It is common practice in construction for an owner to require lien releases when payments are made. This way, the owner hopes to obtain assurances that the general contractor has paid its subcontractors and suppliers. In addition, the owner may believe that the release means there are no other claims. This last idea is not always correct.
The partial waiver
A fairly standard type of partial waiver and release of lien states: The undersigned does hereby waive, release and quit claim all right to a lien upon the property as a result of work performed and materials furnished by the undersigned, any employees, material, men and subcontractors through the billing period for which this payment is made.
You have probably seen this kind of language frequently. Most people do not understand it.
On its face, this provision concerns only liens. Accordingly, you have not waived your right to sue for breach of contract. On the other hand, you are potentially waiving your right to lien the project for disputed work orders and extras. Lastly, the language does not exempt out your retention.
It is becoming more common for partial waiver forms to contain additional language that refers to “claims” as well as liens. In New York, there was a case in which the partial waiver stated that the contractor “does hereby waive, release and relinquish all claim or right of lien which the subcontractor may now have against the premises... except for claims or right of lien for contract and/or change order work performed to the extent that payment is being retained or will subsequently become due.”
When the subcontractor filed a lien for delay damages, the owner argued that all such claims had been waived with each monthly partial waiver signed. In effect, the quoted language was ambiguous. The phrase “all claim or right of lien” could refer to a “claim of lien” (which some states have), or it could refer to a claim or a lien. A lawsuit was necessary to clarify the language.
Other partial waivers go much further and do state that partial payments extinguish claims, liens, delay damages, extras, etc. A large hotel chain, for example, uses a form that requires the contractor to “waive and release any and all claim or right of lien...and any other claim or cause of action of any nature, whether known or unknown...” That language is a killer.
What can you do?
The best advice is to study the particular partial waiver form used with your contract. Make sure you read it carefully when you sign the form, not just at the beginning of the job. Sometimes the form gets changed during construction. Before you sign, you should strike out those parts of the form that are offensive.
You should also place a footnote, or add an attachment sheet to the form, listing all items outstanding for which the partial payment is inadequate. Among these items are open change orders, outstanding requests for extras, a reservation of rights for actual or potential costs for such matters as delays, out-of-sequence work, interferences, acceleration, etc.
By reviewing the impact of the partial waiver against the scope of your progress payment request, you will force yourself to determine whether there are other open items. This way, you can help avoid a waiver of those items, and you will be alerted to the need to send “notice” letters for claims, which may be required by your contract.
You signed the waivers anyway
What do you do if you signed the waivers anyway, without making needed changes and/or listing outstanding unpaid items? Now you have a problem.
Here is the situation: You signed the waiver regularly (without really reading it closely), but as the job is winding down, you realize that you have unresolved claims. The claims could be for extras or for delay/disruption. Even with the waivers, should you submit your claim? And, if the claim is rejected, should you file a lien or an action for breach of contract anyway?
These are not easy questions to answer, but here are some points to ponder:
• How bad is the language of the waiver form?
• Even if you did not reserve rights when you signed the form, did you send correspondence notifying the owner or contractor of actual or suspected claims?
• Did the owner waive the protection of the lien waiver by paying you after you signed for extras performed before you signed the lien waiver form?
• Is there any case law in your state that can give you direction on how to proceed?
The indemnity problem
Some lien waivers require the general contractor to indemnify and hold harmless the owner in the event a lien is filed. In that case, the general contractor may have to defend the owner against a lien and also pay the lien amount if the subcontractor is successful.
There was also a strange case recently decided in Virginia. There, the general contractor filed a lien against the owner for extras and delay damages. Not only did the owner raise the lien release language to get the lawsuit dismissed, but it also raised the indemnity language. The contractor argued that the owner’s interpretation of the lien waiver form would essentially require the contractor to pay itself for its claims, a foolish concept.
The court ruled against the contractor. The court found that the lien waiver form was not ambiguous and would be enforced according to its terms. In addition, even though the form was entitled “Partial Waiver and Release of Lien,” the court held that the caption did not limit the impact of the waiver only to liens. The exact language of the release was more important than the language of the form’s heading.
Realize that the bulk of civil litigation relates to personal injury, collection actions, divorce and other personal or corporate matters. As a result, there are many judges and lawyers who do not understand construction and the laws that apply to it. For this and hundreds of other reasons, you should avoid going to court to enforce your rights.
The final lien release
All of the issues discussed above apply equally to the final lien release. In addition, many owners add language to the final document. At this point in the contract, you need to be even more vigilant in reviewing the language used and in analyzing the status of your payments, retention and claims.
There is a great amount of nonuniformity in lien releases. Just because you are familiar with one form and the next contract has a similar form does not mean you should let your guard down.
Remember that the lien release is for the owner’s protection as it is the owner’s property that is at risk from a lien. Therefore, if you are a subcontractor, a general contractor’s representations to you about the scope and effect of the release will not bind the owner. When in doubt, consult a construction lawyer. EC