American Bar Association Forum on Construction Law

________________________________________________________

The Forum’s Greatest Hits: 1976 – 2016

Celebrating the Forum’s 40 Years

Payment Related Agreements . . . and Wagner

Eric A. Berg Ogletree Deakins, Nash, Smoak & Stewart, P.C.

Chicago, IL

Gregory L. Cashion Smith Cashion & Orr, PLC

Nashville, TN

April 28-30, 2016 Nashville Omni

Nashville, Tennessee

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I. Mechanic’s Lien Waivers

A. Sample Forms

(1) Basic Elements

Mechanic’s lien waivers vary in form and enforceability among the fifty states. Although

the law in this respect is by no means uniform, certain consistent elements of lien waivers appear

frequently across jurisdictions. The following is a discussion of these elements, with illustrations

from a cross-section of states, including California, Illinois, Massachusetts, Michigan, Missouri,

and Pennsylvania.

(a) Legality

While some jurisdictions place few limits on lien waivers, many states prohibit parties

from waiving their lien rights in advance of performing work or supplying materials. These

jurisdictions consider such agreements against public policy and unenforceable. Missouri law,

for example, provides:

An agreement by an original contractor, subcontractor, supplier or laborer to waive any right to enforce or claim any lien authorized under this chapter, where the agreement is in anticipation of and in consideration for the awarding of a contract or subcontract to perform work or supply materials for an improvement upon real property … is against public policy and shall be unenforceable.1

Similarly, Michigan law states:

A person shall not require, as part of any contract for an improvement, that the right to a construction lien be waived in advance of work performed. A waiver obtained as part of a contract for an improvement is contrary to public policy, and shall be invalid, except to the extent that payment for labor and material furnished was actually made to the person giving the waiver. Acceptance by a lien claimant of a promissory note or other evidence of indebtedness from an owner, lessee, or contractor shall not of itself serve to waive or discharge otherwise valid construction lien rights.2

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As the language from both statutes implies, a lien waiver executed, but not prior to work

commencement, is enforceable. This is, in fact, the case in several jurisdictions in which lien

waivers are allowed in certain circumstances.

(b) Statutory Requirements

In states that allow parties relative freedom in waiving lien rights, the requirements for

creating an enforceable lien waiver are straightforward. Pennsylvania, for example, allows

contractors or subcontractors on small-scale residential project to pre-emptively waive their

rights by written agreement.3 On such projects, contractors may also waive their subcontractors’

lien rights provided that the subcontractors receive actual or even constructive notice of such a

waiver.4

Other states, however, set forth by statute form waiver language to which parties must

adhere. California, for example, states in its Civil Code that waivers and releases must be “in

substantially the form provided in this article and . . . signed by the claimant.”5

(c) Permissible Waivers

Even in states which hold pre-emptive lien waivers unenforceable, lien rights can be

waived under certain circumstances. New York, for example, allows lien waivers if provided

simultaneously with or after payment for the labor performed.6 The following is a description of

lien waivers which are enforced in most states.

(i) Conditional/Unconditional Waivers

Lien rights are often waived in connection with ongoing progress payments of a project –

particularly in states which prohibit waivers of lien rights prior to the performance of any work.

In some instances, waiver is not permitted in any other way (other than upon full payment).7

Conditional waivers act as an inducement of a progress payment. In exchange for

progress payments, lien rights covering the relevant payments are released. Unconditional

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waivers, on the other hand, are executed after a progress payment has already been made. The

following samples from California help to illustrate the distinction:

Conditional waiver8

CONDITIONAL WAIVER AND RELEASE ON PROGRESS PAYMENT

NOTICE: THIS DOCUMENT WAIVES THE CLAIMANT'S LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS EFFECTIVE ON RECEIPT OF PAYMENT. A PERSON SHOULD NOT RELY ON THIS DOCUMENT UNLESS SATISFIED THAT THE CLAIMANT HAS RECEIVED PAYMENT.

Identifying Information

Name of Claimant: _________________________________________

Name of Customer: ________________________________________

Job Location: ______________________________________________

Owner: __________________________________________________

Through Date: ____________________________________________

Conditional Waiver and Release

This document waives and releases lien, stop payment notice, and payment bond rights the claimant has for labor and service provided, and equipment and material delivered, to the customer on this job through the Through Date of this document. Rights based upon labor or service provided, or equipment or material delivered, pursuant to a written change order that has been fully executed by the parties prior to the date that this document is signed by the claimant, are waived and released by this document, unless listed as an Exception below. This document is effective only on the claimant's receipt of payment from the financial institution on which the following check is drawn:

Maker of Check: __________________________________________

Amount of Check: $ _________________________________________

Check Payable to: _________________________________________

Exceptions

This document does not affect any of the following:

(1) Retentions.

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(2) Extras for which the claimant has not received payment.

(3) The following progress payments for which the claimant has previously given a conditional waiver and release but has not received payment:

Date(s) of waiver and release: ________________________________

Amount(s) of unpaid progress payment(s): $ ______________________

(4) Contract rights, including (A) a right based on rescission, abandonment, or breach of contract, and (B) the right to recover compensation for work not compensated by the payment.

Signature

Claimant's Signature: _______________________________________

Claimant's Title: ___________________________________________

Date of Signature: _________________________________________

Unconditional waiver9

UNCONDITIONAL WAIVER AND RELEASE ON PROGRESS PAYMENT

NOTICE TO CLAIMANT: THIS DOCUMENT WAIVES AND RELEASES LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS UNCONDITIONALLY AND STATES THAT YOU HAVE BEEN PAID FOR GIVING UP THOSE RIGHTS. THIS DOCUMENT IS ENFORCEABLE AGAINST YOU IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE A CONDITIONAL WAIVER AND RELEASE FORM.

Identifying Information

Name of Claimant: _________________________________________

Name of Customer: ________________________________________

Job Location: _____________________________________________

Owner: __________________________________________________

Through Date: ____________________________________________

Unconditional Waiver and Release

This document waives and releases lien, stop payment notice, and payment bond rights the claimant has for labor and service provided, and

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equipment and material delivered, to the customer on this job through the Through Date of this document. Rights based upon labor or service provided, or equipment or material delivered, pursuant to a written change order that has been fully executed by the parties prior to the date that this document is signed by the claimant, are waived and released by this document, unless listed as an Exception below. The claimant has received the following progress payment: $

Exceptions

This document does not affect any of the following:

(1) Retentions.

