Tag Archives: general contractor

Know Your Rights – Limitations on Retainage for Private Construction Projects

By on November 20, 2017

The Massachusetts Retainage Act limits the amount of retainage allowed for private construction projects, and imposes mandatory processes for reaching the date of substantial completion, submitting punchlists and completing punchlist items, and submitting applications for payment and obtaining payment of retainage.

The Act applies to all construction contracts signed after November 4, 2014, for privately owned projects where the original contract price with the owner is at least three million dollars and the general contractor, subcontractors, or design professionals would have mechanic’s lien rights , but exempts residential housing projects of one to four units.

Limit on Retainage

Under the Act, no more than five percent retainage may be withheld from any progress payment. Among other things, this prohibits frontloading retainage amounts for a portion of the project, with less held at the end.

Substantial Completion

The Act defines substantial completion as the stage in the project when the work required under the general contractor’s contract with the owner is “is sufficiently complete … so that the project owner may occupy or utilize the work for its intended use.” Substantial completion may apply to the entire project or to a phase of the project, but only where the project owner has expressly allowed substantial completion for defined phases.

In order to reach substantial completion, the general contractor must submit a form for notice of substantial completion, as contained in the Act, to the owner within fourteen days of reaching the stage when the general contractor believes the project is substantially complete. Then the owner has fourteen days to accept or reject the general contractor’s notice. Should the owner fail to timely respond to the notice, the owner is deemed accept to general contractor’s work as substantially complete.  If the owner accepts the notice, the date of substantial completion is set and is binding upon all related aspects of the contract. If the owner rejects the notice, it must notify the general contractor in writing of the rejection and include the factual and contractual basis for the rejection and a certification that the rejection is made in good faith. The Act permits an expedited process for the general contractor to dispute the rejection under the contract’s dispute resolution procedures. Alternatively, the general contractor can resubmit a form for notice of substantial completion to the owner for new approval.

Submission of Punchlists and Completion of Punchlist Items

Within fourteen days after acceptance (whether express or deemed accepted) of the notice of substantial completion, or the final and binding resolution of a dispute, the owner must submit a written punchlist “describing all incomplete or defective work items and deliverables” to the general contractor. The owner’s punchlist must be certified as made in good faith.

The general contractor has an additional week after the owner’s deadline expires, or twenty-one total days after acceptance, to submit a punchlist to each subcontractor from whom the general contractor is holding retainage “describing all incomplete or defective work items and deliverables required,” which may include items in addition to the owner’s punchlist. The general contractor’s punchlist to its subcontractors and suppliers must be certified as made in good faith. General contractors, subcontractors and suppliers are permitted to dispute punchlist items directed to them.

Submitting Applications for Payment and Obtaining Payment of Retainage

The general contractor, subcontractors and suppliers from whom retainage is held may submit written applications for payment of retainage no sooner than 60 days following the date of substantial completion.  Each contractor shall use the form required by their contract to apply for payment of retainage. Alternatively, the project owner and general contractor may allow for earlier submission dates. An application for payment of retainage must include the punchlist, along with a written list identifying which items have been completed, repaired or delivered, and a certification that the application is submitted in good faith.

Applications for retainage must be paid within thirty days of receipt, minus any withholdings described below. For each tier of contract below the prime contact with the owner, the time period for paying retainage is extended by seven days.

Should the owner or contractor seek to withhold payment of retainage, they are limited to (1) the value of incomplete, incorrect or missing deliverables as either agreed upon by the parties or, if no agreement is reached, no more than two and a half percent of the total adjusted contract price; (2) one hundred and fifty percent of the reasonable cost to complete or correct incomplete or defective work items; and (3) the reasonable value of claims and any costs, expenses, or attorneys’ fees incurred as a result of the claims (but only when permitted by the terms of the contract).

Retainage, or any portion thereof, cannot be withheld unless the party seeking payment receives, before the date payment is due, a written explanation “of the incomplete or defective work items and incomplete, incorrect or missing deliverables, the factual and contractual basis for the claims and the value attributable to each incomplete or defective work item, deliverable and claim.” The explanation of withholding must also be certified as made in good faith.

