Construction Contract Tip – Subcontractors, Don’t Waive Your Right to a Lien

Sam DeBaltzo | Tonkon Torp

In the course of reviewing construction subcontracts, I’ve recently seen provisions similar to the following (simplified for convenience and confidentiality):

“The subcontractor shall reimburse the [Contractor and/or Owner] for any costs and expenses for any claim, obligation, or lien that arises from the performance of the work.”

“The subcontractor shall remove and discharge any lien, claim, security interest, or other encumbrance related to the subcontractor’s performance of the Work.”

The provisions are often followed with boilerplate requirements for paying the third-party claimant, bonding, reimbursement of attorneys’ fees, indemnification responsibilities, or other ways of providing security to the owner or general contractor. 

The purpose of these types of provisions is clear: owners want their projects completed free of liens, and they want the person responsible for the work to make sure that happens. This is an understandable position, and it is reasonable for any construction contract to require lien waivers. The problem is that these provisions do not require payment prior to the waiver.

Yes, if a subcontractor is paid, it should agree to keep the project clear of liens and remove any liens filed by its respective subcontractors or suppliers. But, until payment has occurred, retaining the powerful lien right is essential for any prudent subcontractor. Whether intentional by the drafting party or not, these provisions suggest the subcontractor is agreeing to waive its lien rights even when the owner or contractor fails to pay. 

With these specific provisions, I find the solution is simple and relatively unobjectionable; I like to add the phrase “provided subcontractor has been paid for the work” at the beginning of the phrase. Subcontractors should be on the lookout for these and other potential pitfalls, and make sure they do not unwittingly leave themselves unprotected by accepting provisions that are inherently unfair.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

PSA: Pay If Paid Ban Goes into Effect on January 1, 2023

Christopher G. Hill | Construction Law Musings

I have written a couple of times here at Musings regarding the new pay-if-paid legislation passed by the General Assembly last session.  While the statute has some inconsistencies and a working group has made some recommendations, the legislation as passed will go into effect on January 1, 2023, without any changes (at least until next session).  As always, such action by our legislature here in Virginia will create work for construction attorneys assisting their clients to amend contracts to meet the new rules.

Essentially (and with minor inconsistencies between public and private contracts), the bill requires that any construction contract entered into after January 1, 2023 have the following provisions:

  • On public projects:  A payment clause that obligates a contractor on a construction contract to be liable for the entire amount owed to any subcontractor with which it contracts. Such contractor shall not be liable for amounts otherwise reducible due to the subcontractor’s noncompliance with the terms of the contract. However, in the event that the contractor withholds all or a part of the amount promised to the subcontractor under the contract, the contractor shall notify the subcontractor, in writing, of his intention to withhold all or a part of the subcontractor’s payment with the reason for nonpayment.
  • On private projects: Requiring the Contractor or subcontractor to pay its subcontractors or sub-subcontractors within the earlier of (i) 60 days of the satisfactory completion of the portion of the work for which the subcontractor has invoiced or (ii) seven days after receipt of amounts paid by the owner to the general contractor or by the higher-tier contractor to the lower-tier contractor for work performed by a subcontractor pursuant to the terms of the contract. In the event that a contractor withholds all or a part of the amount invoiced by any lower-tier subcontractor under the contract, the contractor shall notify the subcontractor, in writing, of his intention to withhold all or a part of the subcontractor’s payment with the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance.

The changes go on to provide for interest provisions for non-compliance and to specifically void any condition precedent pay-if-paid language that may remain in any construction contracts. For more on the specifics, check out my earlier post on this subject.  For the full text of the legislation as passed in SB550, click here.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Liquidated Damages: Too High and It’s a Penalty. Too Low and You’re Out of Luck.

