In this blog, presented by SunRay Construction Solutions and Chad I. Michaelson, Partner, Meyer, Unkovic & Scott LLP, find out what are the key items that you need to focus on when dealing with releases and waivers and an all-in-one checklist that you must adhere to before you go ahead and sign that release form.
What are the stages where you need to pay attention to Releases and Waivers?
Release and waivers come in different forms throughout the course of your construction project, and you must be on the lookout for them at different stages of the project. So, here are some of the stages where you need to pay attention to releases and waivers -
A) In the contract of subcontract
The first place to look for them is typically at the beginning of the project because there are many contracts and subcontracts which may include advance waiver provisions.
- One important fact to remember is that the Pennsylvania law does not allow an advance lien waiver by a subcontractor or a supplier. What this means is that you cannot be asked to waiver your lien rights unless the general contractor posts payment.
- So, if you are signing a contract that says you are waiving your lien rights, but there is no payment bond, then that waiver is not valid. Now, if you are a subcontractor or a supplier, you must ensure that you receive a copy of the payment bond.
- Another thing to look out for in your contract is to check for waivers that are not just related to your lien rights. For example, many contracts will try to waive off your CASPA rights which is Pennsylvania’s Contractor and Subcontractor Payment rights. It provides valuable payment protections for contractors and subcontractors, and it is not permissible to waive them.
- Again, if you sign a contract which states that you are waiving your CASPA rights, it doesn’t matter because it will be ineffective.
There may be some waivers which may be effective.
- In some of the contracts and subcontracts, it may state that the subcontractor is waiving their right to seek additional compensation, such as compensation for loss of productivity.
- According to Pennsylvania law, if the owner interferes, it can make such waivers invalid. However, you must be on the lookout for such waivers in your contracts and subcontracts.
B) Change Orders
The second stage where you need to look out for your releases and waivers is when dealing with change orders.
- It is quite typical for owners and contractors to include a release or waiver language in your change order, such as, “by agreeing to this change order, you waive your right to any other compensation, as it relates to the change order of work.”
- This type of language is okay if it’s a discrete amount of work and you are fully compensated for what you are doing.
- However, this can be problematic if there is any unknown impact on your productivity down the road or there may be some unforeseen work delays for which you had not requested time extension, etc. In such cases, having that waiver language may work against you.
So, if you see a waiver language included in your change order:
- The first thing that you need to ensure is that it is limited to the change order work. Do not sign a change order which says that you are waiving your rights for any additional compensation that happened on the project prior to you signing this change order.
- The second thing that you need to do is really think about the change order and make sure that all the time and money included is exactly what you need.
We highly recommend that you look closely at the language of your waivers. Always read and understand the waiver before you sign it.
C) Interim and Final Payment Applications
The final stage where you may see releases and waivers is in your payment applications.
- The first type of waiver that you need to look out for are conditional waivers and unconditional ones. A conditional waiver is what you sign before receiving payment whereas an unconditional waiver is what you sign after receiving the payment.
- Now depending upon your specific project, you may be requested to submit a conditional lien waiver with your payment application to receive the payment and in the next month, you may be requested to submit an unconditional lien waiver which covers everything through the prior payment application.
- The other type of waivers that you see in your payment application are interim and final waivers. The interim waiver only covers the work done at the time of the waiver, so they are typically sent in with your payment applications. And the final waivers are sent at the end of the project.
- Your final waivers can also be conditional or unconditional depending on when you submit them.
So, when you are looking at your interim payment applications, make sure that you are removing any kind of pending change orders or claims or disputes for which you are still seeking payment. You can put in a specific language which says that “this waiver does not include the change order or claims that we have made to date”.
Why is it important to be aware of what type of document you are Signing?
While working on a construction project, contractors, subcontractors, and suppliers often have to deal with different types of documents. Sometimes, a waiver that you are asked to sign might be more than just a waiver. This is why it is very important to be aware of what type of document you are signing and what rights you are waiving off.
- There are many times when a waiver may include a release, a waiver, and an indemnity provision. There is quite a bit of difference between these three.
