Every month, contractors, subcontractors, and suppliers submit applications for payment upstream along with a form they are contractually required to execute: a release and waiver of claims or liens, commonly called a “lien waiver.” The language in these lien waivers is intended to identify how much the contractor has been paid and release any claims, liens, or demands that the contractor may have against the upstream entities, including the project owner, the property, and any applicable bonds. However, the language is often very broad and is a common area where lower-tier contractors can lose or substantially limit their rights for claims that are not yet fully known, such as the impacts from the novel coronavirus (COVID-19) pandemic.
This alert identifies some of the issues contractors, subcontractors, and suppliers should be looking for in these lien waivers and ways they can protect themselves from losing their rights.
Carefully read every lien waiver. Reading and understanding each and every lien waiver is good advice regardless of a pandemic. However, it is absolutely critical now. The language in lien waivers usually varies from project to project and owner to owner, so you cannot assume that the language you have used on the last five projects will be the same as the current one. Also, though typically referred to as lien waivers, these documents almost always release and waive ALL claims against ALL potential parties for additional compensation or additional contract time. This means your lien waiver is not simply giving up your mechanics’ lien rights, but also your right to submit a change order request, request for equitable adjustment, or file a claim on applicable payment bonds. Knowing exactly what is waived and released is essential.
Reserve your rights. Some lien waivers provide space to identify open change orders and/or claims that are not being waived or released. In these instances, contractors should identify COVID-19-related impacts as an open claim to be resolved later. Even when that option is not provided, contractors should append language to the lien waiver excluding COVID-19-related cost and time impacts. What the reservation language should say may vary by the language in the lien waiver. Owners and other upstream entities may push back on such reservation language, but usually the parties are able to work out agreeable language.
Quantify and submit claims for what you can. In jurisdictions where construction has been entirely shutdown by government or health official orders, the impacts of COVID-19 are apparent. However, in other jurisdictions where construction is continuing without too many restrictions, the impacts may be more subtle or difficult to identify at this time. Nonetheless, contractors should attempt to identify cost or time impacts that they can and seek changes or submit claims as appropriate. But, submitting the change order request or claim is not always enough. Lien waivers may still release and waive unsettled change orders or claims if they are not expressly identified and excluded. As discussed above, even after submitting change order requests, requests for equitable adjustment, or claims, contractors must continue to include these items as open and reserved items on lien waivers for every interim payment until they are addressed and closed.
Document, document, document. As discussed in previous Alerts, clear and detailed documentation of potential impacts is critical. Upstream entities and in particular project owners may push back on broad reservations in lien waivers as suggested above. Regular, detailed project documentation showing potential impacts from COVID-19 (i.e., sick employees, inefficiencies due to social distancing or other CDC-recommend changes, or delayed material or equipment shipments) can help justify the need for such reservations by showing actual changes to the project that may not yet be quantifiable. Additionally, this documentation will be necessary later to support change order requests or other claims. Months or years from now when impacts from this pandemic are being arbitrated or litigated, this documentation will be the difference between a potentially successful claim and unrecoverable costs.
For strategies on responding to and documenting impacts from these government actions and COVID-19 in general, please refer to our previous client alert, “COVID-19 Strategies for the Construction Industry.” Additionally, visit Cozen O’Connor’s COVID-19 website for new updates.