What makes lien waivers unfair?
Thursday, October 02, 2014
A few years ago, a Texas contractor got a $20 million judgment against a property owner who was withholding payment. Shortly thereafter, an appeals court unpinned the judgment and awarded $10 million to the property owner for reimbursed attorney fees.
The contractor in this story, Zachry Construction, got burned by a lien waiver. They signed a waiver of their lien rights in exchange for a payment, and that waiver included a release of any and all claims — including the $20 million claim for work subject to a change order dispute.
Unfortunately for everyone in the industry, lien waivers are taken for granted. They are signed thousands of times per day by accountants, controllers, credit managers, collectors and administrators, who are charged with the task of analyzing the complicated documents and approving or disapproving.
Too often, the lien waiver documents that are signed are unfair. This article will address some common features within a lien waiver document which makes it unfair.
Not honoring statutory lien waivers
It may be complicated to keep track of all the lien waiver rules, but nevertheless, it's important for companies to do so. There are 12 states that specifically mandate what lien waiver documents must say, and state legislatures are quickly jumping on this area.
When state law mandates that a lien waiver contain certain text, it's unfair and illegal to request someone waive their rights using another form. Companies performing work in a regulated waiver state shouldn't sign waivers that don't match the statutory form — and shouldn't request others do so.
Attempting to change the terms of the contract
The lien waiver document is a contract document that contains significant contractual provisions. Predatory companies will use the lien waiver document as a means to sneak in terminology that alters the contractual relationship between the parties.
Lien waivers are not meant to do this. They are simply meant to act as a receipt for the parties. One party pays an amount that the other party receives, and the lien waiver is designed to memorialize that transaction and cancel out any lien rights associated therewith. Waivers that seek to do more, are unfair.
Unconditional waivers when money is not in hand
Are you being asked to sign an unconditional lien waiver when money is not in hand? Yes, this includes electronic waiver exchange platforms that promise to hold your waiver in an "escrow" until payment is hand.
Unconditional lien waiver requests when payment is not in hand is predatory, unnecessary and unfair.
Here is what attorney Nate Budde wrote about conditional and unconditional lien waivers in his article, "Court Saves Material Supplier from Lien Waiver Mismanagement":
"A conditional waiver still waives the lien right (like the higher party wants) but does so only upon the actual receipt of the payment owed. This makes too much sense to be as big a sticking point as it appears to be in this industry. Providing an unconditional waiver prior to receiving payment is poor receivables management, it throws away having a secured position on the project for nothing. A conditional waiver, on the other hand, does not affect the right to lien (and thus does not affect the claimant’s secured position) until payment has been made. And at that point, the lien right is unnecessary."
This makes so much sense. If you're being asked to sign an unconditional lien waiver on unfair terms, the request is unfair. Sometimes, a spade is a spade.
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