Zachry Construction made a big legal news splash a few years ago when they won a three-month-long trial against the Port of Houston, awarding them $20 million. Their trial attorneys, Reynolds Frizzle (on web | press release), bragged about how great they did. Their general counsel, Gibbs & Bruns (on web | press release) similarly gloated.
The case made another splash last week when Texas’ 14th Division Court of Appeals yanked the judgment in its entirety, awarding $0 to Zachry Construction and charging them to pay more than $10 million in attorneys fees. Opinion Full Text.
What happened? Lien waivers!
Signing Lien Waiver Is Fatal To Zachry Construction’s Claims and Defenses!
One assignment of error the Port of Houston won on regarded a lien waiver document signed by Zachry Construction during the course of the project.
If you’re a reader of this blog, you should know all about these instruments. We actually just wrote about the importance of these documents in the review of a Minnesota decision where a material supplier completely lost its lien claim on the back of a lien waiver it signed: Careful What You Waive You May Regret It.
In that article I warned: “If you’re not being paid, then don’t provide lien waivers saying you are.” This Zachry Construction decision, however, demonstrates it’s even harder and more complicated than this.
In Zachry, the contractor wasn’t demanding payment for sums it had mistakenly acknowledged receipt of within a lien waiver. Instead, Zachry was simply defending itself against the liquidated damages claims the Port of Houston asserted. The Port of Houston withheld over $2 million in liquidated damages for contract delays, and Zachry alleged it had defenses to those liquidated damages. But, the court of appeals agreed with the Port of Houston that Zachry had waived all those defenses and claims when it signed a lien waiver.
Here is a summary of the counter-arguments asserted by Zachry Construction and the Port of Houston on the significance of the lien waivers:
The Port argues that, by signing the May 17, 2006 release, as well as releases covering invoices through November 2006 (Payment Estimate Nos. 23-31), Zachry, as a matter of law, released its claim to $2.205 million in liquidated damages, which the Port withheld cumulatively from payment on those invoices/Payment Estimates. Therefore, according to the Port, any failure to comply with the contract by withholding $2.36 million in liquidated damages is excused to the extent of $2.205 million. Zachry counters that each release, styled “Affidavit and Partial Release of Lien,” unambiguously released nothing more than liens.
Here is an important excerpt on the court’s ruling related to the lien waivers:
[T]here is no ambiguity in “what exactly has been released” … The language of the release goes beyond saying Zachry has no further claims against PHA. The release says “[Zachry] has no further claims against PHA for the portion of the Work completed and listed on the Schedule of Costs in Payment Number $”… It is undisputed on this record that the Port had already withheld all of the liquidated damages that it ever did withhold by the time Zachry signed the subject release in January 2007. Thus, it released any further claim for the work that had been completed and listed on the Schedule of Costs in Payment Estimate. Texas law requires identification of the claim to be released–not quantification.
In summary, we conclude that, when Zachry signed the “Affidavit and Partial Release of Lien,” stating that the Port “has made partial payment to ZCC on all sums owing on Payment Estimate Number Thirty (30) and that it has no further claims against PHA for the portion of the Work completed and listed on the Schedule of Costs in Payment Estimate Number 30,” Zachry unambiguously discharged or released the Port from any further duty or obligation to pay sums billed through Payment Estimate No. 29. … The “Affidavit and Partial Release of Lien” mentions the claims being released: “claims against PHA for the portion of the Work completed and listed on the Schedule of Costs in Payment Estimate Number 30.” … As Payment Estimate No. 30 included offsets for liquidated damages in the sum of $2.205 million, Zachry has no further claims for payment arising from the work completed and listed on that Payment Estimate.
We conclude that if the Port failed to comply with the contract by withholding liquidated damages, such failure was excused, in part, as a matter of law by Zachry’s release.
Is Signing Lien Waivers Worth It?
Just two weeks ago I was sitting in meditation for a client (a contractor) who had all types of claims and defenses against a developer. The developer passed along a signed lien waiver from the contractor where all the claims were waived up to a certain date. There it was in black and white. Waived. Done. Gone.
“When you sign these lien waivers you’re sometimes signing away all of your claims and all of your defenses up to a certain point.” Why did the contractor sign the lien waiver? The same reason these things are signed all the time, thousands a time each day across the country. The process of requesting, signing, collecting, requesting, and tracking lien waivers is extremely messy (See: How To Handle Requesting & Tracking Construction Lien Waivers). When it’s time to get paid, a contractor or supplier will do almost anything to get that check. They need that check. That lien waiver is a means to an end, and most of the time, it doesn’t cause a problem because the project ends smoothly.
Nevertheless, general contractors and developers know and love the power of these lien waivers. These documents contain all kinds of provisions within it, and when you sign these lien waivers you’re sometimes signing away all of your claims and all of your defenses up to a certain point. If you’re accepting payment and signing this waiver, heed the lesson from the Zachry Construction case, and (i) read the waiver; (ii) understand it; and (iii) be damned certain that you’re all clear in claims and defenses up to the date of the waiver.