In Texas, a general contractor and property owner got into an argument over $20 million in damages and unpaid bills. The contractor argued the money was due, and the property owner argued that it didn’t matter…because the contractor had waived all rights to the payment.

After a three-month jury trial, the trial court ruled in favor of the contractor and awarded $20 million. Two years later, a Texas appeals court gutted the decision and awarded $10m in attorney fees to the owner.  Then, after another two years of litigation, the Texas Supreme Court weighed in and reversed the appeals court, holding that the contractor was indeed owed the $20m.

This was a high stakes, long, and expensive legal tangle over a simple lien waiver document.  How did it happen?  More importantly, how do you avoid this type of situation when it comes time to sign a lien waiver?

Is The Industry Too Comfortable With Lien Waivers?

The contractor in this story is Zachry Construction, and they were suing the Port of Houston for payment on a job. The Port of Houston didn’t really argue that the $20m in damages and unpaid bills were incorrectly calculated.  Instead, they simply argued that Zachry’s claims for that payment had been waived.

One of the Port’s primary arguments was that the contractor had signed a “Affidavit and Partial Release of Lien” that waived all claims. According to that argument, calculating the $20m in damages and unpaid bills was irrelevant because the contractor had accepted payment and signed a lien waiver forfeiting those claims.

The trial court, appeals court, and Texas Supreme Court spent five years interpreting a simple, unsuspecting, tiny one-page lien waiver, and each came up with different interpretations that had a $20+ million impact.  It is an understatement to say that – at the time of signing that lien waiver – Zachry Construction was unaware of its significance. In fact, it’s much worse than that.  Pen was put to paper on the lien waiver without even a second thought about the document. Signing lien waivers, after all, is a pretty common occurrence.

It is an understatement to say that – at the time of signing – Zachry Construction was unaware of lien waiver document’s significance.

Everyone in the construction industry knows what a lien waiver is, and these documents are signed thousands of times every day. In fact, that’s likely the industry’s biggest problem. Lien waiver documents are exchanged like insignificant receipts, but contain a ton of complicated legal provisions that twist all types of legal rights inside out.

And do we rely on attorneys to read these thousands of lien waiver documents every day?

Well, no, the industry relies upon credit managers, collectors, bookkeepers, and other administrators. These administrative workers are praised when they get money in the door…not when the make a “great lien waiver decision.”  Arguing over lien waiver language doesn’t get any accolades.  Getting money in the door does.

Exchanging lien waiver documents — regardless of what they say — for cash isn’t just acceptable, it’s reality.  And it’s really, really dangerous for all parties.

Robo-Signing Lien Waivers Is Russian Roulette

Robo-Signing Lien Waivers is DangerousEvery time payment is made related to a construction project, the payor and the payee sit at opposite sides of the lien waiver exchange.  The paying party wants to hold back payment until a waiver is signed to protect them against potential lien claims. The party getting paid wants to get the cash as immediately as possible.

Both parties play Russian Roulette when they don’t care about the contents of the lien waiver. Let’s examine the problem from both perspectives.

The Paying Party:  Lien Waivers For Those Wanting to Limit Lien Exposure

Many industry participants know about Textura’s Construction Payment Management application. The application promises owners and general contractors reduced exposure to mechanic lien claims by optimizing the process of collecting lien waivers.  In assisting contractors and owners with the process of collecting lien waivers, Textura is agnostic about what the lien waivers actually say.

The lien waivers can say whatever the general contractor or owner wants them to say, and Textura will blindly require subcontractors to sign them as a condition to getting paid.

While this may appear to be suitable for those wanting to limit their lien exposure, not caring about the contents of the waiver presents a bit of a problem. It enables abuse. And that came up in a New York Supreme Court (Kings County) July 2014 opinion regarding construction of the Brooklyn Barclays Center.

In The Laquila Group, Inc. v. Hunt Construction Group, Inc., here is what the court had to say about Textura’s lien waiver exchange:

Plaintiff argues that, as the releases appeared on forms required for payment, the forms acted only as receipts and did not convey a true intent by the parties to waive all claims…The Appellate Division has, in factually similar cases, found questions of fact concerning the intent of parties executing purported release and the applicable scope of such agreements…

What does this mean?

The general contractor on the Barclay’s Center project required all subcontractors to electronically execute it’s “lien waiver” to get paid. There seemed to be little negotiating room on the waiver, and the waiver’s contents didn’t exactly sync up with correspondence between the parties or payment reality.  [highlight]Not caring about the lien waiver and just wanting to get the thing signed, in other words, has jeopardized the enforcement of the lien waiver in this New York case.

Paying Party’s Perspective:  Just wanting the waiver signed and getting as much legal protection jammed in as possible.

The Problem:  Courts will invalidate waiver language and processes that are unfair, thus jeopardizing all liability protections.

The Party Getting Paid: Lien Waivers For Those Wanting Cash Fast

It doesn’t always go so well for the parties signing lien waivers.  The introduction to this article gave the Zachry Construction example where a lien waiver cost the company 5+ years of litigation, and risk $20+ million in payments. This type of interpretation on lien waivers happens all the time.

When it comes time to get paid, it’s so easy to sign a document in exchange for a check. What could go wrong?  After all, you do this thousands of times and it never causes a problem. When it comes time to get paid, it’s so easy to sign a document in exchange for a check. What could go wrong?  After all, you do this thousands of times and it never causes a problem.

It never will cause a problem…until it does.

In most situations, the parties exchanging a lien waiver will not find themselves in a dispute, and the lien waiver will not get tested. Nevertheless, when disputes arise, lien waiver documents are too frequently cited, and they can absolutely crush a claim.

Those who think of lien waivers as a means to getting paid and who let anyone in their company approve and sign the documents are playing Lien Waiver Roulette.

Payee Party’s Perspective: It’s just a lien waiver, and we need the cash.  Sign and get on with it.

The Problem:  Waivers can contain all sorts of unfair language, and it came come back to bite you hard.

When Is A Lien Waiver Unfair?

Lien Waivers Unfair When Forced To SignThe parties on both ends of a construction payment can get burned by poor lien waiver practices. Interestingly, as discussed in the preceding sections, both parties can be burned by the same thing: lien waivers that are unfair.

Lien waivers are a very important document for construction industry players, and these documents must certainly exist.  Furthermore, everyone in the industry generally wants the documents to be fair. But, what exactly is the difference between a fair and unfair lien waiver?

A. It’s Unfair To Push Lien Waivers That Violate Statutory Requirements

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 13 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.

B. It’s Unfair To Use Lien Waivers To Change The Terms of a 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.

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, however, 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.

C. It’s Unfair To Ask For Unconditional Waivers Before Money Is Exchanged

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 said about conditional and unconditional lien waivers in his article, Court Saves Material Supplier from Lien Waiver Mismanagement:

An 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 effect the right to lien (and thus does not effect 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.