Moreover, the Act prohibits the owner from holding any portion of retainage due to subcontractors or suppliers that are not the subject of the owner’s claim against the general contractor, unless the owner has declared the general contractor in default under its contract.

As the foregoing makes plain, the Act requires all parties to a project to adhere to strict guidelines in connection with withholding, and later releasing retainage.  In order to gain a full understanding of how the Act and other statutes govern Massachusetts construction projects, and how to preserve your rights under those statutes, contractors would be wise to consult with a Massachusetts construction attorney regarding their specific contract and situation.

Show Me the Money: When Payment is Due on Massachusetts Public Construction Projects

By on April 5, 2017

Traditionally, general contractors on Massachusetts state-level public construction projects employed one of two types of risk allocation provisions in payment clauses in their subcontracts with subcontractors:  a “pay-if-paid” or a “paid-when-paid” clause.  This changed, however, due to a 2004 Massachusetts court decision that largely did away with condition precedent payment clauses commonly referred to as “pay-if-paid” clauses.  While the differences between the two clauses may not jump off the page, the use of one rather than the other had a significant impact on a subcontractor’s right to collect payment from the general contractor.

“Pay-if-paid” clauses create a condition precedent to payment.  That is, a subcontractor has no right to be paid for completed work until or unless the general contractor received payment from the owner.  “Pay-when-paid” clauses create no such condition precedent to subcontractor payment.  Rather, a “pay-when-paid” clause is a timing provision; that is, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within a ‘reasonable time’ the subcontractor retains the right to collect payment from the general contractor for its work.  Ambiguous contract language often complicated the subtle, yet substantial, difference between the two types of clauses, leading to high stakes contract interpretation disputes.

In 2004, Massachusetts did away with the distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects.  In,  Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004), the court reasoned, that absent express contract language, if “payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner,” then the default interpretation of subcontract payment provisions, “should be viewed ‘only as postponing payment by the general contractor for a reasonable time after requisition … so as to afford the general contractor an opportunity to obtain funds from the owner.’”  This decision virtually eliminated “pay-if-paid” in favor of “paid-when-paid” clauses on Massachusetts state-level construction projects.         

While the holding in Framingham is generally good news for payment-seeking subcontractors, the issue remains, however, as to what a “reasonable time,” is to afford general contractors before general contractors must make payment to subcontractors should the owner not pay.  In Framingham, the court determined that where the payment issues originated in December 1998 and continued through March 1999, that by the end of April 1999, “the general contractor had exceeded any reasonable period of time,” and thus the subcontractor’s claim for payment for completed work could not be defeated even though the owner had yet to pay the general contractor for the subcontractor’s work.

There has been no subsequent case in Massachusetts that further defines the “reasonable time” standard to determine when general contractors must pay subcontractors when the general contractor objects to making payment as a result of a “pay-when-paid” clause.  Thus, subcontractors should be keenly aware of any developments in the law regarding what constitutes “reasonable time” for payment in connection with these provisions.  If you have questions regarding payment issues on state-level public construction projects you should contact a Massachusetts construction lawyer.   

Federal Subcontractors – Understanding the Basics of Your Rights Under the Miller Act.

By on May 31, 2016

By Jennifer Lynn

     Subcontractors commonly inquire as to what they can do to ensure they receive payment on a project. For federally-owned construction projects, subcontractors can look to the Miller Act as a source of security. The Miller Act, codified as 40 U.S.C. §§ 3131-3134, requires general contractors on federal projects to provide performance bonds and payment bonds to the awarding authority where the prime contract exceeds $100,000. The general contractor’s payment bond must list a “satisfactory” surety and cover the total amount of prime contract. 40 U.S.C. § 3131(b)(2).

