On a construction project, progress payments are typically only made in exchange for a lien waiver. And unless claims for change orders are specifically reserved, a contractor may find themselves out of luck if they signed that waiver. However, in a rather unique holding, a recent North Carolina Court of Appeals held that compensation claims for additional work, at least in the context of “daily changes,” may survive even if the contractor signed a lien waiver.
Change orders & lien waivers
While executing lien waivers seems like standard operating procedure to get paid on most projects, they shouldn’t be taken for granted, particularly in states where the form and content of waivers are not regulated. These forms are closely tied to change orders and, most importantly, a contractor’s right to payment.
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Any and all provisions in a construction contract that deal with these processes should be reviewed closely before starting work on a project. Signing one of these waivers for payment could result in waiving any and all claims for payment, including those for improperly rejected or pending change orders.
However, a recent decision out of North Carolina promotes the notion that, depending on the circumstances and frequency of the changes, claims are potentially exempt from these waivers.
NC subcontractor forced to deal with “daily changes”
The case in question is Gamewell Mechanical, LLC v. Lend Lease Construction, Inc.
- General contractor: Lend Lease Construction, Inc. (Lend Lease)
- Subcontractor: Gamewell Mechanical, LLC (Gamewell)
Lend Lease was the general contractor on a commercial project for the construction of three buildings located in North Carolina’s Research Triangle Park.
For the mechanical and plumbing work on the project, Lend Lease had subcontracted Gamewell under a lump-sum contract for a little over $9M. The relevant portions of the subcontract are outlined below.
Subcontract’s payment and waiver provisions
Every progress payment would be made in exchange for a waiver and release which, according to the subcontract, would “…waive, release, and relinquish any and all rights, claims, demands, liens, claims for relief, causes of action and the like, whether arising at law, under contract, in tort, in equity or otherwise, which the undersigned has now or may have had arising out of the performance of work or the furnishing of labor or materials by the undersigned.”
Additionally, the waiver and release clause also allowed the subcontractor to carve out exceptions in the waiver for any claims currently unresolved for which written notice had been provided. There was even a form provided (Schedule A form) to carve out such exceptions for claims, which included claims for additional work outside the scope of work.
Changes were directed by the GC on a daily basis
Once the contract was signed, Gamewell noticed a multitude of conflicts in the plans and specs. So many, in fact, that construction was impossible to complete according to the plans.
Throughout the duration of the project, Gamewell dealt with multiple delays and lost profits due to the necessary adjustments. These adjustments mostly came in the form of change orders, a majority of which were approved.
Progress payments were made according to the subcontract, and in exchange for a waiver and release. As the project neared completion, Gamewell submitted another pay application for work completed along with a signed waiver and release.
What Gamewell did not submit, was a final pay application for the remaining retainage being withheld. The following month, Gamewell sent a demand to Lend Lease claiming over $2M of payment for the additional work and delays it incurred, which the GC did not pay.
At trial, the court dismissed a majority of the delay claims based on the presence of a “no-damages-for-delay” clause.
However, they ultimately entered a judgment in favor of Gamewell in the amount of $826,429.79, plus interest. The award included sums for:
- The unpaid balance (retainage)
- Additional labor & materials not waived through the pay app process
- Improperly denied change orders
- Change orders that were never approved
It’s important to note that although some of the change order work claims had survived, a fair amount of the additional work was considered waived due to the waivers executed. This is why the award was only $826K as opposed to the $2.7M initial claim.
Regardless, Lend Lease appealed.
Unreasonable to expect every change to be reserved by the sub
On appeal, Lend Lease was mainly challenging the award of any sums in excess of the unpaid contract balance; i.e. all of the claims for payment beyond retainage.
They argued that all other claims regarding changed or additional work were waived in exchange for each progress payment. Their argument was based on a previous case in which claims for unsettled change order requests were dismissed because they were waived in exchange for progress payments pursuant to the contract.
The appeals court acknowledged this holding, but distinguished the facts of the case at hand with the one relied on by Land Lease, just as the trial court had.
The appeals court declared, “…it is undisputed that there were delays, numerous Change Orders issued, re-sequencing, and coordination issues occurring throughout the project.
“Given the daily problems that arose as a result of these issues, [plaintiff]’s failure to reserve claims regarding day-to-day miscellaneous items done in the field at the discretion of [defendant] is not a material breach-of-contract.”
In essence, the court drew a line in the sand when it comes to “daily changes.” Since additional changes and work were dealt with on a regular basis, the waivers submitted with each pay app “could not cover claims not readily apparent due to daily changes on the job.”
Therefore, the court upheld Gamewell’s claims for additional work.
Daily changes may be exempt from progress payment waivers
While performing work out of scope is extremely risky without a written and approved change order, this isn’t always easy in practice. Decisions and changes sometimes need to be made on the fly to avoid falling too far behind on the project schedule. When there are numerous changes that happen on a daily basis, seeking approval for every single change can be impractical.
This North Carolina court’s decision is limited and particularly fact-intensive, and contractors are right to be wary about executing waivers throughout the project when dealing with such a multitude of changes. However, it does open the door for potential claims that may have otherwise been waived in exchange for payment.
Final note: Kudos to Gamewell for having the savvy and wherewithal to refrain from executing a final pay application and waiver! Doing so could have drastically altered the outcome of this case.