The Problem with Waivers
It happens to everyone – when you are not getting paid in the construction industry, you call, you want to find out what the story is, and you hear all kinds of things. The worst waivers you can sign say the following:
a. “You signed waivers releasing us”
One of them of the worst ones is when you sign a waiver releasing us. But this actually happens all the time, whether you know it or not. If you do not read your lien waivers, you are going to find the most awful things in there, that have released them from all kinds of claims.
b. “Contract requires you to sign our choice of waiver”
You have to pay attention to your construction contract to begin with, and you do have some negotiating power at the beginning to get your waivers in.
c. “Contract requires you to sign THIS waiver”
You do not want to sign awful waivers all the way through.
d. “If you file a lien (or do not release that lien you filed), you will never get another job”
You are never going to get another job unless you are low, in which event you will get another job. Maybe you should not file a lien against your best customer, but if you do want to file one against them, you need to tell them ahead of time because you need to get it done.
If you talk to a general contractor first, they will say they did not realize it is a problem, and that they’ll have you check out today. Sometimes there is a big dispute and they will say go ahead and file your lien.
The Solution to the Problem with Waivers
It all starts at the very beginning:
- Condition your bid
- Negotiate your construction contract
- Consider specifying lien waiver forms, too
You want to condition your bid on all kinds of things, like trying to get rid of the pay-when-paid clauses. This one is a tough one though. But one of the things you need to do is get a good lien waiver. Lien waivers are important, in fact, lien waivers drive the whole payment process, which is why you want them there.
Demand Four Different Waiver Forms
There are four different types of lien waivers you need to be cognizant of, and be sure you are using a conditional partial waiver, an unconditional partial waiver, a conditional final waiver, or an unconditional final waiver.
But let us discuss what they are with an example first.
a. Complete General Construction v. Kard Welding
The condition your bid issue really works. There is a Frankling County Court of Appeals case which is complete General Construction versus Kard Welding.
The concept of making a contract is different when you are bidding because when you want to sell something to someone and they say they will pay this much for your product and you say okay, there is a construction contract formed right there. And you can withdraw your price at any time right then and there before it is accepted.
But when you are bidding, particularly when you are bidding to someone else who is going to use your bid to bid, then there is an issue of reliance. If you make a bid to them and they use your bid, you cannot then withdraw even if they have not accepted it yet.
Kard Welding said they had to honor the exact bid or that it can be withdrawn. So if you say that this bid is contingent upon your doing x, y, and z as contingent upon your paying within 30 days of invoice, is conditioned upon using a specific waiver of lien, as “the lien waivers that are attached here.”
If they do not accept those exact terms, you can walk, or you can negotiate until you get a contract that you feel is fair.
b. Unconditional waivers – Partial lien waiver or final lien waiver
With these lien waivers, you know the unconditional ones are the problematic ones. Where are you in the process? Are you finished? Have you delivered everything you are going to deliver? Have you performed all the work you are going to perform? If you have, then you are going to sign a final lien waiver.
If you are not and if you are only part way through, then you are going to sign a partial lien waiver. And the final lien waiver would include everything including the retainage you are going to get. So even though you are finished it does not mean that you are going to waive it if they are going to pay you everything but the retainage.
You are going to get that in a period of time. Sometimes retainage is not released until a year later which is of course obscene. That you should negotiate now if you can. If you are finished, you are getting your last pay, sign a final waiver. If you are part way through, you are only getting paid partly for what you did, you are going to sign a partial lien waiver.
c. Unconditional waivers
With unconditional lien waivers, have you been paid? This is some of the language the waiver will contain:
The waived items could pretty much be anything in the world. Well, that is the first part. if you have gotten paid and the check is cleared (if you do not trust it necessarily), then you are okay to sign this unconditional waiver. Remember this is not an unconditional final waiver, this may be an unconditional partial.
d. Conditional waivers
So what if you are still waiting for the check or waiting for the check to clear? You will hear this all the time – sign this lien waiver and the other side will take the lien waiver to the property owner and they will get paid or they will give you the check and if it is a large company, the check may not bounce, but it could be a small company and you would really like to be sure that it is going to clear.
Now, giving you a check that is returned for insufficient funds is actually a crime and it gets bigger. It gets into felony status if it is a large bounce. But do you want to send the person to jail or do you really just want to be paid?
You want some of your conditional waiver to read like this:
Whatever you waive is also an issue. You do not waive everything in the world, you only want to waive whatever you are being paid for, and not anymore.
For example, you start on October 1st and you work until October 25 or whatever day you have to pay app in. Then the general contractor submits their pay app and 30 days later, they get paid. Under Ohio’s Prompt Pay law, they have to pay you within 10 days except they are going to withhold retainage.
So where are you? The check may not have come in yet and you have given them a conditional waiver so that they can go get paid. Now they have given you the check, and now if you trust that check, when you get paid, you can give them the unconditional waiver. And somewhere around the same time, you are going to give them another conditional waiver. Maybe even in the same transaction. When you go to pick up the check, if they mail it, you are going to send them a conditional for next month.