(2) Extras for which the claimant has not received payment.

(3) Contract rights, including (A) a right based on rescission, abandonment, or breach of contract, and (B) the right to recover compensation for work not compensated by the payment.

Signature

Claimant’s Signature: ______________________________________

Claimant’s Title: __________________________________________

Date of Signature: _________________________________________

(ii) Partial/Final Waivers

Partial waivers of lien rights, like their conditional/unconditional counterparts, are

typically executed in connection with progress payments. There are typically two variations of

partial waivers: 1) partial money waivers, and 2) partial date waivers.

Partial money waivers (or, alternatively, partial waivers of lien to amount paid) waive

lien rights up to a certain amount of money paid. Partial date waivers, as the name suggests,

waive lien rights on work performed or materials supplied through a certain date.10

Final waivers, on the other hand, forever terminate a contractor’s or subcontractor’s lien

rights and are typically executed in connection with a final payment.

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(iii) Hybrid Waivers

Some states create waivers having both unconditional/conditional and partial/final

characteristics. Michigan allows for four possible “hybrids” in its Construction Lien Act:11 1)

partial unconditional waiver, 2) partial conditional waiver, 3) full unconditional waiver, and 4)

full conditional waiver. California’s lien laws also contain similar waiver types.12

B. Lien Rights that are Waivable

As a point of clarification, all lien rights are waivable. Every state will enforce a final,

unconditional lien waiver in exchange for final payment. A contractor can waive or lose its lien

rights if it does not follow the statutory requirements for enforcing its lien. The issue discussed

herein is whether a contractor can waive its lien rights prior to commencing work on the project.

(1) Waiver of Lien Rights in the Construction Contract

Many states allow a contractor to waive its lien rights prior to performing work on a

project. The most common mechanism for the contractor waiving its lien rights is a provision

written in the construction contract itself. The waiver of a lien provision could be written with

the prime contract, a subcontract or the purchase order. Examples of states that allow such forms

of “blanket waivers” or “no-lien” contracts are Alabama,13 Colorado,14 Kentucky,15

Louisiana,16 Texas,17 and Virginia.18

It is an obvious advantage for the owner to have a general contractor waive its lien rights.

Many owners will further require that the general contractor have subcontracts in which the

subcontractors correspondingly waive their lien rights. General contractors may have standard

form subcontracts which state that the subcontractor waives its lien rights regardless of the status

of the lien rights of the general contractor.

The courts typically analyze the validity or enforcement of contract provisions that waive

lien rights prior to performance of work in terms of express or implied waiver and sufficient

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consideration. In Virginia, the Supreme Court held a waiver of mechanic’s lien must be express

or, if it is implied, it must be established by clear and convincing evidence.19 The Supreme

Court in Virginia has further stated that although a person entitled to a mechanic’s lien may

waive that right in whole or part, the general rule is that an agreement to waive or release a

mechanic’s lien must be supported by consideration to be valid and binding.20

When there is a waiver of lien provision in a subcontract, but the general contractor has

not waived its lien rights with the owner, the issue arises as to whether the owner is a third-party

beneficiary of the subcontractor’s waiver of lien provision. In Louisiana, the United States

District Court dealt with this issue in the case of Shaw Constructors, Inc. v. ICF Kaiser

Engineers, Inc.21 In Shaw Constructors, the subcontractor, Shaw, brought action against the

owner of the construction project site, PCS, for recovery on its liens for services rendered on the

construction project, after the contractor, ICF Kaiser Engineers, filed bankruptcy and failed to

make payments under its compromise agreement with Shaw. In Section VI of the Kaiser/Shaw

subcontract, Shaw agreed to a provision entitled “Waiver of Liens”:

Subcontractor hereby agrees to and does waive his right to file any mechanic’s liens or claims of any sort or kind against Owner’s premises or any part thereof. Subcontractor further agrees to obtain a written waiver of the right to file any mechanic’s liens or claims of any sort or kind against Owner’s premises or any part thereof from any and all subcontractors, suppliers and materialmen at the time any subcontracts or purchase orders are issued in connection with the Work. In accordance with Article 25E of Exhibit “C”, General Conditions for Subcontracts, a “Release and Waiver of Lien” in the form of Appendix 1-A thereto shall be executed by Subcontractor prior to release of each payment hereunder.22

The critical issue of the case was whether the owner was a third-party beneficiary of the

waiver of lien clause in the subcontract. The owner PCS argued that the subcontract evidenced

an express intent to confer a direct benefit upon the owner and that it was entitled to third-party

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beneficiary status. The subcontractor Shaw argued that the provisions of the prime contract

made it clear that the intent and principal purpose of the waiver clause in the subcontract was to

benefit the general contractor Kaiser and any benefit to the owner PSC was merely incidental.

The court held that “Shaw expressly agreed to waive its right to file any liens or claims of any

sort against the owner’s premises. The subcontract clearly identifies PCS as the owner. It is

difficult to conceive of a more direct conferral of a benefit to a party than for another party to

state that it agrees to relinquish rights it could assert against that party in the absence of the

stipulation.”23

(2) Waiver of Lien Rights to a Lender

Many construction lenders do not require that the contractor waive its lien rights prior to

performing the work. However, it is a common practice for the construction lender to request

that its borrower, usually the owner, have the contractor subordinate its lien rights to the lender.

The subordination of the contractor’s lien rights to the lender appears to be upheld in all

jurisdictions. (The ultimate question, of course, is whether a contractor would be willing to

agree to such a provision.)

