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A prime contractor on a federal government contract was held to have waived pass-through claims of its subcontractor by virtue of having signed a series of lien waivers and releases. To receive payment under the subcontract, the Sub was required to sign these periodic waivers and releases with its applications for payment. The court found that the releases contained a general release whereby the sub irrevocably and unconditionally waived any claims in connection with the contract “through the end of the period covered by this Application.” There was no exception to allow for subcontractor pass-through claims to be filed.

Because the terms of the release were clear and unambiguous, the court would not consider extrinsic evidence that might have demonstrated an intent by the parties to preserve pass-through claims. The court also rejected the request by the parties to reform the release. That is because the court stated it lacked jurisdiction to reform an agreement between a prime contractor and its sub – the court’s jurisdiction being limited to contract claims between a plaintiff and the Government. M.W. Builders v. United States, 2018 WL 1150729 (Fed.Cl. 2018).

The subcontractor cited a number of U.S. Court of Claims cases in support of its argument that the pass-through claims were not waived. MW Builders cited Metric Constructors, Inc. v. United States, 314 F.3d 578, 584 (Fed. Cir. 2002), for the proposition that partial releases do not bar pass-through claims against the Government, where the parties did not intend to release pass-through claims. In finding that reliance on that case was misplaced and did not help the subcontractor in the current case, the court explained that the releases that were considered in that decision contained qualifying language, i.e., “to the extent of payments actually received,” and that it was the ambiguity of that wording that permitted the subcontractor in that case to maintain its pass-through claims.

The court found that: “Unlike the lien waiver and release in Metric Constructors, MW Builders’ and Bergelectric’s lien waiver and release contained an irrevocable and unconditional waiver of “any other claims whatsoever in connection with this Contract and with the Realty through the end of the period covered by this Application.” (emphasis added). Rather than releasing claims, to the extent payments were received, MW Builders’ and Bergelectric’s lien waiver and release expressly reserved only those claims arising after the date of the Application for Payment. As such, the court determined that the release language unambiguously ‘waive[d] all of Bergelectric’s claims against MW Builders and any related pass-through claims against the Army Corps.’ Therefore, extrinsic evidence was not relevant, required, nor admissible to interpret the text of the release.”

Comment: When reviewing and negotiating contracts (both prime contracts and subcontracts) it is not uncommon to find contract language stating that the contract agrees to waive all rights to file liens and will indemnify the project owner against any claims and damages arising out of the filing of liens. Some, but not all states, do not permit enforcement of such waiver of lien rights. Rather than depend on state law to reform the contract, it is prudent to modify such language to state that the right to file liens is only waived as to amounts actually received on invoices.  Other language may state that a partial lien waiver and release of claims must be submitted with each invoice or pay application. Again, the decision in this case shows the importance of carefully and clearly excepting out of such waivers and releases any claims the parties intend to preserve.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 20, No. 6 (June 2018).

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