     The primary purpose behind the Miller Act is to provide security to subcontractors. Because federal projects are immune from lien claims, the Miller Act provides an alternative to a traditional lien, which instead calls for subcontractors to file claims against the general contractor and its surety under the payment bond. See U.S. ex rel. Metric Electric, Inc. v. Enviroserve, Inc., 301 F.Supp.2d 56, 66 (D.Mass. 2003). As with any claim for payment, the subcontractor must establish that it is owed payment in order to establish an enforceable claim under the bond.  In addition to establishing a basic right to payment, subcontractors must meet other specific requirements to secure the benefits of the Act.

Who is Protected Under Miller Act Payment Bonds?

     The Miller Act requires payment bonds to secure the claims of “all persons supplying labor and material in carrying out the work provided for in the contract.” 40 U.S.C. § 3131(b)(2). “All persons,” for purposes of the Miller Act, applies to (1) first-tier subcontractors, which are contractors who directly contract with the general contractor; (2) second-tier subcontractors, those contractors with a subcontract with a first-tier subcontractor; (3) first-tier suppliers, which are suppliers who contract with the general contractor; and (4) second-tier suppliers that have a contract with a first-tier subcontractor but not a first-tier supplier. See U.S. ex rel. Water Works Supply Corp. v. George Hyman Constr. Co., 131 F.3d 28, 31 (1st Cir. 1997).

     Third-tier and more remote subcontractors and suppliers cannot recover under the Miller Act. Subcontractors and suppliers too remote to file a claim under the Miller Act can file ordinary claims for nonpayment for breach of contract or quasi-contract.  The Miller Act does not alter contractors’ rights in connection with claims for nonpayment, but rather provides security for payment to the “persons” covered by the Act.

What Must a Subcontractor Do to Obtain Security Under the Miller Act?

     Much like comparable statutes for state-owned construction projects, subcontractors must wait the requisite time to file a Miller Act bond claim and may need to provide initial notice to the general contractor. All subcontractors must wait 90 days after they last furnished labor or material to the project[1] before they may file a claim under a Miller Act payment bond. 40 U.S.C. § 3113(b)(2). The wait period serves the purpose of setting aside a reasonable amount of time for the subcontractor to receive payment for completed work. Bond claims filed before expiration of the notice period will be considered premature.

     Second-tier contractors must comply with the 90 day wait period and must also provide written notice of its claim to the general contractor. The notice must be in writing; it must be received by the general contractor within the first 90 days after the second-tier subcontractor last furnished labor or material on the project; it must state “with substantial accuracy” the amount claimed unpaid and due and the name of the party to whom the material or labor was supplied or performed (i.e. the first-tier subcontractor); and it must be delivered by a method that provides verification of delivery (i.e. certified or registered mail) or served by a U.S. marshal. 40 U.S.C. § 3133(b)(2).  The required notice must specifically demand payment from the general contractor.  See U.S. ex rel. John D. Ahern Co., Inc. v. J.F. White Contracting Co., 649 F.2d 29, 31-32 (1st Cir. 1981). The notice requirement is strictly construed, and failure to fully comply will bar the subcontractor from raising a recoverable bond claim.

     Subcontractors must file their claim on the bond within 1 year after the day of last furnishing labor or material on the project, 40 U.S.C. § 3133(b)(4), in the federal court in the district in which the project is located. 40 U.S.C. § 3133(b)(3)(B). Failure to file within the 1 year period will result in an absolute bar against the subcontractor’s bond claim. While a claim will be filed “in the name of the United States for the use of the person bringing the action,” 40 U.S.C. § 3133(b)(3)(A), the claim is a private one brought by the subcontractor and the federal government is explicitly exempt from liability to the subcontractor.

     The above summary covers the general parameters for subcontractors to file a bond claim on federally-owned public construction projects. Because each project presents a different set of facts, the process and outcome to recover for nonpayment and filing under the Miller Act will vary. If you are uncertain regarding your company’s ability to recover payment for its work on a federal construction project, or if your company has complied with the regulations or process governing Miller Act claims, you should contact a Massachusetts construction attorney to achieve the best possible outcome.