The Commonwealth of Kentucky will enforce a lien waiver provision in a construction

contract. In Greensburg Deposit Bank v. GGC-Goff Motors, the Kentucky Supreme Court

upheld the contractor claimant’s waiver of its mechanic’s lien in favor of the mortgagee.24 In

sorting out the relative rights of the lien claimant, Terry Maddox d/b/a Maddox Paving

Company, the owner, GGC-Goff, and the lender, Greensburg Deposit Bank, the court held the

following:

In Taylor v. Fuller, 162 Ky. 568, 172 S.W. 959 (1915), dealing with a mechanic’s lien, it was said that an express waiver must be supported by consideration, and that an implied waiver arises only where a party has engaged in conduct or performed acts inconsistent with the existence of the right alleged to have been

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waived, misleading the other party to his prejudice. That principle was applied to a materialman’s lien in McCorkle v. Lawson & Co., Ky., 259 S.W.2d 27 (1953). In neither Taylor nor McCorkle was any direct consideration or detrimental reliance found. That is not the case here. For his waiver, Maddox received the prospect of prompt payment from GGC-Goff, knowing that once the loan was made, it would have the ability to pay in accordance with its “acceptance of work” agreement with Maddox. Moreover, it is clear that the bank approved the loan to GGC-Goff in reliance on Maddox’s express assurance that he would not assert any claim superior to its own. We conclude that the waiver was supported both by actual consideration and by the bank’s detrimental reliance on Maddox’s representations.25

In North Carolina, the Court of Appeals addressed a similar issue in the case N.C.

Monroe Construction Co. v. Coan.26 In N.C. Monroe, the defendant, Coan, contracted with the

contractor to construct a motel. When the completion date approached, the extras the defendants

wanted exceeded the original contract price. The parties agreed upon a final amount for which

the defendants executed two notes. In return and as part of the agreement, the plaintiff contractor

executed a lien waiver “acknowledging payment in full and waiving any lien rights in the

project,” in order to enable defendants to obtain financing from their lender. After the

defendants failed to make payments due on the notes, the plaintiff filed suit. The court held that

the agreement was supported by adequate consideration because:

. . . defendants received the [lien waiver] in return for the notes. By that instrument, plaintiff admitted being fully paid on the underlying obligation and also waived its rights to file and perfect mechanic’s and materialmen’s liens . . . . That the lien waiver constituted value to the defendants is evidenced by their admission of using [it] to obtain permanent financing.27

In summary, when parties execute lien waivers which induce action on the part of a

lender, the courts will generally enforce the lien waiver under a theory that it constituted a new

agreement between the parties. Obviously, the factors of express intent and consideration will be

applied by the courts.

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C. Lien Rights that are Non-Waivable

As set forth in Section I.A.(1)(a) above, states such as Michigan and Missouri specifically

prohibit a contract provision which waives a contractor’s right to claim a lien. Several states

hold that a waiver of lien provision as a part of a contract for an improvement is unenforceable as

a matter of public policy. The State of Georgia’s lien law provides that a contractor’s lien rights

cannot be waived prospectively even if a payment bond is provided on a private project.28

Florida also does not allow lien rights to be waived in advance of performing the work.29 This

legislation was enacted as a response to the trend of developers in inserting lien waiver clauses in

their contracts with general contractors.

One of the more interesting cases dealing with waiver of lien rights is the case of Kipin

Industries, Inc. v. Van Deilen International, Inc.30 This is a case that only a construction lawyer

with a keen interest in contract forms (and choice-of-law provisions) could enjoy. Kipin

Industries involves a case which started in the Eastern District of Michigan pursuant to a forum-

selection clause in the contract between Kipin and VDL. The property that was improved is in

Kentucky. Furthermore, the parties selected the law of Michigan to govern the contract.31

The parties’ contract contained a provision in which the contractor, Kipin, waived its lien

rights.32 This prohibition or waiver of a right to file liens was invalid under the statutory law of

Michigan. However, at that time Kentucky law did not forbid nor invalidate the pre-work waiver

of the right to file mechanic’s liens. The Sixth Circuit held that the lien waiver provision of the

contract was therefore valid under Kentucky law.33 The selection of Michigan as the governing

law was ignored with regard to the lien waiver provision, as a “mistake” of the parties.34 The

court found that the Commonwealth of Kentucky had the more significant relationship to the

contract and transaction of the parties since the improvement was in Kentucky.35

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D. Enforceability

Because mechanics liens are creatures of statute, not common law, requirements for valid

waivers of these lien rights provide little room for variation. “Clear and unambiguous” is the

rule of thumb for creating enforceable lien waivers.36 This rule is meant to ensure that parties

truly intend to waive such important rights that were instituted for contractors’ and

subcontractors’ protection. Typically, compliance with the rule entails closely following the

statutorily-required language. Like many states, California, as described above, provides in its

lien laws a sample of an enforceable lien waiver providing specific language which lien waivers

must include in substantial part to be enforceable.37

Research surveying all of the federal and state case law concerning the enforceability of

lien waivers reveals that some courts have, however, ventured outside the four corners of the

waiver. These courts have considered the enforceability of lien waivers under various

interrelated principles of contract law including: 1) consideration, 2) innocence/good faith, 3)

estoppel, 4) custom, and 5) parol evidence.

(1) Consideration

It is established law in most jurisdictions that enforceable lien waivers must be supported

by adequate consideration.38 Generally, one who receives payment in exchange for a signed

waiver has received sufficient consideration to support a waiver of all lien rights accruing from

the work for which payment was received.

On the other hand, a waiver in exchange for payments which one is already bound to pay

does not constitute valuable consideration.39 Similarly, a waiver given in return for a bad check

or an unsatisfied promise to pay will generally be void for lack of consideration.40 In sum, a

separate agreement to waive lien rights must be supported by adequate consideration distinct

from preexisting legal obligations.

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Additional Cases

• Project Plumbing Co. v. St. Croix Properties, Inc.41 Plaintiff, a contractor, contracted to

fix the plumbing and heating in an apartment complex and executed a lien waiver which,

on its face, indicated that it was in full payment for labor and materials furnished to date.