Christian Fernandez | Real Estate Ligitation Blog

Liquidated damages provisions in commercial and residential real estate contracts play a vital role when a transaction goes south, and should be given careful consideration when negotiating a real estate contract. Liquidated damages may be referred to in a variety of ways, such as “earnest money,” a “good-faith deposit,” or a “non-refundable deposit,” but each typically denote a negotiated amount of money that a seller is entitled to retain should a buyer breach a purchase and sale agreement. The purpose of liquidated damages is to provide the parties with certainty when actual damages arising from a breach of contract may be difficult to calculate. Accordingly, liquidated damages provisions alleviate the need for potentially expensive litigation associated with proving damages.

While parties are free to negotiate the amount of liquidated damages, the amount must approximate the loss anticipated at the time of contracting, or the loss that actually occurs as a result of a breach. Arizona courts have held that where the amount of liquidated damages is unreasonably large when compared to the anticipated loss or actual loss, the liquidated damages provision is unenforceable as a penalty. A breaching party faced with high liquidated damages will often seek to invalidate the provision as a penalty. If a court agrees, the non-breaching party may still recover damages, but must go through the process of proving such damages. Therefore, when negotiating a real estate contract, consideration should be given as to whether a liquidated damages amount is arbitrarily high when compared to an anticipated loss in the event of a breach.

In contrast, setting the amount of liquidated damages too low may have the undesirable consequences of preventing a non-breaching party from recovering the actual and full amount of damages that the party suffered. For example, this may occur when the real estate market experiences a rapid downward trend during escrow such that a seller can no longer sell the property for nearly as much after the breach as before going under contract. However, in Roscoe-Gill v. Newman, 188 Ariz. 483 (Ct. App. 1996), the court held that the principles that justify invalidating a liquidated damages provision for being an unreasonably large penalty do not support invalidating a liquidated damages provision that is claimed to be insufficient. Rather, unless the non-breaching party can establish fraud, duress, or unconscionability, a liquidated damages provision will be enforced despite the liquidated damages amount being inadequate to compensate the non-breaching party for damages actually incurred. Therefore, care should be taken when determining what anticipated damages may be incurred that are covered by a liquidated damages provision.

Factors that a party may consider when determining a liquidated damages amount include:

  • The time, difficulty, and cost associated with finding another buyer.
  • The cost of carrying the property until another buyer is identified.
  • Whether the real estate market is trending up or down.
  • Consequential damages, meaning damages that arise indirectly from the breach, such as the loss of use of the funds that would have been received.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Re-Thinking the One-Sided Contract: Considerations for a More Balanced Approach to Contracting

William Underwood | ConsensusDocs

Construction projects can be inherently risky – often there are multiple parties (owners, architects, engineers, contractors, subcontractors, consultants, vendors, government officials, sureties, insurers, and many others), unforeseen site conditions, tangled supply chains, acts of God, inadequate funding, site safety matters, and a whole host of other issues that can make even a relatively straight-forward job complex.  Parties necessarily want to minimize their individual risk to the greatest extent possible on construction projects.  And to do so, they may seek to push as much risk as possible onto the other side through one-sided terms in their construction contract.  

But is an entirely one-sided contract the best way to mitigate risk?  In many instances, the answer is no.  Every contract is different – and many considerations should be taken into account when drafting and negotiating contracts – but entirely one-sided can often have unintended consequences and create risks that otherwise might not exist in a contract that allocates and balances risk more equally across the parties.   

This article reviews several considerations (although it is not an exhaustive list) for avoiding one-sided contracts, including some of the benefits created through the use of equitable contract clauses.  And for context, some examples of one-sided contract clauses include no relief for other contractor/owner-caused delays; no relief for force majeure events; no relief for unforeseen site conditions; and broad form indemnification clauses (i.e. one party assumes the obligation to pay for another party’s liability even if the other party is solely at fault).  Again, this is a non-exhaustive list, and many other standard contract provisions can be altered to become one-sided.  But the general premise of a “one-sided contract clause” is that it shifts all risk, obligation, and liability to one party.  And this article examines why that might not be the best idea.  