[1] For more information about “last date of work” and how it is calculated, read Payment Bonds on Federal Construction Projects – Last Date of Work.

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Sub-Subcontractor’s Ambiguous E-mail Insufficient to Satisfy Statutory Notice Requirements for Claim on General Contractor’s Payment Bond

By on March 14, 2016

In an opinion issued this week in N-Tek Construction Services, Inc. v. Hartford Fire Insurance Company, the Massachusetts Appeals Court ruled that a sub-subcontractor’s e-mail to a general contractor on a public construction project failed to clearly present a claim that would satisfy the notice requirements of M.G.L. c. 149, s. 29.

The unpaid sub-subcontractor on a public bridge painting project sent an e-mail to the general contractor that stated the following. “Enclosed is the January 15, 2010 Statement to [subcontractor] for services through that date by [sub-subcontractor] for the [project] that are still unpaid. Please give me a call at [telephone number] when you have a chance.” The attached Statement listed ten invoices. The general contractor’s project manager testified to having never heard of this sub-subcontractor prior to the e-mail, and did not understand the e-mail to be some form of claim.

M.G.L. c. 149, s. 29, requires parties that do not have a direct contractual relationship with the general contractor to provide written notice to that general contractor of any claims of non-payment within 65 days of last providing labor or material on the project. The statue merely requires that the notice state “with substantial accuracy the amount claimed, [and] the name of the party for whom such labor was performed.”

The Court’s opinion included a nuanced analysis of the purpose of this notice requirement. It held that the implied purpose is to give general contractors a clear, timely understanding that a claim is being directed against them. This is to allow an opportunity to attempt to resolve the claim prior to litigation and involvement of the payment bond surety.

In ruling against the sub-subcontractor, the Court looked at all of the circumstances surrounding the e-mail and deemed it inadequate, for failing to state “explicitly or implicitly” that the e-mail constituted a claim for an unpaid balance due on the project.

Sub-subcontractors and material suppliers on public construction projects in Massachusetts should consult with a construction attorney prior to sending 65-day notices to general contractors to insure the preservation of their payment bond rights.

Punch List and Remedial Work May Not Extend the 120 Day Period to Secure a Mechanic’s Lien in New Hampshire

By on February 8, 2016

A recent ruling in the Rockingham County Superior Court offers further guidance to contractors regarding the extent of the right to maintain a mechanic’s lien in New Hampshire.  In the matter of Fabcon Precast, LLC, v. Zirkelbach Construction, Inc., et al. Strang Scott attorney Corey N. Giroux secured a discharge of the plaintiff’s mechanic’s lien as untimely for its client, Zirkelbach Construction, Inc., of Florida, despite the plaintiff performing work within the statutory 120 period to perfect a mechanic’s lien.

The plaintiff, Fabcon Precast, LLC, secured a mechanic’s lien against the subject project, on an ex parte basis, in September of 2015.  Fabcon completed its scope of work on the project in January of 2015, and issued a sworn payment application to the general contractor indicating that it had completed 100% of its scope of work on the project at that time.  Subsequently, in May of 2015, Fabcon returned to address punch list items related to its scope of work.  While on site to complete the punch list work, Fabcon’s workers performed some limited work that they had failed to perform initially that was properly part of Fabcon’s original scope of work on the project.

In order to secure a mechanic’s lien against the project, it was necessary for Fabcon to perfect its mechanic’s lien within 120 days of its last date of work on the project.  Thus, in order for its September 2015 attachment to be proper, Fabcon relied upon the punch list work and other work performed in May of 2015 to support its right to the mechanic’s lien.  Fabcon argued that its punch list work, and the “new” work performed – that is, the work it failed to perform that was part of its subcontract — was sufficient to support its mechanic’s lien pursuant to NH RSA 447, New Hampshire’s mechanic’s lien statute.