The waiver was actually made in partial payment of the sum owing. The Supreme Court

of Minnesota held that the contractor could enforce the lien for the unpaid portion noting

that the owner had no right to receive a lien waiver for the unpaid balance as a condition

to its paying the contractor an amount it was already legally obliged to pay. Since

consideration was, therefore, wholly lacking, the waiver was held unenforceable. But see

Minnwest Bank, M.V. v. All, Inc.42 (because mortgagee of the project and not its owner

paid lien claimant $100,000 for the release, question of adequacy of consideration

remained for trial court’s determination).

• McLellan v. Hamernick.43 Defendant, a contractor, was engaged to construct an addition

to a house and subcontracted with other parties to perform various duties. The owner of

the house paid the contractor periodically, but the subcontractors were never paid. When

the work was substantially complete, the contractor requested the remaining balance and

the owner demanded that he first obtain lien waivers from the subcontractors. To obtain

the lien waivers, defendant wrote checks to the subs, but asked them to hold the checks

until money was received from the owner. The court held that while consideration is

required to create an enforceable lien waiver, consideration “may consist of detriment

suffered by the property owner, who, having no knowledge of a secret mental reservation

of the lienholder, in good faith does something to his detriment in reliance upon the

waiver . . . . There is a consideration if the promisee, being induced by the agreement,

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does anything legal which he is not bound to do or refrains from doing anything which he

has a right to do - it is sufficient that something valuable flows from him, or that he

suffers some prejudice or inconvenience, and that the agreement is the inducement to the

transaction.”44

(2) Innocence/Good Faith

As is reflected in the preceding decisions, a discussion of the adequacy of consideration

often leads to an examination of the owner’s good-faith reliance on the waiver. Courts have

qualified the “clear and unambiguous” standard by applying it only when “the party against

whose property a lien is sought has relied upon the waiver of lien in innocence and good faith.”45

Thus, courts have held, for example, that a homeowner acting in good faith is not liable

to a subcontractor who provides a lien waiver yet later claims nonpayment by the general

contractor. By the same token, a party will not be deemed “innocent” (rendering the waiver

invalid) if it obtained the waiver by fraud or if all of the parties knew the waiver did not

accurately reflect the price and payment status.

Additional Cases

• Metro. Pier & Exhibition Auth. v. Mc3D, Inc.46 The U.S. District Court for the Northern

District of Illinois found that the waiver at issue was nearly identical to previous cases in

which waivers were found clear and unambiguous. It then stated, however, that the

“clear and unambiguous” rule applies only when a waiver is relied upon in innocence and

good faith. At issue was the parties’ knowledge concerning the inaccuracy of the lien

waivers. Because some of the parties knew the waivers to be an inaccurate reflection of

the amount due, they were not “innocent” and could not then rely on the waivers to avoid

the exercise of lien rights.

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• Continental Concrete, Inc. v. Lakes v. La Paz.47 The general contractor was found to

have forged the signature of one of the subcontractors on some lien waivers. When the

general contractor was delinquent in its payments to the subs, the plaintiff, a

subcontractor, brought suit to foreclose on its construction lien. The court found that

there was no evidence that the owner knew (or even should have known) that any of the

waivers were forged. It also determined that the owner fulfilled its responsibilities under

the state’s lien law and made all proper payments to the general contractor and the

subcontractors. Although both the plaintiff and the defendant were innocent parties in

this fiasco, the court held that an owner acting in good faith is not liable to the

subcontractor. The court also outlined the circumstances under which an owner

presented with forged lien waivers would not be held liable: 1) The owner fulfilled all

duties required by the construction lien law, 2) the subcontractor contracted with the

general contractor for payment, 3) the owner made all proper payments to the

contractor/subcontractor, 4) the owner in good faith believes that the forged lien waivers

are valid, 5) the “proper payments” made by the owner equal or exceed the direct contract

price.

(3) Estoppel

Akin to the effect of good-faith reliance on a waiver is the theory of estoppel. Even in

circumstances in which lien waivers are not supported by adequate consideration, courts may

still declare the waiver enforceable under an estoppel theory. Where a subcontractor gives a lien

waiver in a circumstance under which an owner might be expected, and does indeed, rely on

such a waiver, courts have held that the subcontractor is estopped from asserting its lien right.

This applies even when consideration is inadequate or wholly lacking.

Generally, six elements must be present for application of the equitable estoppel doctrine:

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(1) Words or conduct by the party against whom the estoppel is alleged constituting either a misrepresentation or concealment of material facts;

(2) Knowledge on the part of the party against whom the estoppel is alleged that representations made were untrue;

(3) The party claiming the benefit of an estoppel must have not known the representations to be false either at the time they were made or at the time they were acted upon;

(4) The party estopped must either intend or expect that his conduct or representations will be acted upon by the party asserting the estoppel;

(5) The party seeking the benefit of the estoppel must have relied or acted upon the representations; and

(6) The party claiming the benefit of the estoppel must be in a position of prejudice if the party against whom the estoppel is alleged is permitted to deny the truth of the representations made.48

In simpler terms, estoppel is applicable when a party “has paid out money or otherwise changed

his position to his detriment upon the waiver.”49

Additional Cases

• Rogene, Inc. v. Shamrock Excavating, Inc.50 The seller of a development contracted with

the defendant to provide excavating services. At the request of the purchaser, seller

obtained two lien waivers from the defendant, both of which were signed by the

contractor but not supported by separate consideration. The court noted that the

purchaser specifically obtained the waivers to ensure its priority position in the

development against the contractor’s claims. It held therefore that the purchaser’s

reliance created enforceable waivers and estopped the defendant from enforcing its lien.

