August 5, 2020

By: Matt Corder Summer Associate, Jones Walker LLP.

Monthly progress payments are the lifeblood of construction. Subcontractors need prompt payment on a monthly basis to maintain cash flow and stay in operation. Contractors understandably want interim payment waivers to avoid liens, but sometimes contractors want more than they are entitled to or need to protect against liens.

Contractors may try to make subcontractor progress payments contingent on broad releases, with subs waiving any and all rights for liens and all claims for a certain period of performance.  Subs are familiar with the need to execute a limited lien waiver that is contingent on actual receipt of payment in order to get paid.  In the urgent press for payment and the inevitable bustle of a modern construction project, subs may find themselves unwittingly waiving more rights than simply the right to lien.  This article identifies the potential pitfalls interim waiver clauses pose to subs, as well as the best practices for subs to protect their rights to payment. 

A minority of states mandate standard waiver forms for interim progress payments.

At least twelve states have statutes that require contractors and subs to use specific language within their interim lien waivers.  These statutorily mandated waiver forms provide predictability and consistency to subs operating within a state; the waiver form remains the same from project-to-project and owner-to-owner.  For example, in the Georgia statutory partial lien waiver, the sub waives any and all lien rights up to the specific date (with the exception of rights to retainage).  Further, the waiver is what is known as a “conditional” waiver, in that it expressly conditions the sub’s waiver upon receipt of contractor’s payment:

Upon the receipt of the sum of $________________, the mechanic and/or materialman waives and releases any and all liens or claims of liens it has upon the foregoing described property or any rights against any labor and/or material bond through the date of ______________________________ (DATE) and excepting those rights and liens that the mechanic and/or materialman might have in any retained amounts, on account of labor or materials, or both, furnished by the undersigned to or on account of said contractor for said building or premises.”

(Emphasis added).  

In addition to knowing whether there is controlling statutory language, subs must also understand precisely how a given state applies the language within its statutory waiver form.  In Georgia, the conditional interim waiver converts to an unconditional waiver if the sub fails to dispute any deficient payment within 60 days following the date of execution.  Further, because the underlying lien statute provides that failure to dispute deficient payment binds the sub “for all purposes,” one Georgia court has applied the lien waiver beyond lien rights and ruled the sub waived its right to bring a breach of contract claim for the disputed payment when the sub failed to object to the deficient payment within 60 days. (Note—the Georgia legislature has recently passed legislation seeking to amend its lien statute).  Thus, even in states with statutorily prescribed waiver forms, subs must carefully evaluate the waiver’s implications by examining the underlying lien statute and following all procedures in order to preserve claims.

Even given these potential complexities, statutory waiver forms provide subs with consistency, predictability, and efficiency advantages when compared with states that do not mandate waiver language. 

Locating the “Mines” — What to Watch for Before Signing An Interim Waiver.

The majority of states do not prescribe statutory waiver forms.  In these states, waiver language can vary dramatically from project to project and impact a sub’s rights in dramatically different ways.  The courts in these states without controlling statutes generally view waivers as creatures of contract; that is, the parties are free to agree on the terms and to have those terms enforced as written, regardless of any perceived unfairness resulting to the sub.  The prudent subcontractor carefully reviews each waiver before signing, while staying on guard for common pitfalls that could cause it to waive more rights than it intended.

Exactly What Claims Are You Waiving?

Subs must understand the precise types of claims they are being asked to waive in the release form provided.  Just because a general contractor labels the release a “lien waiver” may not mean the sub is only waiving its right to lien.  Instead, wording may be added to make the scope of a purported lien waiver include a sub’s rights to receive compensation for extra work, bring breach of contract claims for nonpayment, or assert claims provided for by statute.  For example, here is a broad wavier clause used within payment applications executed during a recent large-scale construction project:     

“Subcontractor, by executing this certification, also waives all claims, including but not limited to, any statutory claims, liens, and/or privileges which in any way arise out of work, labor, equipment and materials furnished by Subcontractor in connection with the Project up through the date of the Application for Payment, except those claims which were previously made in writing, remain unsettled and are specifically identified as follows___.”

(Emphasis added).

Note the broad waiver of all claims arising from the sub’s work on the project.  Many courts will interpret such language literally and enforce the waiver by barring any claims made by the sub.  These claims could include any claims for extra work or delay arising from the period of performance subject to waiver, even if the conditions giving rise to the claim were unknown at the time of the waiver’s execution.