On behalf of its client, Strang Scott argued that the September 2015 lien was defective because Fabcon’s work in May of 2015 was insufficient to support the mechanic’s lien and therefore insufficient to extend the 120 day statutory period to perfect its lien.  In particular, it was argued that Fabcon’s sworn payment application in January 2015, which averred that Fabcon had completed 100% of its work in January 2015, commenced the running of the 120 period for Fabcon to perfect its lien, despite the subsequent performance of punch list, remedial, or original scope work by the plaintiff.  The Court agreed. 

The Court directed the plaintiff “could have preserved its right to extend the lien by representing [in January] that it still needed to complete some work.”  “Because it represented that the work was 100% complete, the Court finds that the work performed …. was remedial.  The 120 days [to perfect the plaintiff’s lien] began to run on January 15, 2015.”

This ruling should be instructive for subcontractors and general contractors alike.  Subcontractors should be careful to avoid representing to general contractors that they have fully completed their scope of work if punch list or other work remains to be performed on their subcontracts.  General contractors should take care to insure that their payment applications contain sworn statements from subcontractors as to the extent of the work performed or which payment is sought.  Contractors with questions regarding the extent, duration or nature of their mechanic’s lien rights would be well-advised to consult with their New Hampshire construction attorney.

Subcontractor’s Indemnification with General Contractor: Is it Void?

By on November 9, 2015

In most construction projects, general contractors require subcontractors to indemnify the general contractor for the subcontractor’s negligent actions.  Meaning, if the subcontractor’s negligence causes injury to a third-party and that third-party sues the general contractor, the subcontractor agrees to defend the general contractor.  Often times, general contractors will attempt to go a step further and seek indemnification from the subcontractor for injuries beyond the subcontractor’s control.  In Massachusetts, such provisions are void.   

The Massachusetts statute, MGL 149 § 29C, provides the following:

Any provision for or in connection with a contract for construction, reconstruction, installation, alteration, remodeling, repair, demolition or maintenance work, including without limitation, excavation, backfilling or grading, on any building or structure, whether underground or above ground, or on any real property, including without limitation any road, bridge, tunnel, sewer, water or other utility line, which requires a subcontractor to indemnify any party for injury to persons or damage to property not caused by the subcontractor or its employees, agents or subcontractors, shall be void.

A contractual indemnification clause is valid against a subcontractor where the clause is limited to indemnification for injuries or damages that were caused by the subcontractor.  See Collins v. Kiewitt Constr. Co., 2 Mass.L.Rptr. 416 (Mass.Super. 1994).  Moreover, there is nothing in MGL 149 § 29C that specifically prohibits a proportionate indemnification in subcontracts (e.g. a subcontractor can be required to indemnify a general contractor for the subcontractor’s “share” of the fault).  However, MGL 149 § 29C specifically prohibits provisions that “obligate a subcontractor to provide indemnification for losses that it in no way caused.”  N. Am. Site Developers, Inc. v. MRP Site Dev., Inc., 63 Mass.App.Ct. 529, 535 (2005).

If you are a general contractor, it is important to review the contracts you have with your subcontractors.  If drafted in contravention of MGL 149 § 29C, your indemnification provision may be rewritten by a court, which can have unpredictable consequences.  If you are a subcontractor, you should carefully review the contract with your general contractor to ensure that the general contractor is not attempting to force you into an indemnification that is otherwise unenforceable.  If you have any questions or concerns about the indemnification provision in your contract, you should contact a Massachusetts construction lawyer. 

 

Proposed Bill Targets “Wage Theft” in Massachusetts

By on May 26, 2015

Strang Scott has previously written about both the Wage Act, the Massachusetts law protecting the earnings of workers, as well as the independent contractor statute, which governs the classification of workers as either employees or independent contractors. Violating the Wage Act and independent contractor statute can have significant real-world consequences. One consequence is a state investigation of wage theft. “Wage theft” is a broad term signifying an employer’s illegal retention of earned wages. The Boston Globe recently reported that “wage theft” is rampant throughout the construction industry. Wage theft often incurs in conjunction with the misclassification of workers as independent contractors, particularly at the subcontractor level where many workers are paid in cash. According to the Globe, the Massachusetts attorney general’s office has issued 253 wage-related citations to the construction industry alone over the last eighteen months, totaling more than $1.6 million in penalties and unpaid wages. The Attorney General’s office views investigating and prosecuting wage theft as a priority.