- A waiver is basically giving up your legal right in advance. So, it means that you are waiving off your rights even before the actual payment is made to you.
- A release on the other hand is used to extinguish existing claims. So, you use a release when you have actually made a claim against the owner and by signing the release you are stating that you are releasing this claim and you will not sue the owner.
- A typical lien waiver will have the language that you are waiving your lien rights for everything that you have bene paid for and you promise that you have paid your suppliers, and nobody will lien for the amounts that are paid through this payment application.
- It will also include that the contractor and subcontractor also release all claims for any compensation for work covered through this payment application. This may be problematic if there are any outstanding claims, so just make sure that you exclude those unresolved claims from your waiver.
Another key provision that you need to watch out for is indemnity. This is a common provision, and you need to look out for the scope of the indemnity and what you are indemnifying for.
- An indemnity means that if one of your subs or suppliers file a lien that you are going to pay for the legal defense of that claim, and if you can’t get that claim to go away, and you have bonded off that you will pay for it, then you will fully protect the owner from any damages.
- The indemnity is a good provision if you are the owner or if you are a contractor, then it makes sense to request it from your subcontractor.
However, indemnity is a huge responsibility, so you need to ensure that you are looking out for it specifically and determine whether you need to or want to give indemnity if it is asked and included within a waiver.
What Can You Do?
Now that we have looked at all the various waivers and releases and some of their key aspects, let’s take a look at what you can do when you are asked to sign a release or a waiver.
Do not sign your release unless it is consistent with your contract. That is where all your obligations start from.
- If your contract does not require you to submit lien waivers with your payment application, but you still choose to do it, then it is fine because you may have been paid on time and you have made payments further down the chain and you are sure that there is no risk of anyone filing a lien. However, if the owner or contractor is a slow payer or you have any outstanding claims, then those lien waivers become risky.
- Also, if the contract does not say that the owner has the right to get a lien waiver before they have to pay you, then they cannot demand you to sign the waiver. If they refuse to pay you because you are not signing it, then that is considered as a violation of the contract, and they will be liable for interest and penalties.
B) Does the contract include a form?
When looking at your contract, you need to pay close attention to what does it requires. Does it provide a form?
- Many owners will provide a form of a lien waiver in the contract that they want to use. They may provide a form for an interim lien waiver and one for a final lien waiver.
- What you need to do is go through the form and look for all the things that we have discussed above – does it include releases? Does it include indemnity? Is it a broad release of claims or is it only related to payment?
- You need to compare all this information with what is provided in the contract. For example, if the contract says that you will submit a lien waiver with your payment application, then they do not have the right to ask you for indemnity.
- This means that you do not have to sign it and if this in turn stops your payment, then it will be considered a violation of the contract.
- If the owner does not include a form in the contract, you can use your own form. You can work with your counsel to prepare a form that you are comfortable with. Also, if your contract doesn’t state that the owner gets to specify the form, and if you only have to submit a lien waiver, then you can use your own form and they cannot withhold your payment.
C) Be Careful
Next thing is you need to be very careful and make sure that your waiver is limited to the claims that have been resolved and paid. You must be sure that they are limited to the money that you have received.
- Typically, in contracts when the owner asks for indemnity or if the contractor asks to waive lien rights, make sure you use the right language which states that you will waive lien rights only for the work for which you have been paid.
- So, keep an eye out on where you are in the project, look at what the owner or the contractor is doing in terms of the timing of the payment, and ensure that you are not waiving off any important rights as a result.
D) Difference between Conditional and Final; Partial and Full
Finally, you need to be aware of the difference between conditional and unconditional waivers and partial and full waivers.
- If you are a contractor and you want to protect the owner against liens, then you should be looking out for conditional waivers for current payment applications as well as unconditional waivers.
- For example, if you are on payment application three in a job, then it means that you will get a conditional waiver for payment application three and an unconditional waiver certifying that all the subs and suppliers have been paid the amount mentioned in payment applications one and two.
So, this is the basic checklist that you must follow before you go ahead and sign a release or a waiver.