Two Big Legal Developments Hit the Construction Landscape

Two major recent changes impact the enforceability of Virginia construction contracts. These changes make certain contractual waivers “null and void” as a matter of law.

First, waivers of mechanic’s lien rights executed before work begins or materials are supplied by subcontractors or material suppliers are now null and void.

This change is found in Virginia’s mechanic’s lien statute. Specifically, Section 43-3 of the Virginia Code is now amended with this italicized language:

C. Any right to file or enforce any mechanics' lien granted hereunder may be waived in whole or in 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, services, or materials. A provision that waives or diminishes a subcontractor's, lower-tier subcontractor's, or material supplier's lien rights in a contract executed prior to providing any labor, services, or materials is null and void.

Second, waivers of rights to payment bond claims and claims for “demonstrated additional costs” executed before work begins or materials are supplied by subcontractors or material suppliers are null and void.

This second change adds a new section to Virginia law on payment bonds and claims for demonstrated additional costs. This section is contained in Section 11-4.1:1 of the Virginia Code:

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

This new section adds broad protections for subcontractors and material suppliers on the change order front. Change order procedures in construction contracts can be overly complicated and as a result, it can be easy for a subcontractor or material supplier to let a change order claim slip through its fingers. Subcontractors and material suppliers can use this new change as leverage to negotiate change order procedures. For example, many change order procedures require a change order claim to be brought within a certain (sometimes short) time window. Under the new Virginia law, change order language mandating strict time limits to bring claims may be negotiated in favor of a subcontractor or material supplier if there is an argument that it “diminishes” the subcontractor or material supplier’s right to assert a claim for demonstrated additional costs in a contract.

In sum, here are the take-home points about the recent changes to Virginia construction law:

• Prohibited Waivers: Subcontracts and material supplier contracts cannot contain the waivers.
• Allowed Waivers: Contracts between owners and general contractors can contain the waivers. Further, subcontractors and material suppliers can waive the aforementioned rights after any work starts or materials are supplied.
• Change Order Procedures as a Negotiation Point: Savvy subs and material suppliers can use Virginia’s new rule banning pre-work waivers of claims for demonstrated additional contract costs to negotiate burdensome change order requirements in their favor.

Katie Lipp is a Senior Associate Attorney and head of the construction practice at Berenzweig Leonard LLP. She can be reached at klipp@BerenzweigLaw.com.

Pick your Litigants Wisely When Filing Mechanic’s Lien Lawsuits

The Supreme Court of Virginia recently held that a subcontractor, Synchronized Construction Services, Inc. (“Synchronized”), could proceed with its mechanic’s lien lawsuit against the project owner and bank, despite the absence of the general contractor on the hotel construction project, finding that the general contractor was not a necessary party. In Synchronized Construction Services, Inc. v. Prav Lodging, LLC, et al., 764 S.E.2d 61 (Va. 2014), the subcontractor sought project amounts due with a breach of contract count against the general contractor (“GC”), and a mechanic’s lien count against the project owner and bank.

Synchronized failed to serve the GC in the litigation, and an appealable issue arose because the GC was not involved in the litigation of the mechanic’s lien claim. The circuit court held that because the GC was a necessary party, Synchronized’s mechanic’s lien claim could not proceed.

On appeal, the Supreme Court of Virginia focused its necessary party inquiry on the subject matter or the so-called “res” of the mechanic’s lien action.  Notably, the GC failed to perfect a mechanic’s lien on the project real estate. During the litigation, the owner and bank chose to go through a “bonding-off process” where they posted a bond, which had a practical effect of substituting the bond for the underlying project real estate – meaning that the res became the bond itself and not the real estate. The Court found that because the GC was not involved with its own lien and therefore had no rights to the underlying project real estate, and its rights were not tied up in any way with the posted bond, it had no specifically defined interest in the subject matter of the lawsuit, and was not a necessary party.

In light of this case, subs and other companies should ensure that they choose their parties wisely before proceeding with construction litigation. Failing to do so could derail an attempt to get a fair shake in court. The legal landscape is complicated and one slip can endanger a company’s entire payment claim.

Katie Lipp is an attorney with the Washington, DC regional business law firm Berenzweig Leonard, LLP, and the head of its construction law team. Katie can be reached at klipp@berenzweiglaw.com.