This is the third of a three-part series exploring the Texas Supreme Court’s decision in Zachry Construction Corp. v. Port of Houston Authority of Harris County. A summary of the case can be found at Part 1 of the series. Part 2 addressed the “no-damages-for-delay” aspects of the case and commented upon the current state of North Carolina jurisprudence on the enforcement of such contract clauses. This post explores the decision’s holding with respect to lien waivers and highlights some key issues contractors should bear in mind before executing these often-overlooked instruments.
What Zachry Says About Lien Waivers
By way of reminder, here’s the pertinent lien waiver language that gave rise to the dispute over whether Zachry waived its right to claim $2.36 million in liquidated damages (“LDs”) that had been withheld by the Port Authority:
[Zachry] hereby acknowledges and certifies that [the Port Authority] has made partial payment to [Zachry] on all sums owing on Payment Estimate Number [–––] and that it has no further claims against [the Port Authority] for the portion of the Work completed and listed on the Schedule of Costs in Payment Estimate Number [–––].
The Port Authority argued this language constituted a waiver of all claims for payment; Zachry argued it only applied to lien claims. The trial court saw it Zachry’s way, and the Texas Court of Appeals reversed.
The Texas Supreme Court thought the jury got it right.
Looking to the express language of the lien waiver, the Court ruled that it “plainly refers only to claims for work completed, not for liquidated damages withheld for delays — work not completed.” (Emphasis in decision). The Court also noted that Zachry “actively disputed the Port’s right to withheld liquidated damages from the first time the Port did so, and that dispute was never resolved.” Based on these considerations, the Texas Supreme Court ruled, as a matter of law, that the lien waiver language extended neither to Zachry’s claim for release of LDs nor to its claim for delay damages.
The Danger of Lien Waivers
To be honest, I found the Texas Supreme Court’s lien waiver analysis to be a little thin, and perhaps even outcome-determinative. Why do I say that? Three reasons. One, the court doesn’t cite to any prior lien waiver case — from Texas or anywhere else — in reaching its decision. Two, the Port Authority, by trampling on Zachry’s means and methods, was the “bad actor” in the case. And three, Zachry complained about the withholding of liquidated damages from the start. On the whole, then, I suspect the court, as a matter of “rough justice,” determined that it would have been unfair to withhold millions of dollars from Zachry’s contract balance simply because it signed an arguably overbroad lien waiver in order to keep the cash flowing.
Frankly, I find the express language of the lien waiver problematic for Zachry’s position. Let’s remember that the Texas Court of Appeals did, too, and that Zachry only prevailed because the Texas Supreme Court stepped in and bailed it out. The roller-coaster ride ended well, but I imagine Zachry got nauseous on the journey.
My point is this: it’s nigh impossible to predict how judges and juries might resolve thorny questions about what a lien waiver really means. One court might see it one way, while another court might reach the opposite conclusion. Bottom line, the difficulty our civil justice system is having interpreting lien waivers with any consistency heightens the risk for contractors in managing the monthly payment cycle.
I’ve said it before and I’ll say it again: lien waivers are among the most overlooked of construction project documents, and that’s a real problem. If not executed in a mindful manner, they can expose contractors to significant risks, including inadvertent waiver of lien rights, waiver of contract time & price adjustments, and even allegations of fraud. Contractors who think executing lien waivers is nothing more than a routine clerical task performed just before receiving a periodic payment are making a big mistake.
Being Mindful About Lien Waivers
Execution of lien waivers is typically a contract requirement, and the party imposing that requirement typically seeks maximum protection from the lien waiver. Whether you’re a prime contractor signing the owner’s form lien waiver or a subcontractor signing a prime contractor’s form, vigilance is key. Here are three things I recommend you look for and consider before signing your next lien waiver:
(1) Is the Lien Waiver Conditional or Unconditional?
An unconditional lien waiver releases lien rights without imposing any conditions, such as actual receipt of the subject payment. Signing an unconditional lien waiver before you actually receive the payment that is the subject of the waiver could expose you to the argument that you’ve waived your lien rights to the extent of that payment. If the party above you in the contractual chain wants you to sign an unconditional lien waiver before this month’s check is in-hand, consider responding that you’ll execute a conditional lien waiver for the payment currently due, and an unconditional follow-up release next month, after payment has been made.
(2) Does the Lien Waiver Carve Out Exceptions?
Retainage is almost certainly being withheld from your monthly payments. Change orders might be pending. And, like Zachry, you might have a claim for excusable or compensable delay caused by one or more parties above you in the contractual chain. Make sure you’re excepting these items from the scope of the lien waiver. If the lien waiver form you’re being asked to sign doesn’t provide space to carve out these exceptions, then drop an asterisk and list them at the bottom of the form.
(3) Am I Telling the Truth?
Many lien waiver forms require you to represent that you have satisfied all debts owed to those immediately beneath you in the contractual chain. Have you? If the answer is “no,” you could face some unsavory consequences: (1) you may have committed a criminal misdemeanor punishable by jail time, fine and/or an action on your license (see, e.g. N.C. Gen. Stat. § 44A-24); (2) you could be accused of fraud, which in turn could give rise to a claim for an unfair and deceptive trade practice (and exposure to multiple damages and the other side’s attorney fees); and (3) you might be called upon to indemnify the party above you in the contractual chain if a lien and/or bond claim is filed by a party beneath you in the chain.
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I strongly suggest that you work with the party above you in the contractual chain during the contract negotiation stage to craft a lien waiver form that is fair to both parties. Each of the three key issues I’ve identified above can be addressed at this time, so that month-to-month, the payment process can run more smoothly and your rights & remedies can be best protected. An experienced construction lawyer can help guide the way.