A General Contractor’s right to back charge or withhold money from a subcontractor has not really changed under the new Virginia law SB550, except for the enhanced notice requirements. Because of inconsistent wording in the statute, the standard for notice of breach or withholding varies from Private and Public projects and between general contracts and subcontracts.

Under Virginia Code § 11-4.6(C), private subcontracts have the most stringent notice requirements. Any private subcontract

shall require such higher-tier contractor to pay such lower-tier subcontractor within the earlier of (i) 60 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 to the lower-tier contractor for work performed by a subcontractor pursuant to the terms of the contract. Such contractors shall not be liable for amounts otherwise reducible pursuant to a breach of contract by the subcontractor. However, in the event that a contractor withholds all or a part of the amount invoiced by any lower-tier subcontractor under the contract, the contractor shall notify the subcontractor, in writing, of his intention to withhold all or a part of the subcontractor's payment with the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance.

A private project general contractor can only withhold money in the event of a “breach of contract” and the general contractor shall notify the subcontractor, in writing, of the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance.

This puts general contractors and lower-tier subcontractors in a difficult administrative position with their subcontractors. There is also some question whether the last portion is workable from a practical point of view. It will often be difficult for a general contractor to know which lower-tier subcontractor is responsible for the problem.

The penalty for failure to give the required notice is not clear. What happens if no notice is sent? Does the higher-tier contractor lose the right to charge back for the noncompliance? Is there no penalty?

Note that under Virginia Code § 11-4.6(C), in any private general contract:

An owner shall not be required to pay amounts invoiced that are subject to withholding pursuant to the contract for the general contractor's noncompliance with the terms of the contract. However, in the event that an owner withholds all or part of the amount invoiced by the general contractor under the contract, the owner shall notify the general contractor, in writing and with reasonable specificity, of his intention to withhold all or a part of the general contractor's payment with the reason for nonpayment.

A private project owner can withhold payment to a general contract any time there is a “noncompliance with the terms of the contract.” This seems to be a more lenient standard than the “breach of contract” a general contractor needs to withhold payment from a subcontractor.

Under Virginia Code § 2.2-4354, public subcontracts seem to have an even more lenient withholding notice requirements. A general contractor shall not be liable for amounts reducible due to the subcontractor's noncompliance with the terms of the subcontract. However, the general contractor shall notify the subcontractor, in writing, of his intention to withhold payment with the reason for nonpayment.

Unlike federal, District of Columbia and Maryland law, the Prompt Pay statute simply does not apply to a public owner in Virginia.

The inconsistent wording for the standard for notice of breach or withholding will certainly result in confusion and litigation. Hopefully the General Assembly or the courts can provide more guidance.

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

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

James D. Fullerton
Fullerton & Knowles, P.C.

12642 Chapel Rd.
Clifton, VA 20124
(703) 818-2600, Ext. # 205
JFullerton@FullertonLaw.com