Contracts Should Generally Allocate Risks to the Correct Parties 

On the surface, it may appear that transferring as many obligations and risks as possible to the opposing is a good idea.  But generally, the better practice is to allocate risks to the parties best situated to manage that risk.  This concept is neither new nor novel.  And countless articles address this basic concept in depth – but it still bears repeating at the outset here.    

For example, if a contractor or subcontractor is forced to bear risks that it has no control over, then it has little chance to mitigate that risk.  And the contractor must (or at least should) ensure against that risk or add a further contingency to the bid price.  Either way, the costs go up (more on that below) and no one is well-positioned to mitigate the risk itself.  In many instances, this functions as a lose-lose for everyone involved, as the project becomes both more expensive and potentially delayed.   

So using a one-sided contract makes it difficult to properly allocate and assign risks to the correct parties.  And everyone can suffer because of it.  But the use of more equitable contract provisions that allocate risks to those best situated to manage the risk can lead to real-time benefits on the project.  

Better Cost Control 

As mentioned above, the allocation of risk to a party with no control over that risk is likely to lead to cost increases.  Most contractors likely recognize that they must adjust their contract price upwards to account for increased risks and potential liability—particularly those risks that are outside of their control.  So forcing all risk and liability for issues onto one party will often lead to increased contract prices.  And depending on the size of the project and the risks involved, the price increases can be quite significant.  

There are also additional “hidden costs” that may exist beyond just the contract price itself.  For example, there is a heightened chance of increased claims, which adds to the cost of the project.  And there is a real chance that bid competition itself may be more restricted and less competitive if one-sided risk shifting is made clear upfront.  Fewer contractors may be willing to bid on the job and options become limited.   

Finally, on a basic level, there is an increased chance that the relationship between the parties will simply be more adversarial if the contract is overly one-sided.  Such adversarial relationships generally are not conducive to problem-solving and overall cost mitigation.  

More Efficient Project Administration 

Balanced contracts can also help reduce the cost and burden associated with basic project administration functions.  For example, many one-sided contracts contain very short notice periods to submit claims for issues like unforeseen site conditions, force majeure events, or other sources of delays and increased costs.  And often, these notices must contain detailed statements of the subject events and their impact on time and price.  The general intent is to prevent contractor claims by creating narrow windows within which claims must be submitted or they are otherwise waived.  But in reality, most contractors are still going to try to move forward with claims anyways, regardless of whether they provided notice outside of the contractually required window.  And particularly diligent/administratively savvy contractors will simply paper every possible claim at the outset, which in turn creates a larger administrative burden on the project as everyone wades through claims.   

So allowing for a more reasonable notice period can reduce the administrative burdens created by excessive claims and allow the parties to focus on other project execution-related matters.  And this concept applies beyond just notice periods/requirements as well, as any sort of one-sided requirement could unintentionally lead to excessive administrative burdens on a project.  

Keep Your Contract Realistically Enforceable 

At the end of the day, a contractor most likely wants the provisions of its contract to be enforceable to greatest extent possible.  Every state’s laws are different when it comes to one-sided or otherwise inherently “unfair” contract clauses.  And contractors should understand the relevant laws that impact the enforceability of their respective contracts.  But even one-sided contract clauses that are facially enforceable in a particular jurisdiction (for example, broad form indemnity clauses) may still not be a good idea.  

On a practical level, if a judge or arbitrator wants to avoid the application of a certain contract clause – particularly when it is overly harsh and one-sided – he or she can usually find a way to do so, even if the clause is arguably “legal” on its face.  This is not to say that courts and arbitrators will not strictly enforce black letter laws (they will), but most dispute resolution forums lean towards finding an equitable and just result.  And the opposing party (i.e. the party harmed by a one-sided contract clause) will happily point the relevant decision-maker in the right direction.   

Furthermore, few things will make a juror dislike a party more than the perception that someone is openly and willingly seeking to take unfair advantage of someone else.  This can be particularly true within the context of a large owner or general contractor and a smaller party.  

So one-sided contract clauses may not ultimately be enforceable.  But using a more equitable approach to contracting can help increase the chances that the contract’s terms are enforced in the event of a dispute.  