Note also that the above waiver—which requires the sub to waive all claims “up through the date of the Application for Payment”—may cover a substantially larger amount of work than the actual payment received.  To illustrate, a sub could execute this waiver in the third month of a project in order to receive corresponding payment for the first month of work.  In that case, the contractor may later argue that the sub just signed away its rights to lien and make claims for two months of work in which it still has not been paid.  While many states will still allow a sub to bring a breach of contract claim to recover any unpaid balance, subs don’t want to find themselves in the position of disputing the language within interim waivers.

Thus, the scope of interim waiver can include much more than simply a sub’s right to lien the property.  Further, waivers can release a sub’s rights to assert claims for a much larger amount of work than the corresponding payment amount. 

Waiver before payment? “Conditional” versus “Unconditional” release.

Subcontractors must also pay careful attention to the timing of the waiver.  In the event that the waiver is executed prior to payment, subs should opt for a conditional waiver.  A conditional waiver conditions any waiver on receipt of the stated payment amount.  In other words, if the sub does not receive the corresponding payment then the waiver has not effect. 

Meanwhile, a sub signing an unconditional waiver can unwittingly waive its right to lien and file claims for work that it has yet to be paid for.  While some states such as Texas and California require payment to enforce an unconditional waiver—effectively converting unconditional waivers into conditional waivers—other states do not affirmatively void an unconditional waiver of claims executed prior to payment if payment is not actually received.   

Lulled to sleep: aggressive contractors can take advantage of the routine nature of interim waivers.

Busy subs may execute a large number of interim waivers over the course of a year, and the practice of signing the waiver can become routine.

Subs typically pay close attention to the specific dollars earned, requested, and documented in each payment, but all the other pre-printed forms accompanying the pay applications – all that “fine print” – may become a blur that receives little attention from the sub as all those papers are being shuffled.  This is dangerous.

Subs must be careful to review the form’s precise waiver language each time before signing.  Whether done intentionally or not, there have been cases where the waiver language changes midway through the project.  Without being vigilant, a sub could unwittingly go from waiving only its lien rights to waiving its rights to all claims arising from its work on the project. 

In the event of a dispute, many jurisdictions will find that the changed waiver language still binds the sub.  For example, in New York, a clear and unambiguous waiver is enforceable to bar any claims subject to the waiver.  The only available defenses are fraud, misrepresentation, mutual mistake, and duress.  Each of these defenses are extremely difficult for an injured sub to prove, and without more facts a change in waiver language does not by itself constitute a valid defense.  

Becoming the Prudent Subcontractor: Best Practices

While subs often lack the leverage necessary to make blanket demands regarding the form a project’s waiver will take, subs can still greatly benefit by developing and training personnel to adhere to some basic procedures when reviewing and executing interim waivers.  

First, the importance of carefully reviewing the release language before signing each and every waiver cannot be overstated.  Because each waiver form is its own mini-contract, the prudent sub never assumes that the waiver language will not change over the course of a project. 

Second, subs should always strive to condition any waiver upon actual payment received.  The prudent subcontractor only agrees to unconditionally waive claims when the corresponding funds are already safely in the bank.  Many modern construction projects utilize conditional waivers for the current month’s payment application, coupled with unconditional waiver for the previous month’s application.  Such a process has the effect of protecting both the general contractor and the sub—the sub preserves claims in the event of non-payment, while the general contractor receives protection against any untimely claims for extra work or delay.

Third, the prudent subcontractor negotiates for waivers that correspond with the period for which it is receiving payment.  In the event a sub must waive claims arising from work for which it has not received payment, the prudent subcontractor clearly indicates on the waiver that the listed payment amount does not represent the total outstanding payment due on the project for the specified time period.

Fourth, the prudent subcontractor knows if a given state has statutorily prescribed interim waiver language.  The prudent subcontractor also understands a given state’s lien laws.  As we saw with Georgia, certain states may enforce waivers against claims that are seemingly beyond the scope of the waiver clause itself.  The prudent subcontractor is vigilant in remaining up to date on the latest lien law in the states in which it operates. 

Finally, the prudent subcontractor diligently lists any and all known claims that are exceptions to the waiver.  Subs can also modify the waiver’s language before signing, such as striking through any troublesome language. 

These best practices may at times conflict with the practical, economic imperative subs face to receive payment.  Subs should strive to “bend but don’t break”; that is, negotiate with the contractor for the most favorable interim waiver given the particular circumstances.  At the very least, subs should understand the risks assumed by executing a given interim waiver in case a dispute does arise.  Such an understanding can save subs from the time and expense of litigating interim waiver disputes as well as the disappointment of losing such a dispute.

The  views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.