(4) Custom

Evidence of industry custom has typically been admitted to show that a clear and

unambiguous lien waiver has been relied upon in innocence and good faith. Stated another way,

a clear and unambiguous lien waiver is valid on its face, and subject to innocent, good faith

reliance. Custom, then, is appropriate in determining how the waivers were viewed by the

parties, and thus whether there was a reasonable reliance on them.51

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Some courts have also admitted evidence of custom and past practice to clarify particular

terms in lien waiver when the terms are not completely clear in the extent to which lien rights are

waived. In Durant Construction, Inc. v. Gourley, the court grappled with the question of

whether a lien waiver was full or partial, and therefore, whether defendant bank’s mortgage had

priority over any lien rights.52 The court permitted evidence showing that industry custom and

practice dictated that lending institutions required full waiver of liens before distributing portions

of a construction loan in order to secure a first position on the mortgage. Ultimately, the lien

waiver in question was held to be a full, and not partial, waiver of lien rights.53

(5) Parol Evidence

Courts are usually adamant in holding parol evidence inadmissible when lien waivers are

unambiguous in their terms.54 Parol evidence may be admissible, however, if relevant to: (1)

explain an ambiguity appearing in the instrument; (2) prove a collateral oral agreement which

does not vary the terms of the writing; (3) add a missing term in a writing which indicates on its

face that it does not set forth the complete agreement; or (4) to show mistake or fraud.55 With

respect to the enforceability of an apparently unambiguous lien waiver, parol evidence is likely

most relevant in providing mistake or fraud.

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WAIVER EXAMPLES

MICHIGAN

(a) PARTIAL UNCONDITIONAL WAIVER

I/we have a contract with __________ (other contracting party) to provide __________ for the improvement to the property described as __________, and by signing this waiver waive my/our construction lien to the amount of $__________, for labor/materials provided through __________(date).

This waiver, together with all previous waivers, if any, (circle one) does does not cover all amounts due to me/us for contract improvement provided through the date shown above.

If the improvement is provided to property that is a residential structure and if the owner or lessee of the property or the owner's or lessee's designee has received a notice of furnishing from me/one of us or if I/we are not required to provide one, and the owner, lessee, or designee has not received this waiver directly from me/one of us, the owner, lessee, or designee may not rely upon it without contacting me/one of us, either in writing, by telephone, or personally, to verify that it is authentic.

Signed on:

(signature of lien claimant)

Address: (date) Telephone:

DO NOT SIGN BLANK OR INCOMPLETE FORMS. RETAIN A COPY.

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MICHIGAN

(b) PARTIAL CONDITIONAL WAIVER

I/we have a contract with __________ (other contracting party) to provide __________ for the improvement to the property described as: __________, and by signing this waiver waive my/our construction lien to the amount of $__________, for labor/materials provided through __________ (date).

This waiver, together with all previous waivers, if any, (circle one) does does not cover all amounts due to me/us for contract improvement provided through the date shown above. This waiver is conditioned on actual payment of the amount shown above.

If the improvement is provided to property that is a residential structure and if the owner or lessee of the property or the owner's or lessee's designee has received a notice of furnishing from me/one of us or if I/we are not required to provide one, and the owner, lessee, or designee has not received this waiver directly from me/one of us, the owner, lessee, or designee may not rely upon it without contacting me/one of us, either in writing, by telephone, or personally, to verify that it is authentic. If the improvement is provided to property that is a residential structure and if the owner or lessee of the property or the owner's or lessee's designee has received a notice of furnishing from me/one of us or if I/we are not required to provide one, and the owner, lessee, or designee has not received this waiver directly from me/one of us, the owner, lessee, or designee may not rely upon it without contacting me/one of us, either in writing, by telephone, or personally, to verify that it is authentic.

Signed on:

(signature of lien claimant)

Address: (date) Telephone:

DO NOT SIGN BLANK OR INCOMPLETE FORMS. RETAIN A COPY.

MICHIGAN

(c) FULL UNCONDITIONAL WAIVER

My/our contract with __________ (other contracting party) to provide __________ for the improvement of the property described as: __________ has been fully paid and satisfied. By signing this waiver, all my/our construction lien rights against the described property are waived and released.

If the improvement is provided to property that is a residential structure and if the owner or lessee of the property or the owner's or lessee's designee has received a notice of furnishing from me/one of us or if I/we are not required to provide one, and the owner, lessee, or designee has not received this waiver directly from me/one of us, the owner, lessee, or designee may not rely upon it without contacting me/one of us, either in writing, by telephone, or personally, to verify that it is authentic.

Signed on:

(signature of lien claimant)

Address: (date) Telephone:

DO NOT SIGN BLANK OR INCOMPLETE FORMS. RETAIN A COPY.

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MICHIGAN

(d) FULL CONDITIONAL WAIVER

My/our contract with __________ (other contracting party) to provide __________ for the improvement of the property described as: __________ has been fully paid and satisfied. By signing this waiver, all my/our construction lien rights against the described property are waived and released.

This waiver is conditioned on actual payment of __________

If the improvement is provided to property that is a residential structure and if the owner or lessee of the property or the owner's or lessee's designee has received a notice of furnishing from me/one of us or if I/we are not required to provide one, and the owner, lessee, or designee has not received this waiver directly from me/one of us, the owner, lessee, or designee may not rely upon it without contacting me/one of us, either in writing, by telephone, or personally, to verify that it is authentic. If the improvement is provided to property that is a residential structure and if the owner or lessee of the property or the owner's or lessee's designee has received a notice of furnishing from me/one of us or if I/we are not required to provide one, and the owner, lessee, or designee has not received this waiver directly from me/one of us, the owner, lessee, or designee may not rely upon it without contacting me/one of us, either in writing, by telephone, or personally, to verify that it is authentic.

Signed on:

(signature of lien claimant)

Address: (date) Telephone:

DO NOT SIGN BLANK OR INCOMPLETE FORMS. RETAIN A COPY.

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II. Payment Bond Claims

A. Sample Forms

When a surety pays a payment bond claimant, the surety is primarily concerned

with: 1) settlement of the claim for a set price; 2) release of the claim by the payment

bond claimant; 3) assignment of the claim from the payment bond claimant to the surety;

and 4) the representation and warranty of the payment bond claimant to the surety that

the payment bond claimant has paid for all labor and materials supplied to the project and

that the payment bond claimant warrants its performance.

B. Requirements for Claim Filing

Most payment bonds require some type of notice as a condition precedent to

asserting a claim. On public jobs, the notice is controlled by statute. On Federal jobs, the

notice is controlled by the Miller Act and on state projects, the notice is controlled by the

state’s payment bond statutes which are typically known as Little Miller Acts.