Conclusion 

Although one-sided contracts may appear to be a good way to shift risk and avoid liability that may not always be the case.  In many instances, one-sided contracts can lead to unmitigated risks, increased costs, and other negative impacts for all parties involved.  So consider the benefits of equitably allocating risks to the correct parties while avoiding overly one-sided contract provisions – it may pay dividends in the long run.  


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Prime Contractor Beware, No. 2: “Know Thy Owner”

David Taylor | BuildSmart

Here’s the Scenario: After months of working with a new national developer (and providing hours of unreimbursed value engineering), you get the draft prime contract and see that the named “owner” will not be the hugely successful developer, but a specially created “limited liability company” that’s sole “asset” is the land upon which the project will be built. The developer has also shopped around to obtain investors for this project, and the LLC is made up of a series of limited liability companies, limited partnerships, etc. The project is also being financed, so that the sole owner “asset” is subject to a deed of trust/mortgage by the lender that will take precedence over any contractor lien claim. While there’s been zero discussion or mention of this “owner,” the pressure is on. What options do you have?   

A Warning

Those old timers who have been around recall the series of failed projects and bankruptcies that followed the 2008-2010 financial meltdown. This put many construction companies out of business while the lenders foreclosed, wiped out any liens, and then sold the projects without having to pay a dollar to the construction companies that built the half-completed projects. Any non-escrowed withheld retainage is gone. Always, always, know that there is a reason a “LLC” is called a “limited liability” company.

So, what can a prime contractor do?

  • Demand and ask for evidence of financing whether or not the owner is or is not financing the project. Some owners do not need financing. If using an AIA form prime contract, remember that the standard A201 General Conditions (Article 2.2) states that upon a written request, the owner is required to provide “reasonable evidence” that the owner has made “financial arrangements” to fulfill the owner’s obligations. And the contractor also has no obligation to “commence the work” until such information is provided. If the AIA form is not used, include something similar in your prime contract.
  • Don’t sign the contract until you have some reliable information about financing. For financed projects, you have some leverage. Typically, the owner/developer is ready to finalize the plans, get the prime contract signed, close the loan, and break ground. And to close the loan, it needs an executed prime contract. At this late date, it’s really hard for an owner to then find another contractor. Use that leverage if necessary. 
  • Protect withheld retainage: Many states (like Tennessee) have mandatory limitations on the amount of retainage that can be withheld (ranging from 5% to 10%), and for a long project, that’s a lot of delayed profit. Know the retainage laws (and penalties) if the retainage is not escrowed throughout the project, which is mandatory in some states (like Tennessee). Try to have the owner even agree NOT to withhold retainage, which would allow a contractor to in turn have very, very happy subcontractors. 
  • During the course of the project, track payments and don’t accept promises of payment. No matter the explanations, strictly adhere to the payment terms and conditions, especially for deadlines for notices for claims. Know deadlines for lien notices. It’s also vital to carefully examine those typically required partial lien releases that are required to be provided with pay applications: Make sure that any and all claims or proposed change orders are carved out and preserved. You better believe that after a dispute or termination, without making these efforts, these lien waivers will be thrown back in the contractor’s face by the owner or the lender.      
  • Before you exercise any default, threats to stop work, or initiate ADR proceedings, make sure that there not any other executed documents that may have been required by any lender. My previous post discussed the issues with the demand that the contractor execute the typically required “Consent and Assignment Agreement” in favor of the lender.

The Bottom Line

In 98% of your projects, contractors will get paid, which will in turn allow subcontractors to get paid, and the work will be done properly and on time. Any issues are worked through in good faith. The “we are all a team” attitude should prevail throughout a successful project, and everyone should pledge to work together again. But remember “who” you are contracting with, and it’s not the great developer. If there are issues and the developer decides to tank the project, or has issues with the lender, you could be holding the bag and face potential liability from subcontractors. “Know thy owner” is a mantra that should be a part of every internal discussion before embarking on a new project.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.