Owners, contractors, suppliers and subcontractors often rush to start projects and neglect necessary steps that mitigate risk and prevent problems. Handshake agreements are great fodder for litigators, but when it comes to making sure all parties are on the same page, clarity is king. Write it down, make it clear and get it signed.
Consider Incorporating the following simple suggestions.
Use a written contract
Failing to use written contracts can be tragic. For example, in a recent mediation, an owner brought claims against a third-tier supplier who failed to use a subcontract form that would have provided excellent defenses. The supplier has been doing business for years using a purchase order that referred to terms and conditions, but the supplier never actually provided those terms and conditions to its customer. Avoid this by putting a system in place that ensures customers receive and agree to your contract form before you begin work.
Read before you sign
Failure to read or understand a contract is a bad defense, and the time to avoid problematic contract language is before you sign- not when the project is in trouble. Before signing any construction contract, read and understand how it allocates risk. For example, is there an enforceable pay-if-paid clause? Such a clause can offer a full defense to payment if the owner does or cannot pay. Evaluate the risk that your contracting partner may not be able to pay. Upfront understanding and negotiation of contract risks reduces big headaches (and costs) later on.
Follow your own requirements to avoid waiver
Make sure that the requirements of your contract are enforced in the field. Those requirements typically exist to protect you from post-contract extra claims or expenses that should have been documented and dealt with at the time they arose. When such terms and conditions exist, follow them without deviation. Require project personnel to follow the contract forms, and implement procedures to confirm compliance both upstream and downstream. The party who ignores its obligations may waive its rights.
Follow all contract requirements when making claims
Ohio law is clear: fail to document extra work, changed conditions or claims in strict accordance with contract requirements, and you likely have waived the claim. While waiver arguments can be made, it’s easier – and cheaper – to correctly insert claims or extras from the start of work. Consider creating a flow chart of contract requirements for extra work or changed conditions, including how quickly notice must be provided. Additionally, if demanded to perform extra work without a resolution regarding responsibility to pay for the work, then it is prudent to provide notice that the work is being performed under protest with a reservation of payment rights. Silence will be considered acceptance of your adversary’s position.
Use lower-tier Notices of Furnishing (NOF) to limit lien liability
When working on a project with subcontractors of suppliers in the contract chain, maintain a list of lower-tiers who provide NOFs, to preserve their lien right. Each time payment is issued, all lower-tiers who provided NOF’s should be paid. Contractors should provide signed waivers of liens and claims from their lower-tiers and suppliers acknowledging receipt of payments and waiving all liens and claims through the date of last payment. Yes, this requires a detailed approach to paperwork and management of lower-tiers, but it avoids lien or bond claims from unpaid lower-tiers. If lower-tiers are not being paid, then the opportunity to issue joint checks ot to direct-pay those suppliers might exist if that right is provided in your contract form.
Be cautious when signing lien waivers
Payment is regularly accompanied by an obligation to sign a waiver of liens or claims. many forms are overreaching and waive claims for unresolved extras or delays. Read carefully before you sign to avoid inadvertent waivers. If you have claims or your customer is holding retention, then those things should be explicitly reserved on the face of the lien waiver.
Additionally, the waiver should be conditioned upon the receipt of funds. Finally, a contractor cannot be required to sign a waiver of disputed claims in order to receive an undisputed payment. That demand violates Ohio’s Fairness in Contracting Act.
Obtain complete lien and claim waivers from your lower-tiers
Before you issue any payment to your lower-tiers, get a conditional waiver of liens and claims from your lower-tier and its subcontractors and suppliers. The form should confirm that the amount of the payment satisfies your lower-tier in full through the period that the check covers including any claims for extras, delay or interest. Reservation of undisputed balances for earned and unpaid retention are appropriate, but any such reservation should be specific. The claim waiver should also include an affidavit of contractor affirming that lower-tiers have bene paid and providing indemnity against any claims from these lower-tiers in the future. Like any written agreement, you must use the form to receive the benefit of it’s protection.
Construction companies should confirm these risk migration controls are in place to avoid disputes and improve the bottom line. Contract forms that remain unused, unread or are unclear only lead to headaches and strife.
*Reprinted from the Properties Magazine.