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Penny Savvy, But Pound Foolish?

Mid-Atlantic Construction - February 1, 2005

By: Shawn R. Farrell

Signing a waiver of liens and claims may help you receive partial payments in the short term, but could cost you more later.

Imagine you are a subcontractor who has experienced delays to the timely performance of your work. You have submitted numerous letters to the general contractor explaining the delay, your intention to seek more money, and a request for a time extension. But the owner has not yet agreed to pay you any additional money or give you an extension. As you wait for a response, the general contractor wants to give you a partial payment for the work previous performed, however, he demands that you sign a waiver of liens and claims. Do you sign it?

Lien waivers, as their name implies, pertain to lien rights and historically do not speak to the general right for payment. While making periodic payments, the cautious prime contractor may want protection against its subcontractor's failure to flow money down to its employees, suppliers, lower-tiered subcontractors and a host of other potentially troublesome creditors of the subcontractor.

The general contractor may use this as justification for the subcontractor to sign a waiver, but as the hypothetical example suggests, things may not be as simple as they seem.
The problem arises when the subcontractor is owed additional money and the owner or general contractor disagrees.

By signing a waiver of liens and claims, the subcontractor may lose its right for additional money. In fact, a recent federal court case held just that. In the case, a drywall subcontractor was asked to perform additional work after the project had been delayed for one year. As required by the contract, the drywall subcontractor signed waivers, in order to receive partial payment for the additional work. In addition, the drywall subcontractor sent periodic letters explaining that the change orders did not include all the costs that arose from the delay and additional money was owed which was impossible to quantify until the end of the project. At the end of the project, the drywall subcontractor sued the general contractor, seeking delay damages.

Astonishingly, the court found that the drywall subcontractor waived any claim for additional monies by signing the waivers. The fact that it sent letters to the general contractor notifying it of the additional money claimed was immaterial. What the drywall subcontractor had waived could not be recaptured through a letter.

So what is a contractor to do? If you do not sign the waiver of liens and claims, you do not receive the partial payments. If you sign the waiver of liens and claims, you may not be able to pursue any additional claim for money at the end of the project.

One suggestion is to strike from your contract any obligation to sign a waiver of liens and claims as a condition precedent to the receipt of a partial payment.

If this can't be done or if it's too late to do so, strike from the waiver itself any reference to "claims for any contract balance or credits owed for any labor or material provided pursuant to the subcontract work." Initial these strikeouts along with signing the waiver.

If neither of these steps is possible, send a letter with the waiver that clearly states that you do not release or waive any claim for additional consideration arising out of delay, acceleration or pending change orders.

Finally, comply with all notice requirements in the contract and state, in writing, that pursuant to the terms of the contract, you are putting the contractor on notice of a claim for additional money. If possible, state the amount of the claim.

While you may need the partial payment to meet your payroll obligations and pay your suppliers, there can be negative ramifications from signing a waiver of liens and claims. When you sign such a document, you are altering the terms and conditions of your contract. Make sure that waiver says exactly what you and the general contractor have agreed upon. Failure to take this simple step may prevent you from getting paid for all the work you performed.

Shawn R. Farrell is a partner at the law firm of Cohen, Seglias, Pallas, Greenhall & Furman in Philadelphia, Pa., and concentrates his practice in the area of construction law. He can be contacted at (215) 564-1700.