With respect to the Miller Act, first tier claimants (parties that have a direct

contractual relationship with the prime contractor) are not required to give notice of their

claim prior to filing suit under the Miller Act. Second tier claimants (parties that do not

have an express or implied contractual relationship with the prime contractor) must give

written notice to the prime contractor within ninety days from the date on which the

claimant provided the last of the labor or material for which the claim is made.56

With respect to Little Miller Act claims, most state payment bond statutes closely

follow the Federal Miller Act. However, the state payment bond statute may have

different notice requirements. For example, in Tennessee, there is no distinction between

a first tier claimant and a second tier claimant. Any claimant under the public payment

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bond in Tennessee must give notice within ninety days after completion of the public

works project.57 Obviously, all notices must be in writing and most states require a

certified mail receipt in order to prove that the owner or notified party received the

notice.

With respect to private projects, the notice requirements are controlled by the

language of the payment bond. The payment bond language can increase the coverage

for claimants on a public job; however, payment bond language cannot restrict the

coverage when there is a statute governing the notice requirements on the public project.

For a state-by-state narrative of the notice requirements for state payment bond

claims, we would recommend the article of Michael I. Less, Chapter 5 of The Law of

Payment Bonds, edited by Kevin L. Lybeck and H. Bruce Shreeds, American Bar

Association, Tort and Insurance Practice Section, 1998.

C. Enforcement

The enforcement of a claim against a payment bond after proper notice is given,

involves the commencement of a lawsuit. The Miller Act and the state payment bond

statutes will control the timing of the lawsuit. The terms of the payment bond will

control the timing of the lawsuit for private projects and public projects if the bond

allows more time in which to file an action. In order to narrow the scope of a relatively

broad area of enforcement, we will discuss in this section the defenses of waiver when

pursuing a payment bond claim.

Waiver is the intentional and voluntary relinquishment of a known right.58

Normally, a waiver is only valid if it was made by unequivocal statements or conduct.

Under the Miller Act and its related set of Little Miller Acts, a subcontractor or supplier

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can waive its payment bond rights when the intent to waive was clearly made.

Nevertheless, in American Casualty Co v. Coastal Caisson Drill Co.,59 the Florida

Supreme Court held that an ex-ante contractual waiver of statutory payment bonds was

void as against public policy. Other states, such as Maryland, Minnesota, and Wisconsin

also have statutes banning these waivers. States such as Arizona, California and Georgia

prohibit advance waivers of payment bond rights except as provided by forms premised

on actual payment.

For a waiver of payment bond rights to be effective, it must be specific. For

example, an effective waiver of Miller Act rights requires that the waiver mention the

‘Miller Act’ and ‘unambiguously express intention to waive the rights provided by it.’

Thus, a subcontractor’s waiver rights cannot be abridged because the subcontractor

entered into a general agreement to be bound by the terms of the prime contract.

Additionally, waiver cannot occur from a simple request for additional security such as a

note, personal guaranty or joint check agreement. Specifically, accepting a note is

intended to be mere evidence of an extinguishment of an antecedent debt rather than

direct proof. Unless the surety could be joined in the arbitration, making a demand for

arbitration is no waiver of payment bond rights either. Finally, a sub-subcontractor does

not waive its bond rights by agreeing to a new contract with the prime that distribution of

monies for labor and material furnished prior to the subcontractor’s bankruptcy would be

the responsibility of the bankruptcy court.

A currently outstanding question concerns the interplay between lien waivers and

bond rights – specifically, whether, a lien is available as an additional remedy. The

battleground for this debate has mostly been in Illinois. One line of Illinois cases hold

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that waivers and bond rights are unrelated. In Capital Development Board ex rel. P.J.

Gallas Electrical Contractors v. G.A. Rafel & Co.,60 an Illinois Appellate Court held that

the tender of a final waiver of lien by a subcontractor prior to receiving payment was held

to be a customary practice in the construction business and did not reflect any intention

that the subcontractor’s bond rights be released as well. Under the custom, a

subcontractor was required to tender the waiver if it wanted to get paid. Additionally, the

court held that the surety should have been knowledgeable concerning this custom.

In City ex rel. Charles Equipment Co. v. United States Fidelity & Guaranty Co.,61

a subcontractor was only paid by the contractor upon the receipt of a payment request,

waiver of lien and sworn statement that all labor and material had been paid. The Court

held that neither the lien waiver, payment request, nor sworn statement was a valid

defense against a bond claim by an unpaid supplier of the subcontractor. Similarly, a

federal case concluded that a contractor’s payment of a subcontractor on receipt of the

subcontractor’s lien waiver did not release the subcontractor’s payment bond surety

because the surety knew that the sub-subcontractor had not been paid. Other courts have

held that lien waivers do not destroy payment bond rights when the waivers are limited to

lien rights alone.

However, other courts have found that there is a relationship between lien waivers

and bond rights. In William Aupperle & Sons v. American Indemnity Co.,62 the court held

that a payment bond claimant waived its rights to recover on the bond because it waived

its lien. In Chicago Bridge & Iron Co. v. Reliance Insurance Co.,63 the Illinois Supreme

Court held that a subcontractor likely waived its bond rights because it agreed in the

prime contract to a lien waiver to assist the prime contractor in obtaining payment from

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the obligee. The Court’s theory was that when the subcontractor effectively “released”

the underlying security, the subcontractor discharged the prime contractor’s surety and

therefore the subcontractor no longer had a claim. The court though did grant the

subcontractor an opportunity to prove that the antecedent waiver it made through the

prime contract was customary and that the surety agreed in that custom, such that it was

prevented from asserting the waiver as a defense.

III. Fifty State Survey

The discussion and presentation of materialman and mechanic’s liens to a national

audience is difficult. The difficulty is that each state has its own method of filing and

enforcing construction liens against improved property in that state. Therefore, while the

issue of lien claims and lien waivers is a part of virtually every construction lawyer’s

practice, we must present the topic with the qualification to be sure and check your state’s

lien laws.

In order to assist our construction lawyers, we decided to conduct a fifty state

survey of two issues. The first issue is whether a state allows a party to waive its lien

rights in advance of performing the work. The second survey focusing on the number of

states that have a notice of commencement lien statute.

