First, many GCs, lenders, sureties, or developers will mandate the use of a single waiver form on all projects, without
considering the state’s particular laws. For example, a contractor that performs a lot of work in New York may have a
few projects in New Jersey, but since it is so familiar with
New York’s waiver rules, it may expect compliance with
those rules instead of learning New Jersey’s nuances. This
can easily result in lien waiver terms that are confusing, illegal, void, illogical, or carry unexpected consequences.
Second, these same parties may take advantage of the situation to include favorable language in lien waiver forms. It is
common to see provisions waiving rights to make claims for
change orders, extra work, disputed items, retainage, and
other contractual rights. Even more common, parties will
demand an “unconditional” type of waiver before payment is
made. Though these waivers are voided in some states, other
states will hold a signor’s feet to the fire.
Third, since specialty subcontractors and suppliers receive
high volumes of unique waiver requests, and the terms can
be nuanced and complicated, it’s difficult to adequately analyze all of them. They frequently sign things they shouldn’t
(even in spite of policies to the contrary) due to the volume
of requests received and the incentive of receiving payment
when they sign.
Diversion #2: The Phantom Catch- 22
Getting paid on a construction project can seem like a
Catch- 22. The paying party, wanting to mitigate its lien
exposure before handing out cash, needs a lien waiver before
exchanging payment. However, the receiving party, fearful of
potential payment issues, needs to receive payment before
providing a waiver.
How can parties reconcile these competing needs? Must the
parties exchange the documents at the same time, use an
escrowing service, or invest in technology to make a simultaneous handoff? The truth is that the Catch- 22 does not
exist. This false fear is based on a misunderstanding of how
lien rights and lien waivers actually work.
Conditional lien waivers are available in every state for every
type of project. These waivers protect the paying party
because they are effective and binding immediately upon
payment, and they protect the receiving party because they
are ineffective until the payment is exchanged. There are no
legal prohibitions or adverse consequences to either party
providing or accepting a conditional lien waiver. Using conditional lien waivers resolves the fear associated with the “false
Catch- 22” and meets the protective needs of the parties both
making and receiving payment.
Examples of Legal Implications of Lien Waivers
In The Laquila Group, Inc. v. Hunt Construction, a subcontractor sued a GC for payment, and the GC defended itself by
producing a lien waiver electronically exchanged through a
waiver technology platform. However, the New York court in
this case, citing Rivera v Wyckoff Hgts. Med. Ctr., 113 AD3d
667, 671 (2014) invalidated the lien waiver despite very broad
language, and stated that waivers “will not be read as applying
to claims the parties did not intend to waive.”
Interestingly, the court pointed to the method of the exchange
(i.e., through electronic platform): “the circumstances surrounding the execution of these documents reveal an issue…
regarding whether the documents constituted mere receipts
for payment actually received.” The lesson from this case is
that courts may go out of their way to prevent contractors
and suppliers from waiving rights they didn’t intend to waive.
In other words, inserting over-reaching language into a lien
waiver may be more trouble than it’s worth.
The opposite of this decision was reached in the Minnesota case,
J.H. Larson Electrical Company v. C&S Electric, LLC et al.
There, it was clear that a subcontractor signed a lien waiver
indicating that it received money it did not in fact receive.
The cost of lien waiver arguments can be substantial, as
seen in the turbulant Texas case of Port of Houston
Authority of Harris County, Texas v. Zachry Construction
Corporation. This case concerned about $20 million in
change orders and liquidated damages. The owner argued
that Zachry Construction waived all defenses to a liquidated
damages assessment (i.e., $20 million) when it signed a broad
lien waiver. The appeals court agreed with the owner, costing the contractor $20 million in liquidated damages and $10
million in attorney fees. This decision was reversed by the
Texas Supreme Court and the parties were left to determine
just how much was owed irrespective of the lien waiver.
Notwithstanding the eventual outcome, the lesson here is that
waiver interpretations can take a long time, carry significant
legal expense, and be quite unpredictable.
What You Should Know