Employers who commit wage theft or misclassify their workers do so at substantial risk. Any worker is free to file a complaint with the Attorney General’s office, which will conduct a preliminary investigation or allow the worker to file a private law suit. Should the Attorney General ultimately find that a violation occurred, penalties start at $10,000 for non-willful violations, and $25,000 for willful violations. Repeat violations incur higher penalties, and willful violations may be further punished by debarment, preventing offending companies from seeking public contracts.

Current Massachusetts law holds the employer and the employer’s owners and/or managers liable for wage-related violations, but the legislature is considering expanding on current law. State Senator Sal DiDomenico has filed a bill to address the wage theft problem. Among other provisions, the bill (currently known as S.966) will hold “lead companies” responsible for wage violations. “Lead companies” are defined as any business entity that obtains or is provided workers directly from a labor contractor or indirectly from a subcontractor. In other words, should this bill become law, first tier subcontractors and general contractors would share liability for wage issues, include wage theft and independent contractor misclassification. Opponents of the bill have highlighted the potentially unfair burden the legislation would place on honest general contractors, and it is unknown if the bill will ultimately become law. However, all employers (particularly subcontractors, general contractors, and other entities operating in the construction industry) should properly classify all of their existing workers and be advised that the legislature may increase their direct liability for unpaid wages and misclassified workers. Employers should consult with their counsel to ensure that all workers are properly paid and classified.

 

Subcontractors: Do You Really Know What You’ve Waived in Your Lien Waiver?

By on April 27, 2015

Many subcontractors treat lien waivers interchangeably:  that is, if you’ve seen one, you’ve them all.  More and more, treating lien waivers in this manner could lead to significant and costly consequences.  Increasingly, general contractors and construction managers are providing subcontractors and suppliers with a new breed of lien waiver.  Unlike traditional lien waivers that sought only to protect the owner from the prospect of unwanted labor and materials (mechanic’s) liens cropping up on their projects, many new “lien waivers” are crafted with the intent for the subcontractor to agree to far more than a simple waiver of its lien.

In New Hampshire, and other jurisdictions, it’s well-settled law that contractors and subcontractors may waive their right to assert or perfect a mechanic’s lien by contract.  Savvy owners, developers and general contractors have long drafted contracts with this in mind.  As more and more subcontractors rejected provisions that limited or restrained their right to assert mechanic’s liens, owners, developers and general contractors have started to shift additional waiver language from subcontracts into lien waivers.  As an illustration, consider the following, taken in part from a lien waiver recently reviewed by the author:

 “In consideration of receipt of payment, the undersigned irrevocably and unconditionally releases and waives any and all mechanic’s liens or other liens or right to claim any and all mechanic’s liens or other liens against [the property].  Additionally, the undersigned waives and releases any and all other claims against the Owner, the property or the Contractor, or any other claims of any kind whatsoever in connection with the Subcontract and the property.  The undersigned shall defend, indemnify and hold harmless the Owner and Contractor against any lien, bond, claims or suits in connection with the materials, labor and everything else in connection with the subcontract.”

In this instance, the subcontractor waived not only its right to assert a mechanic’s lien or any other lien upon accepting payment, but the subcontractor also waived its right to assert ANY claim related to the contract or the property.  Furthermore, the subcontractor has affirmatively agreed to indemnify the owner and contractor for any claims connected to the materials, labor or “anything else in connection with the subcontract.”  Among other things, this means that contractor has agreed to pay the general contractor and the owner for any costs they might incur in dissolving a lien on the project arising from the subcontractor’s sub-subcontractors or suppliers or in resolving any other claim or lawsuit connected with the sub-subcontractor or material supplier’s involvement in the project.  This so-called “waiver,” contains substantially more than a waiver of the subcontractor’s right to claim a lien in consideration of its partial payment on the subcontract.  