A. Advance Waiver of Lien Rights Statutes

In evaluating a lien claim, one of the threshold issues is whether the party

performing work which improves the property can waive its lien rights in advance of

performing the work. We researched each of the fifty states and the District of Columbia

to determine which states prohibited a party from waiving its lien rights in advance of

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performing the work. The individual results of our polling are attached hereto as Exhibit

A.

Overall, we found that thirty states consider a lien waiver only effective for the

work performed on the project through the date of the lien waiver. In other words, a lien

waiver which purports to waive the value of work which has not been performed by the

contracting party is void as against public policy and wholly unenforceable. Simply

stated, a right to claim a lien may not be waived in advance.

Accordingly, twenty states plus the District of Columbia will allow a party to a

construction contract to waive its lien rights in advance of performing the work. This

type of advanced lien waiver is usually placed in the construction contract or subcontract

between the parties. There is no pattern to the split of states regarding its view of

advanced waiver of lien rights. The twenty states that allow advanced waiver of lien

rights are basically in every geographical area. However, the trend of the legislation is

moving toward implementing a public policy in the state law to not allow contracting

parties to waive their lien rights in advance of performing the work.

B. Notice of Commencement State Statutes

Lien rights typically fall into two categories in the state statutes. The first

category is usually termed a “back end” notice of lien statute. This is a statute which the

lien claimant’s time deadlines for filing and enforcing its lien claim are tied to either the

date of last materials or service performed by the lien claimant or the date the project was

completed. With respect to the “back end” notice states, the owner is typically not aware

of a lien claimant until the project is almost completed. Our fifty state and District of

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Columbia survey concluded that forty states and the district of Columbia have “back end”

notice state lien statutes. See Exhibit B.

The ten other states have what is termed a notice of commencement state statute.

This is frequently referred to as a “front end” notice state statute. The “front end” notice

states generally require that the owner or general contractor file a notice of

commencement whenever the project is started. Each subcontractor or material supplier

that is engaged to perform work or provide material must file a notice of furnishing

within a set time after they start to work on the job site. The failure of a contracting party

to file a notice of furnishing within the time prescribed usually prevents that party from

being able to later file a lien. The states that require a notice of commencement are

Florida, Georgia, Iowa, Michigan, Missouri, Nebraska, Ohio, Pennsylvania, South

Carolina and South Dakota.

Essentially, the tradeoff between a “back ended” notice statute and a notice of

commencement statute is paperwork versus control of potential lien claimants. In at least

one state, the notice of commencement statute was rejected by the construction

community because they did not want to go through the trouble of having to file notice of

furnishings on every project in which they performed work or delivered material. The

general attitude was that the “back end” notice statute was not broke and therefore, did

not need fixing. Furthermore, the construction community believed that lien claims were

not typical on most projects and therefore they were willing to run the risk of the issues

involved with receiving notice of a lien after either performance of the work or

completion of the project.

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The advantage of a notice of commencement statute is that the owner and general

contractor will have notice on the “front end” of the project of every potential lien

claimant. Once the owner and general contractor know all of the potential lien claimants,

then they can be proactive in ensuring that the potential lien claimants are paid by their

contracting parties. In other words, the notice of commencement statute gives the owner

and general contractor a better opportunity to manage the liens on a project site.

1 R.S.Mo. § 429.005 (West 2015). 2 MCL § 570.1115(1) (West 2015). 3 49 Pa. Stat. Ann. § 1401 (West 2015). 4 Id. at § 1402 (2016). 5 Cal. Civ. Code § 8124 (2016). 6 New York Lien Law § 34 (2015). 7 See Wm. R. Clarke Corp. v. Safeco Ins. Co. 15 Cal. 4th 882, 64 Cal. Rptr. 2d 578, reh. denied (1997). 8 Cal. Civ. Code § 8132 (2016). 9 Id. at § 8134 (2016). 10 Mass. Gen. Laws Ann. ch. 254, § 32 (West 2016). 11 MCLS § 570.1115 (9) (a)-(d). 12 See Cal. Civ. Code § 8136, § 8138. 13 See Floyd v. Rambo, 250 Ala. 101, 104, 33 So. 2d 360, 363 (1949); Ala. Code § 35-11-210, et seq. 14 See Colo. Rev. Stat. Ann. § 38-22-119 (West 2015). 15 See Ky. Rev. Stat. Ann. § 376.070(3) (Baldwin West 2015). 16 Shaw Constructors, Inc. v. ICF Kaiser Engineers, 192 F. Supp. 2d 545 (M.D. La. 2001), rev’d on other grounds, 395 F.3d 533 (5th 2004). 17 See Shirley-Self Motor Co. v. Simpson, 195 S.W.2d 951 (Tex. Civ. App. – Fort Worth 1946, no writ); Collinsville Mfg. Co. v. Street, 196 S.W. 283 (Tex. Civ. App. – Amarillo 1917, writ ref’d.); Cain v. Texas Bldg. & Loan Ass’n, 21 CA 61, 51 S.W. 879 (Tex. Civ. App. 1899, writ ref’d.). 18 See Va. Code Ann. § 43-3 (West 2016); See First Am. Bank v. J.S.C. Concrete Constr., Inc., 259 Va. 60, 523 S.E.2d 496 (2000). 19 First Am. Bank at 68, 523 S.E.2d at 500. 20 United Masonry, Inc. v. Riggs Nat’l Bank, 233 Va. 476, 483, 357 S.E.2d 509, 513 (1987).

