Thoughts on construction law from Christopher G. Hill, Virginia construction lawyer, LEED AP, mediator, and member of the Virginia Legal Elite in Construction Law

Back Posting with Thoughts on Lien Waivers

The seals of the Commonwealth of Virginia
The seals of the Commonwealth of Virginia (Photo credit: Wikipedia)

After a week of being unable to post due to the rigors of my solo construction practice, I’m back on the blogging train. For those of you that missed my new musings this past week, I hope that you had a chance to look through some of the past Guest Post Friday posts for some good stuff to read.

During the course of my busy week last week, a question came up regarding the mechanic’s lien waivers that commercial construction companies routinely execute as part of the payment process. The waiver forms vary, but each essentially states that in exchange for payment the payee, whether a subcontractor or supplier (or even general contractor) waives its future rights to record a mechanic’s lien for the work that is covered by the payment received. Most if not all of these forms further require a certification that the funds paid will either be used to pay suppliers or that suppliers have already been paid. This general description is not the reason for this post.

As is always the case in the Commonwealth of Virginia where the contract is king and a court is unlikely to reinterpret any written contractual document, the devil is in how that waiver is worded. Some waivers are worded in such a way that they essentially require a payee to certify receipt of the funds prior to payment being received. These same forms require the same pre-payment certification that all suppliers and subcontractors of the payee have already been paid. In short they require a payee to both place complete trust in the payor that the check will be paid and that the check will not bounce while in many cases (often with an unstated “wink and nod”) claiming payment was already made when all know the likelihood is that it has not.

Clearly, this is a poor situation for a subcontractor seeking payment because in the event of non-payment a court will have to believe that the subcontractor actually did not receive the funds when the subcontractor certified that it did. A court will also wonder at the credibility of that company should one of its suppliers claim not to be paid should the waiver form state otherwise.

A better practice, at least in my mind and informed by experience, is to make sure that any lien waiver form, whether as extreme as that described above or not, state that the waiver is effective upon receipt and clearance of funds and that the funds will be used to pay subcontractors and suppliers. This last is the law in Virginia in any event. This language protects both sides of the transaction while not putting a payee into the vice described previously.

Another best practice is to require lien waivers of this type from all downstream subcontractors and suppliers. This protects you, as a subcontractor, from liens after your payment to your downstream subs and suppliers and also gives assurance to the general contractor and owner that they won’t be in a place to pay twice. Furthermore, many construction contracts require such downstream waivers so you may not have a choice.

Of course, each lien waiver form will have its nuances so please have an experienced Virginia construction attorney review any form prior to executing it.

These are just my thoughts. If you have others, please feel free to share them in a comment below.

As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.

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5 Responses to Back Posting with Thoughts on Lien Waivers

  1. Chris, as always, this was a great post. I was reviewing a (non-AIA) subcontract for a client just yesterday that had similar language in it – essentially requiring the subcontractor to pay sub-subcontractors and suppliers BEFORE getting paid by the general contractor. I always find that ironic because general contractors go to great lengths to avoid having any obligation to pay subcontractors and suppliers until AFTER they are paid – and even sometimes conditioning their obligation to pay at all on actual receipt of funds from the owner (thru a “pay if paid” clause).

  2. Chris, as always, a great, informative article! My two cents regarding the law in New York. In New York, while contract language is still king (well sometimes more like a duke), lien waivers, such as discussed here, are generally considered “receipts” for payments received. The general practice is that the waivers must be given, along with the payment requisitions, BEFORE payment is made to the contractor. A prudent owner will require that the contractor’s subcontractors supply them, as well as all known suppliers. Because the waivers are given before payment, they cannot operate as a waiver if the monies are not received. So if an owner fails to pay the contractor, the owner cannot waive the waiver in defense of a nonpayment or lien foreclsoure proceeding. However, it gets sticky, if the owner pays the contractor, and the contractor fails to pay the subcontractor, payment to the contractor will be a defense available to the Owner. The Sub will have a breach of contract action, as well as a lien law trust fund action, but will not be able to maintain a lien foreclosure proceeding against the underlying real property.

  3. In California there are two forms of releases: the conditional and the unconditional. The conditional is used where payment is made by a check and is conditioned on the check clearing the bank, the unconditional is where either cash is paid or a check is given and has cleared the bank already. By making this part of the statutory scheme the legislature prevented the confusion and alleviated the glut of court cases that could arise from the difference.

  4. Another potential pitfall are forms where the payee “releases all claims” against the upstream party. I see these over-broad forms more and more now. The release should only apply to the payment (i.e. “releases all claims related to payment…” California has gotten this right. Echoing Ashley Baron, this is another reason that I use the California forms regardless of where the project is located.

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