Some lien waivers go a step further.  Consider the following language, taken in part, from another lien waiver recently reviewed by the author:

 “In consideration of the receipt of the payment above, the receipt and sufficiency of which are hereby acknowledged, [the subcontractor] releases and forever discharges [the contractor and owner] of and from any and all claims, causes of action, liabilities and other obligations respecting payment for, upon or by reason of work, labor and/or materials furnished through the date shown below to the construction project.”

At first blush, this provision appears ordinary enough.  A more thorough consideration of the highlighted language, however, reveals that the provision is carefully calculated to insure that each month the subcontractor waives its right to pursue payment for all work performed before the date the lien waiver is signed. 

So why is this a problem?  To the extent that the subcontractor signing such a lien waiver performed extra work, change order work or has disputed work that occurred prior to signing the lien waiver, and the subcontractor accepts the payment referenced in the lien waiver without carving an exception for the added, changed or disputed work, the subcontractor has agreed to relinquish its right to any further payment, a lien or a claim for payment for that work.  In other words, the subcontractor has agreed not to be paid anything further for work performed through the date the lien waiver is signed, regardless of whether the subcontractor is otherwise entitled to payment.  In tying the subcontractor’s waiver to a particular date in time, rather than to an agreed upon amount to be paid, this waiver extinguishes any claim for payment for any work performed that wasn’t included in the subcontractor’s payment for which the lien waiver was signed.  This subtle, but very important distinction, can prove costly when the subcontractor fails to appreciate its impact on its right to payment.

Other lien waivers seek to make the subcontractor a trustee, converting the funds paid to the subcontractor into trust funds for the benefit of its subcontractors and suppliers, by agreement.  Take the following example:

 “The undersigned [subcontractor] acknowledges and agrees that it is receiving the funds paid in consideration of this payment application as a trustee, and said funds will be held in trust for the benefit of all subcontractors, materialmen, suppliers and laborers who supplied work for which the beneficiaries or their property might be liable, and that the [subcontractor] shall have no interest in such funds until all these obligations have been satisfied in full.”

In this instance, rather than taking payment as the rightful owner of the funds paid, the subcontractor accepts payment as a trustee for its sub-subcontractors and materials suppliers, installing affirmative obligations and fiduciary duties on the subcontractor to its sub-subcontractors and suppliers, which otherwise do not exist.  By virtue of the language in this provision, the subcontractor has agreed to restrict its discretion and ability to use the funds paid to it for its work as it deems necessary, replacing its discretion with the affirmative obligation to hold and distribute the funds paid to its subcontractors and suppliers on behalf of the owner and general contractor.  In a perfect world, every subcontractor would pay each of its sub-subcontractors and suppliers in full out of each payment it received on a project.  In the real world, there are often good business reasons for subcontractors to withhold some or all of the payments claimed due by its sub-subcontractors and suppliers, or to apply certain portions of the payments it receives elsewhere.  This language removes the subcontractor’s discretion to do so.

With increasing frequency, developers, owners and general contractors employ “lien waivers” intended to do much more than insure that mechanic’s liens aren’t perfected against a property after payment has been made.  Instead, this new breed of “lien waivers” is intended to create “knowing” waivers of subcontractors’ affirmative rights after they have signed their subcontract.  These “lien waivers” are intended to rewrite the bargain to which the parties agreed in their subcontract by downshifting the owner’s and general contractor’s desired contractual terms into a lien waiver when it might otherwise have been rejected in the subcontract.  It’s no longer sufficient for subcontractor’s to review only the proposed subcontract and scope of work.  Subcontractors must review proposed lien waivers carefully to insure that the lien waivers aren’t an agreement not to be paid.  If you have any questions or concerns regarding the provisions of your lien waivers, consult your construction attorney for a thorough assessment of the risks and exposures.