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21192 F. Supp. 2d 545 (M.D. La. 2001), rev’d on other grounds, 395 F.3d 533 (5th Cir. 2004). 22 Id. at 548. 23 Id. at 552-553. 24 851 S.W.2d 476 (1993). 25 Id. at 478 26 30 N.C.App. 731, 228 S.E.2d 497, rev. denied, 291 N.C. 323, 230 S.E.2d 676 (1976). 27 Id. at 739-740, 228 S.E.2d at 502-503. 28 Ga. Code Ann. § 44-14-366(a) (West 2015). 29 Fla. Sta. Ann. § 713.20 (2) (West 2015). 30 182 F.3d 490 (6th Cir. 1999). 31 See id. at 492. 32 See id. at 493. 33 See id. at 496. 34 See id. at 495. 35 Id. 36 See, e.g., Country Serv. & Supply Co. v. Harris Trust & Sav. Bank, 103 Ill. App. 3d 161, 164-65, 430 N.E.2d 631, 634 (Ill. 2d Dist. 1981); Kern v. City of Lawrenceburg, 1993 Ind. App. LEXIS 1557, 625 N.E.2d 1326, 1330 (1st Dist. 1993). 37 Cal. Civ. Code § 8124 (2016). 38 North Dakota is one example of a state that does not require consideration for a lien waiver to be enforceable. See First Union National Bank v. RPB 2 LLC, 2004 ND 29, 674 N.W.2d 1, 7 (2004); see also G.R. Sponaugle & Sons, Inc. v. McKnight Constr. Co., 1973 Del. Super. LEXIS 158, 304 A.2d 339 (1973); Kelly v. Johnson, 251 Ill. 135, 95 N.E. 1068 (1911); Abbott v. Nash, 35 Minn. 451, 29 N.W. 65 (1886). 39 See Beebe Constr. Corp. v. Circle R Co., 10 Ohio App.2d 127, 132, 226 N.E.2d 573, 576 (4th Dist. 1967); but see Steveco, Inc. v. C & G Inv. Associates, No. 77AP-101, 1977 WL 200326, at *2 (Ohio Ct. App. Aug. 4, 1977) (blanket lien waiver provision in original, $400,000, subcontract was one of many terms of a bilateral contract containing mutual promises which were consideration for each other and thus independent consideration was not required). 40 See, e.g., Westland Homes Corp. v. Hall, 193 Neb. 237, 243-44, 226 N.W.2d 622, 626 (1975) (per U.C.C., if the personal check is dishonored, an action may be maintained on either the check or the obligation, due to failure of consideration); but see Tesco Controls, Inc. v. Monterey Mech. Co., 124 Cal. App. 4th 780, 792-93, 21 Cal. Rptr. 3d 751, 760 (2004) (under the statutory language of the release, a subcontractor or materialman waives his mechanic's lien rights in exchange for a progress payment for services and materials furnished through the date specified in the release, whether or not he receives compensation for all of those services and materials). 41 297 Minn. 409, 211 N.W.2d 873 (1973). 42 No. A10-936, 2011 WL 781178, at *9 (Minn. Ct. App. Mar. 8, 2011). 43 264 Minn. 345, 118 N.W.2d 791 (1962). 44 Id. at 347-48, 118 N.W.2d at 793-94; see also G.V. Dev., LLC v. Atlas Excavating & Utilities, Inc., No. CX-02-1973, 2003 WL 21962470, at *7 (Minn. Ct. App. Aug. 13, 2003) (although it is established law in Minnesota that a lien waiver must be based upon

30

a consideration, compromise and settlement, however, is contractual in nature and requires an offer and acceptance constituting a meeting of the minds, the consideration for which is the settlement of the dispute). 45 Premier Electrical Constr. v. LaSalle Nat’l Bank, 132 Ill. App. 3d 485 492, 477 N.E.2d 1249, 1255 (1st Dist. 1985); see also Cordeck Sales, Inc. v. Constr. Sys., Inc., 382 Ill. App. 3d 334, 368, 887 N.E.2d 474, 509 (2008) (following holding in Premier in reviewing extrinsic evidence of innocent reliance presented in opposition to lien waiver defense). 46 56 F. Supp. 2d 984 (N.D.Ill. 1999). 47 758 So. 2d 1214, 2000 Fla. App. LEXIS 5780 (4th Dist. 2000). 48 See Stewart v. O'Bryan, 50 Ill. App. 3d 108, 110, 365 N.E.2d 1019, 1020-21 (4th Dist. 1977) (listing six factors for estoppel). 49 Tharp v. Keeter/Schaefer Investments, LP, 1997 Mo. App. LEXIS 519, 943 S.W.2d 811 (1997). 50 1989 Minn. App. LEXIS 144, 1989 WL 10413. 51 See Merchants Envt’l. Indus., Inc. v. SLT Realty Ltd. P’ship, 314 Ill. App. 3d 848, 877, 731 N.E.2d 394, 405 (1st Dist. 2000); see also Cordeck Sales, Inc. v. Constr. Sys., Inc., 382 Ill. App. 3d 334, 368, 887 N.E.2d 474, 509 (2008) (following Merchants decision in reviewing extrinsic evidence of custom in enforceability of lien waiver). 52 125 Mich. App. 695, 336 N.W.2d 856 (1983). 53 See id. at 701, 336 N.W.2d at 858. 54 See Merchants Envt’l. Indus., 315 Ill. App. 3d 848, 731 N.E.2d 394; Daniel & Daniel, Inc. v. Cosmopolitan Co., 146 Ga. App. 200, 245 S.E.2d 885 (1978); Walker & Laberge v. First Nat’l Bank of Boston, 206 Va. 683, 146 S.E.2d 239 (1966). 55 See Alstom Power, Inc. v. Balcke-Durr, Inc., 269 Conn. 599, 849 A.2d 804 (Conn. 2004); Capp Indus., Inc. v. Schoenberg, 104 Conn. App. 101, 112, 932 A.2d 453, 461-62 (2007). 56 40 U.S.C. § 270B(a) (1997). 57 T.C.A. § 12-4-205. 58 The Law of Payment Bonds, edited by Kevin L. Lybeck and H. Bruce Shreeds, Chapter 11 – Defenses, James A. Knox, Jr., American Bar Association, Tort and Insurance Practice Section, 1998. 59 542 So.2d 957, 958 (Fla. 1989). 60 493 N.E.2d 348, 351-3 (Ill. App. Ct. 1986). 61 491 N.E.2d 1269, 1273-74 (Ill. App. Ct. 1986). 62 394 N.E.2d 725, 727-28 (Ill. App. Ct. 1979). 63 264 N.E.2d 134 (Ill. 1970).

31