exhibit to a subcontract. If the progress payment waiver attached to the subcontract diminishes the subcontractor or supplier lien rights for future work or retention, for example, then the subcontract provision  requiring that waiver is now null and void.

The amendments to Virginia Code §43-3(C) are shown in italics below:

Any right to file or enforce any mechanics' lien granted hereunder may be waived in whole or in part at any time by any person entitled to such lien except that a subcontractor, lower-tier subcontractor, or material supplier may not waive or diminish his lien right in a contract in advance of furnishing any labor, services, or materials. A provision that waives or diminishes a subcontractor's, lower-tier subcontractor's, or material supplier's lien rights in a contract executed prior to providing any labor, services, or materials is null and void.

 

The new Virginia Code §11-4.1:1 reads as follows:

Waiver of payment bond claims and contract claims; construction contracts

A subcontractor as defined in §43-1, lower-tier subcontractor, or material supplier may not waive or diminish his right to assert payment bond claims or his right to assert claims for demonstrated additional costs in a contract in advance of furnishing any labor, services, or materials. A provision that waives or diminishes a subcontractor's, lower-tier subcontractor's, or material supplier's right to assert payment bond claims or his right to assert claims for demonstrated additional costs in a contract executed prior to providing any labor, services, or materials is null and void.

 

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Readers are welcome to reprint or republish this article with the following attribution:

© (2016) James D. Fullerton

Fullerton & Knowles, P.C.

Clifton, VA (703) 818-2600

Use the Free Construction Law Survival Manual at www.FullertonLaw.com

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