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Three Contract Documents That Can Take a Bite Out of a Company’s Legal Rights

Furnishing materials or labor in the construction industry mandates that companies interact with a variety of complicated legal documents. The core construction contract, for example, is notoriously long and convoluted, but at least it has been quasi-standardized by the AIA, ConsensusDOCs and similar efforts.

There are a few other contract documents circulated among contractors and suppliers that receive less attention, and while the documents may seem like benign “standard forms,” the truth is they lack any standardization and can take a bite out of a company’s legal rights.

Joint Check Agreement

Utter the term “joint check agreement” outside the construction industry and the response likely will be confusion. In the construction industry, however, everyone knows this tool well. Despite this, it is surprising that the joint check agreement itself is not a construction-specific tool, nor is it a defined tool at all. At its core, joint check agreements are simply agreements in which two or more parties agree to certain terms.

The terms themselves can be pesky, and that’s because joint check agreements are unregulated nationwide. There is no 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 joint check agreements are misunderstood by many in the industry, and the expectations for the agreement are different for the “payee” and “payor.”

How can a joint check agreement go wrong? 3 Fatal Joint Check Agreement Mistakes exposes the following three high-level and common mistakes:

  1. thinking all joint check agreements are alike and overlooking the actual agreement’s language;
  2. accepting agreements or joint checks without the word “and” in them; and
  3. trusting that the other parties to the agreement will meet or understand their obligations under the agreement.

The lien waiver document is the most dangerous paper exchanged in the construction industry

Lien Waivers

The lien waiver document is perhaps the most dangerous paper exchanged in the construction industry and, unfortunately, it is the most overlooked. Everyday, contractors, suppliers, lenders and other interested parties exchange thousands of lien waivers among one another. They rarely examine the language with legal counsel. Unfortunately, in some instances, the waiver exchange has been constructed as a simple technological step (i.e., just press this button and relax, everything will be fine). The trouble is that everything is not always fine.

Lien waiver documents are a Wild West of complicated and onerous contract language. Owners and lenders know they have contractors and suppliers on the ropes and in a very vulnerable position, and they often exploit that by requiring strong terms be within the waiver. While waivers should simply memorialize that money is being exchanged, they frequently go further to require waivers of claims of all sorts. Be aware!

Unlike joint check agreements, there are at least some laws in place to regulate lien waivers. Unfortunately, these laws vary from state to state, and regulated waiver items are significantly out-numbered by unregulated waiver items. In other words, it is much more likely to encounter unrelated waiver scenarios.

And an oversight can be costly. One company in Texas just got through fighting for $20 million that nearly got erased because of lien waiver language, and by “commoditizing” lien waiver management on a New York project, a few parties are in litigation as to whether the waiver signed was worth anything at all. Lien waivers will be a hotbed of litigation in the coming years, and there is a lot of unseen legal and financial exposure with waivers. Don’t take them for granted and invest in processing them right.

Change Orders

Many contractors don’t realize change order documents are contract documents, but these documents are just as much part of the contract as the lien waiver and the contract’s general conditions. In some cases, the change order documents will not add any terms, but in others, contractors, owners and other parties see the document as an opportunity to pass extra contract terms into the agreement.

When reviewing or signing a change order, be certain that the change order’s scope is fully understood. Are rights being waived as to any past changes that are not part of the change order, or any future changes that may be related to the work and not included? These terms are often spelled out within the change order document, and are excessively harsh.

The Forms Fantasy

These three documents are a trinity that live in a “form fantasy.” Many in the construction industry incorrectly consider these documents to be forms. In fact and in practice, however, the documents are legal contract documents with unique and unregulated terms that can come back to bite a company.

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