So you always have this process. The owner can always understand where the conditional waivers are, where the unconditional waivers are, know that they have limited exposure, that there are payments being made, and waivers being given.
In this, talking about any of the waivers whether conditional or unconditional, going back to the example above, when you invoiced through the 25th. The waiver will say whether it is upon a receipt of the payment or for this amount received, which is acknowledged all payments are waived through the date hereof.
But that is not right. Because you have not been paid through the date hereof. You have been paid through the 25th of last month, not even this month. So you want to waive the right stuff. You also want to waive your right to be paid anymore. You do not want to release all claims by signing a final release. Well you might have unresolved change orders. That is a claim and you might have just waived that. So be really careful.
If you have an issue and you want to know where you stand, you have a crazy waiver of lien – one you have not seen before or one you are just not sure about – you should get in touch with an attorney. They will be happy to look at it for you and chat with you for some time and work through this to make sure you are signing the right lien waiver.
e. Partial waivers
When you are still owed money or you have other unresolved issues, you are only going to give a partial lien waiver.
f. Final waivers
When you are paid in full, including retainage, and all issues are resolved, there is no remaining condition. This means that there are no unresolved change orders or nothing pending. Then you are going to sign the paid in full, final unconditional lien waiver. That is just fine if everything is okay.
Below is some what a partial waiver will read like:
‘Choses in action’ or any right against labor or material bond on construction projects means you have waived lien claims, bond claims, or stop notices, which are essentially an order (in Ohio is the public authority) to stop paying the contractors.
So all these things you are waiving because you have been paid in full on everything. There might be claims coming back against you? Because you are not going to waive those, or they are not going to waive those and the claims against you will be a warranty issue or something similar.
When waivers are overbroad, this is some of the language it will contain:
If it is the final waiver that is okay. If it is a partial one, you have just waived too much. Now this happens and is seen all the time.
For example, there is a supplier who delivers windows and doors and they have $114,000 worth of unpaid invoices over the last year. This is one situation where the supplier said they have a good relationship with the contractor. The supplier is asked to file a construction lien and obtains unconditional lien waivers for every month going back 12 months.
And what happened was the supplier kept signing the unconditional lien waivers. So he waived all of his rights up until the last one where he finally decides he has had enough because he has not been paid. What the contractor has is $17,000 in this entire account and he says he will pay it to the supplier because no one else has made a claim and everyone else signed all lien waivers and were golden.
But for the supplier, $17,000 was all he would get on the lien issue and that he did not even have a claim of lien because he already waived all that. So he took the $17,000 and then chased the contractor for the rest.
It would have made it so simple if he used the right lien waiver all the way through. That contractor would not have continued to pay a subcontractor and thus, the supplier would have been paid or the contractor would have held enough money to cover what he had.
That is the issue and that is how this work. In Ohio, there is a Notice of Furnishing and the point of the Notice of Furnishing is to tell the owner and the contractor if you are a sub-subcontractor or supplier to a contractor that you are supplying labor and/or material to the project. That way, every time it comes time to write a check to the contractor, they can look through their list and say that they need see lien waivers from all of these people who have given notices. Because they have lien rights.
So that is good. You have staked your claim, you have done the notice, the property owner does the right things and says that they are not giving the check until they see the lien waivers.
Now the owner is going to be exposed for one month because you are going to give this conditional lien waiver and then that conditional release is going to have money released on, he is going to get the unconditional lien waiver for that money just received, along with the conditional lien waiver for the next month. So he only has exposure for 30 or 31 days.
That is the type of overbroad waiver you are never going to sign unless it is your final lien waiver.
i. Through what date and is it a final waiver after payment?
This is the most common form you see. The lien waiver is “effective through the date hereof.” This only works if it is for final payment and you have been paid.
Why is this so important? It is because your pay application is through last month. You are not getting paid. Your pay app was through the 25th of the month and now you are getting paid on the 10th of the following month. So essentially, you have given up 30 days for Month 2, five days for Month 1, and ten days for Month 3 (the current month).
So you have given away way too much when you have not been paid. Go ahead and change it right on the form. You need to mention the amount that you are still owed for retainage. And it is only effective though the date of your invoice. You are not getting paid for all of September and the ten days in October.
They will give you a headache on that. Unless you have negotiated a good form, they can give you a real headache. Sometimes you should just go for it. Do not return their form to them, return the proper form to them. This works 90% of the time. Sometimes you will have a hard time, but do what you need to to protect your payment.
If you do not, it is going to turn around and you are going to find out that every once in a while, it is going to be a lot of money and you are going to be very sorry.
ii. Retainage not excluded from the waiver
Be sure that retainage is excluded from your waiver. They almost always say “through the date hereof.” And they do not say ‘except for retainage’ despite the fact that they have withheld probably ten percent on you. It is probably ten percent because that is really the common thing even though it is silly. And sometimes if you are a first-tier subcontractor, first-tier subcontractor, or selling to a prime contractor on a public job, it is actually illegal.
