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Recent Changes in Virginia Construction Law Benefit Subcontractors and Suppliers - March 2016

March 21, 2016

by Glen W. Thompson

Subcontractors and suppliers are typically at the mercy of the general contractor concerning contract terms and conditions. This is especially true in times when the economy is weak. The general contractor routinely has its attorneys prepare the contract to be presented to the subcontractors and suppliers for signature with little room for negotiation. To receive the economic benefit of a construction contract, subcontractors and suppliers may agree to provisions that waive or limit their rights to file a mechanic’s lien against the project, file a bond claim, or file a claim for demonstrated additional costs.

Recent changes in Virginia construction law have levelled the playing field, but may also have created some new uncertainties in contracts with subcontractors and suppliers. On July 1, 2015, changes in Virginia construction law went into effect concerning mechanic’s liens and contracts.

Section 43-3 of the Virginia mechanic’s lien statute has been amended with the additional language shown in italics:

C. Any right to file or enforce any mechanic’s lien granted hereunder may be waived in whole or 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 rights in a contract in advance of furnishing any labor, service or materials. A provision that waives or diminishes a subcontractor’s, lower tier subcontractor’s, or material suppliers lien rights in a contract prior to providing any labor, services or materials is null and void…

A similar protection was enacted in the new Virginia Code section 11-4.1:1 concerning claims on payment bonds and claims for demonstrated additional costs:

A subcontractor as defined in §43-1, lower tier subcontractor, or material supplier may not waive 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 for demonstrated additional costs in a contract executed prior to providing any labor, services, or materials is null and void.

Who is covered and did the new law create a special class for suppliers?

Section 43-1 of the Virginia Mechanic’s lien statute defines a “general contractor” as one who provides labor or materials directly to an owner of property and “subcontractor” as one who provides services or materials, who does not contract with the owner, but with a general contractor. There is no separate definition for “material supplier.”

While the new law prohibits general contractors from including lien waiver provisions in their contracts with subcontractors and suppliers, there is no similar provision to prevent an owner from contractually requiring general contractors to waive their mechanic’s lien rights and claims for additional costs.

This distinction is important when several contractors contract directly with the owner/builder, which is common in residential construction. Although roofers, electricians, or plumbers may consider themselves to be subcontractors, if they contracted directly with the owner/builder, they are general contractors and are not covered by the new provisions. The owner/builder is not prohibited for including lien waiver provisions in his direct contracts with the various trades.

However, the new law appears to create a new category for material suppliers. Prior to the new law, material suppliers were not separately defined and their status was not different from suppliers of labor or services, defined as a general contractor, subcontractor, or lower tier subcontractor depending on with whom they contracted. The new law applies the lien waiver prohibition to contracts with subcontractors, lower-tier subcontractors and material suppliers. Therefore, the prohibition appears to apply to material suppliers that contract directly with the owner, but not suppliers of labor and services that contract directly with the owner.

How will the “Waive or Diminish” language in the new law affect other contract provisions and procedures?            

The prohibition of contract provisions that “waive or diminish” lien rights or the right to assert claims for demonstrated additional costs may be the basis for challenging other common construction provisions and procedures.

Do “Pay if Paid” clauses which condition a subcontractor’s payment on a general contractor’s payment from the owner “waive or diminish“ a subcontractor’s ability to file a valid mechanic’s lien?

Do subordination clauses that require a potential mechanic’s lien to be subordinated to deeds of trusts or construction lender advances “waive or diminish” a subcontractor’s mechanic’s lien rights and priority?

Do certain procedures for change orders, such as requiring written approvals from specific persons, or limiting the number of days to submit a change order requests after the work has been completed, “waive or diminish” the right to assert a claim for demonstrated additional costs?

These are questions that may arise in future construction litigation.

Conclusion

The recent changes in Virginia law prohibiting a pre-work waiver of rights to file mechanic’s liens, bond claims and claims for additional costs for subcontractors and suppliers must be addressed by all parties in any new construction contract. The future effect of the new law on other aspects of construction contracts is unclear. Owners, general contractors, subcontractors and suppliers should have legal counsel review any new construction contracts to protect their legal rights.                

Pender & Coward shareholder Glen W. Thompson focuses his practice on Construction and Government Contracts, as well as other types of commercial litigation. He can be reached at (757) 490-6284 or gthompson@pendercoward.com.