Virginia courts take an interesting and unique approach regarding pay when paid clauses in construction contracts. As outlined by Galloway Corp. v. S.B. Ballard Const. Co., 464 S.E. 2d. 349 (1995), Virginia examines each pay when paid clause dispute on a case by case basis when the language of the contract is not explicitly clear. This is done in an attempt to determine the intent and understanding of the parties. This approach time consuming and inefficient judicially, and it puts contracting parties in a position where the actual terms of the contract may not be knowable until after a dispute arises, if the contractual language is not sufficiently clear. If the exact same contractual language can result in wildly different outcomes, no party to the contract can really be sure exactly to what it is that they are agreeing.
Intent Beyond the Language of the Contract May Matter in Virginia Pay When Paid Clauses
As pointed out previously, the parties’ intent behind the pay-when-paid clause in the construction contract may matter in Virginia. In fact, the parties’ understanding of the language is the cornerstone for determining whether the pay-when-paid clause functions as a timing mechanism or as a risk-shifting device when the language of the contract could reasonably be interpreted either way. On its face, this may not seem to be such a big deal. After all, generally speaking a “meeting of the minds” is required for a proper contract, which makes sense. If two parties contract for something, they need to be in agreement as to what that is. This doesn’t generally mean, however, that a fine-toothed comb will be dragged over the contract in the event of a dispute in order to determine whether or not each party understood each individual provision to mean exactly the same thing. The freely-given consent to the contract as a whole, evidenced by signing the contract and starting to perform under it, gives rise to the presumption that the parties were in agreement about the contents.
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As described in a recent post, if there is ambiguity in the contractual language, the exact same contract terms can work in a different manner depending on how that language is understood by different parties. So, how does the Virginia approach work?
As described in a recent post, if there is ambiguity in the contractual language, the exact same contract terms can work in a different manner depending on how that language is understood by different parties. This was clearly set forth by Ballard, where numerous subs signed contracts with the exact same pay when paid clause. The court determined that some of the subs understood the pay when paid clause would shift the risk of non-payment (and work like a pay if paid clause), and one sub did not. Because the language of the contract contained what the court determined to be a “latent ambiguity”, the court was able to look beyond the words of the contract in an attempt to determine the parties’ understanding and intent. This clearly worked to the benefit of the sub that did not understand the pay when paid clause to work as a risk-shifting device in the event of non-payment by the owner.
What Does This Mean, and Why Does It Matter?
There are a couple of important things to consider regarding pay when paid clauses in Virginia construction contracts. The language [of a pay when paid clause] should be explicitly clear. The first is that the language should be explicitly clear. A contract in which the pay when paid clause specifically states that payment from the owner is a “condition precedent” to payment from the general to the subs, and that it is agreed between the parties that the clause will function to shift the risk of non-payment, will likely work as a “pay if paid” clause even if the language says “pay when paid”.
Likewise, if a pay when paid clause is explicitly clear that it is to be interpreted as a timing mechanism, and not a risk-shifting device, it will likely be interpreted in that specific manner. Language that a sub is to be paid within 10 days from the date the general is paid, but “If, for any cause which is not the fault of the Subcontractor the Contractor does not receive timely payment or does not pay the subcontractor within 10 working days after receipt of payment from the Owner, final payment to the Subcontractor shall be made upon demand” is likely sufficient to render the pay when paid clause a mere timing mechanism, and not a risk-shifting device.
If, however, the language of the contract is not sufficiently clear so as to determine whether or not the pay when paid clause was intended to be a risk-shifting device or a timing mechanism, the court will look to the intent of the parties. This can result in the odd situation where the exact same contractual language can work in two different ways.
Since the court can look to outside evidence of intent and understanding when the contract language is ambiguous, it seems clear that the savvy subcontractor would have a policy, and internal communication detailing that policy, of only understanding pay when paid clauses as a timing mechanism. Evidence that a subcontractor believes pay when paid clauses to only pertain to timing, rather than risk-shifting can actually produce that result. If a party has that evidence, and follows a policy that provides more evidence of the same, that party is likely protected from risk-shifting pay when paid clauses acting as pay if paid clauses when the contractual language is ambiguous. This, in essence, provides a subcontractor with the potential ability to determine the terms of the contract unilaterally in instances where the contractual language may be ambiguous.