Almost no one knows this because no one reads the administrative code. But it says in the administrative code that they cannot withhold more from you than is being withheld from them. But that is a whole different article.
iii. Possible relief for overbroad waivers
One of the things that you can go against is, let us say you are just trying to get paid. You are not worried about the construction lien; you are worried about being paid.
For example, if you are working for a subcontractor and the subcontractor says that you already signed their lien waiver, tough cookies. He says he does not have any real responsibility to you anymore because you signed this lien waiver.
This is not necessarily true though, because the lien waiver itself is contract, and they had an obligation to pay you. So you know right in your main contract whether it is a purchase order or whatever it is. You have an obligation to perform and deliver labor and/or materials, and they have an obligation to pay you.
They will say that they gave you the amount of money that is in the lien waiver. But they already have that obligation because it was in the contract. So there is no new consideration for this contract. The only place it falls flat, which means that you can try to overpower it, the best judges can see the difference.
But remember reliance. It is the same thing here. When you were bidding, the contractor relied on your bid to give their bid to the owner. Here, the owner has relied on your lien waiver to pay the contractor, to pay you. So the one that skipped the beat, unless they have actual knowledge, the one who is at the head (the owner), if they pay without actual knowledge that your lien waiver is wrong, you do not have lien rights.
For example, for a job in Downtown Cleveland at the Union Club, the contractor is going out of business. This is one of his last two jobs. There is this one and the one before. His electrical contractor when out of business, left him holding the bag for about $600,000, and he is really just going to walk away, pay himself, be done, and close the business.
That is not a good thing. There are six different people on that job that all give lien waivers, because the contractor paid but he always pays late. So people just give him lien waivers. But he was not paying this time. The architect on the project is the owner’s designee and a notice was sent to the owner’s designee, not to rely on the lien waivers because they were incorrect.
But no one had been paid. The architect was called and told to look at their email and stop any payments on this project. But he says he has a great attorney telling him not to ignore a legal document. And that is absolutely correct. Now if he pays, he has already been told verbally and in writing that these lien waivers are wrong. So he can no longer rely on the fact that the contractor has paid the subcontractor.
So now there is some arm wrestling happening, and the owner can get involved and try to get payment rather than busting the wrong way.
Negotiate your contract and your waivers
So how do you avoid these overbroad waivers? First, read and understand everything before you sign. That includes your contract and your lien waivers. It also includes change orders.
Avoid overbroad waivers
Lien waivers are everywhere and that is one of the problems with them. You see that you have a change order, you need extra time, you have extra time, you need extra money, you get extra money, and you are asked to sign on the dotted line. That works fine except you stop reading part way through and you give them an extra year of warranty.
You waived all lien rights and you did all kind of things, so be really careful. Understand that if you do not call your construction lawyer, have them look at it, or contact one of our attorneys. They will not charge you and would be happy to look at it.
For an overbroad waiver, you can modify it. You can cross stuff out, you can footnote it, you can basically do anything you want before you sign and deliver it.
The One Thing to Do If You Have Not Been Paid
If you have not been paid, this is really the one thing that is the most important. The other things shared above are important too but this conditional waiver of lien part is important. This line will save you:
If you do it right from the beginning, you have four different lien waivers that you can use on construction projects all the way through. That is the conditional partial waiver, the unconditional partial waiver, the conditional final waiver, and the unconditional final waiver.
Get yourself set up so you are going along the right path and you are getting paid what you are supposed to be paid. You are keeping your lien rights so you can get paid in the future. Why do you want to keep your lien rights? Do you want to file a mechanic’s lien? No, you do not want to file a mechanic’s lien. Why? Because you want to get paid.
These steps will help you get paid and avoid having to file a mechanic’s lien. If you are still not getting paid, then you do need to file a mechanic’s lien to be taken seriously and actually make a good business decision. This is the money that is yours and you have the legal right to payment.
You are a lender. When you are delivering materials or you are working on a job and you are not getting paid. For every day that you are working or delivering, you are lending money to the contractor and to the owner.
Let us say you have $100,000 worth of material sitting there, the average person is not going to be able to go to the bank and say that they would like to borrow $100,000. They will not want to put a mortgage on their house, they will just want to sign their signature loan. They would want to just promise to pay back.
Well, there is a lot of that here. The lien is like the mortgage. For a mortgage you borrow money to buy, you sign a note that says you promise to pay back the money, and you sign a mortgage that says if you break the promise to pay back, then the bank can take your house, sell it, and if there is anything else to give it to you.
The same thing applies here. The statute writes all those things between the lines. It says if you have not been paid and you follow the rules, did you notice the furnishing, give a good heed to all the lien waivers you signed? You get to the end and you still have not been paid, depending upon what type of project you are working on, there is a different time period for filing each lien, and you are within your time period.
You can file the lien and take your mortgage on that property. So if you are not paid, you can leverage getting paid by threatening to file a foreclosure action. Or you can file a foreclosure action and get paid out of the money at the sheriff's sale.