Pay-When-Paid Clauses Enforceable in Virginia

Virginia, unlike some other states, adheres to a policy favoring freedom to contract. Virginia law treats most businesses and individuals as presumptively capable of negotiating in their own best interests, and when a deal is reached and a contract is signed, courts rarely interfere with the result, however unfair that result may seem to outside parties.

In construction contracts, for example, it is common to find a “pay when paid” clause, stating that a subcontractor’s right to any payments from the general contractor is expressly conditioned on the general contractor’s first receiving payment from the owner. Some states go out of their way to protect subcontractors from the potential harsh consequences such a provision can cause. Virginia courts, however, will assume that the subcontractor was sophisticated enough to know what it was signing and will enforce contracts as written.

The freedom to contract includes the freedom to negotiate pay-when-paid clauses, and Virginia courts will enforce such clauses provided they are clear and unambiguous. In Universal Concrete Products v. Turner Construction, Universal, a subcontractor, entered into a written agreement with Turner, the general contractor, to install pre-cast concrete on the Granby Tower project Contractors.jpgin Norfolk, Virginia. When the real estate market collapsed, the owner became unable to finance the construction. Universal, however, substantially completed all of its work on the project, and naturally asked Turner to pay for its services. Turner refused to pay Universal because Turner had not been paid by the owner and the parties’ subcontract contained a pay-when-paid clause.

The specific clause in question provided that the “obligation of Turner to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner.” While that language seems pretty clear, Universal argued that it was ambiguous in light of language in the contract between Turner and the owner, which provided that the owner would reimburse Turner for “payments made by the Construction Manager to Subcontractors in accordance with the requirements of the subcontracts,” suggesting perhaps that Turner would pay Universal before being paid by the owner. The Eastern District of Virginia disagreed, and so did the Fourth Circuit.

The Fourth Circuit affirmed the district court’s conclusion that the clause in the Turner-owner contract related only to the amount of the reimbursement, not to when those amounts would be paid. This language did not render the pay-when-paid clause ambiguous (and thus unenforceable) because it did not make its meaning “of doubtful import” or make it capable “of being understood in more than one way.” The pay-when-paid clause was clear and unambiguous, so the subcontractor was not entitled to demand payment for its work until the contractor received payment from the owner.

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