Watch out: These construction documents are not standardized
Thursday, June 18, 2015
Construction industry participants are routinely required to navigate complicated legal documents as part of the project and payment process. Legally significant documents are exchanged every day, and often without significant review.
The nature of construction payment requires documents that can have a significant impact on a party's legal rights to be exchanged all of the time, and this time crunch can cause a problem with giving some of these documents the review time that may be necessary, due to the complicated or non-standardized nature of the documents at issue. While some construction documents have moved toward standardization, others inhabit the Wild West of legal contracts — where almost anything goes.
While some of these non-standardized documents seem benign and commonplace, the reality is that even common documents can have significant impact on a construction company’s rights.
Lien waivers, despite the fact that they are exchanged for nearly every construction payment, may be the most dangerous document exchanged in the construction industry. The common nature of the document and its ubiquity in the construction payment process has led many companies to view these important contracts as merely a document standing in the way of payment that only needs to be rubber-stamped.
While in the majority of cases in which a lien waiver is provided payment is made and the project continues with no trouble, that is not always the case. Overlooking a lien waiver merely because it is a common document is a disservice.
Since few states mandate the contents of a lien waiver, and/or dictate the proper circumstances in which certain types of waivers can be used. Lien waiver documents generally inhabit the unregulated Wild West of construction contact documents.
Often, lien waivers can include complicated and onerous contract language meant to improve one party's legal position at the other's expense. Since parties on the top of the chain know they have significant leverage to get a waiver signed (i.e., the prospect of payment), that can be exploited by inserting strong terms within the waiver. While the purpose of lien waivers should simply be to serve as a receipt of payment made and a waiver of lien rights to that extent, they can go further and work to waive all sorts of different rights.
While, as noted above, there are some states in which lien waivers are regulated, these states are in the minority. Because of this, and a potential trend of states slowly moving toward a more regulated approach to waivers, litigation regarding lien waivers will likely be a boom industry in the coming years. Since the documents themselves are as varied as the parties to them, there is a lot of hidden or undetermined legal and financial exposure.
Joint Check Agreements
Joint check agreements are contracts familiar to construction industry participants, but relatively unknown to parties outside the industry. Despite their well-known nature in construction, however, joint check agreements are not construction-specific tools. Even more interestingly, there is no such thing as a "standard" joint check agreement. At its most fundamental nature, a joint check agreement is simply the agreement of two or more parties to be bound by certain payment terms.
The terms agreed to, though, can be difficult beasts. Unlike lien waivers, where, despite the fact that regulation/standardization is the minority but at least present to some extent in places, joint check agreements are completely unregulated nationwide. There is not a single law in the United States that dictates what can and cannot be in a joint check agreement, or how the joint check agreement should work. This is further complicated by the fact that many construction participants misunderstand joint check agreements, and some of the consequences related to them. Further, the expectations for the agreement are different for the "payee" and “payor."
Despite some commonly held beliefs, joint check agreements are not all the same, or even work the same. The specific language of the joint check agreement at issue controls the agreement, so if there are differences between agreements, which there likely will be, the agreements can be interpreted differently.
Not Just "Forms"
Since both lien waivers and joint check agreements are basically everywhere in the construction payment process, many parties in the construction industry assume that they are "just forms" and that cursory review is the only thing necessary. In fact, these documents are complex legal documents that can have significant impact on a party’s legal rights, and potentially on a party’s ability to get paid. Waivers and joint check agreements should be reviewed and understood to best protect a company's bottom line.
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