Virginia’s law on the payment of subcontractors and suppliers just got some muscles. For years, Virginia had a statute that made it a crime for any contractor or subcontractor “with the intent to defraud” to retain or use funds for any purpose other than to pay persons performing labor or furnishing material on a project. This was a rarely known or used statute as Commonwealth Attorneys across the state had little time, knowledge or motivation to dig into the financing of a construction project to see if funds were properly used. But because the Virginia Supreme Court ruled that the statute was criminal in nature, and Virginia does not treat construction funds as a trust for those performing the work or providing materials no private right of action existed to enforce the prohibition on using construction funds for purposes other than paying for the labor, equipment and materials benefiting the property.
However, effective July 1, 2020, Virginia code §43-13 is strengthened to now provide a private cause of action “for a party in contract” with the general contractor or subcontractor as appropriate for the moneys owed. Simply, the use of funds before paying all amounts due for labor and material creates the presumption of “intent to defraud.” Subcontractors and suppliers now have a new arrow in their quiver to claim the contractor acted with an intent to defraud by using funds without payment the amount the subcontractor believes is due it on a project.
Additional changes to Virginia Code §43-13 will require almost every general contractor to modify their form subcontracts. Any provision in a contract or subcontract that permits the general contractor to offset or withhold funds due under one contract for alleged claims or damages due on another contract is now void as against public policy. The right of offset is a common tool used by contractors and specifically permitted on contracts that deal with the sale of goods. If a subcontractor is not performing on a project, then the general contractor now has less tools to enforce performance requirements.
Consult with the attorneys at Vandeventer Black LLP to develop your strategy to deal with the realities of Virginia’s new subcontracting laws. Modify your subcontracts and develop the processes you need to protect your business and keep it successful in these changing times.
Written by James R. Harvey, a partner a partner in Vandeventer Black’s Construction and Public Contracts Law Group. If you have questions about this article or need assistance with reviewing your contracts and subcontracts, please contact Jim or one of the other attorneys at the Construction and Government Contracts Practice Group.