Lien waivers are a popular and confusing topic in the construction industry. Unfortunately, these instruments are encountered nearly every day. Where the promise of payment is concerned, discipline is necessary as lien waiver mistakes come with consequences. This article will serve as a helpful guide through the most common of these mistakes.
Lien waiver language is like a box of chocolates
When a lien waiver crosses your desk, it's critical to pay attention to the language of that specific document. Many waivers may look the same, but it’s common for these documents to have subtle differences that can change their meaning.
Lien waiver language falls into one of two categories: (i) states that have restricted language; and (ii) states that do not.
Some states, like
Other states, however, do not have any rules about lien waiver language. The result is a “Wild West” of documents, and individual interpretation of each and every waiver that crosses your desk is required.
Money first, and lien waiver second
What comes first — payment or waiver? That’s a touchy topic for many parties, and a topic made especially complicated when cash is due or overdue the signing party.
In an article written last year about lien waivers, we compared lien waivers to purchase receipts, and explained:
A lien waiver is like a receipt for payment you are receiving. A contractor pays you $100,000, and you waive $100,000 of lien rights. It’s as simple as that.
If you go to the grocery store, you’re not going to be given a receipt for your groceries until after you pay for them. The same logic should apply with lien waivers. Signing a lien waiver document is usually a legal admission that you have received the payment indicated on the waiver document. If you didn't receive that payment, you’ll have a hard time offsetting your signature on the waiver.
In response to this problem two solutions have been created.
First, many states or lawyers have crafted a “conditional lien waiver” document. This document looks like a lien waiver, but is “conditioned upon” actual receipt of payment. In states that regulate the lien waiver's language, these conditional releases are safe to sign. In other states, however, be careful that the waiver is actually “conditional.”
Second, some technologies have been created to coordinate the payment process between parties. Textura is an example of this. This technology requires the subcontractor or supplier to electronically sign a lien waiver, and the lien waiver is held in trust by Textura until the funds clear. Thereafter, the waiver is released to the paying party. This technology is good, but requires adoption by all parties and a little bit of trust in the process, since Textura is probably not responsible if there is a premature release of the waiver.
Examples of lien waiver exchanges gone wrong
You may think the warnings in this article are a little overboard or paranoid. Think again, because lots of contractors and suppliers have lost their shirts in recent years because of seemingly insignificant lien waiver mistakes.
Last year, for example, Zachry Construction lost over $10 million because they signed a lien waiver incorrectly stating they were paid before they were actually paid. The court looked at the lien waiver document and concluded that “there is no ambiguity about what [claims] exactly had been released.” Therefore, whether the money was or was not received is really immaterial. The release completely waived the claims.
Over $1 million was unnecessarily waived in a decision in August regarding Lyda Swinerton Builders Inc v. Cathay Bank. In this case, the parties filed a lien because items were in dispute. The parties came to an agreement to move forward with the project, and a partial payment was made. However, when a dispute reappeared, the contractors found themselves unable to claim any of the amounts due before the agreement and partial payment. Again, the court stated the waiver language was clear, and the claims were released.
Conclusion
You already know lien waivers are a fact of life in construction, but don’t ignore them simply because they are confusing or seem unimportant. Treat them with fragility. Only sign lien waivers that reflect your exact agreement, and try your best to avoid situations when you are signing these documents before receiving the cash.
