Last year, a case decided by the Wisconsin Court of Appeals placed contractors in that state on notice. In some jurisdictions, if you sign and deliver a lien waiver without getting paid, the owners have a right to rely on it. The case was Tri-State Mechanical, Inc. v. Northland College, 681 N.W.2d 302 (Wis.App. 2004), and the facts were as follows:

The Facts:

Northland College (“Northland”), the owner, contracted with Frank Tomlinson Co. (“Tomlinson”), the general contractor, to build a new science building. Tomlinson subcontracted with Wynn O. Jones & Associates, Inc. (“Jones”) to provide labor for the installation of the science lab. The subcontract contained a lien waiver provision that required Jones to provide a properly executed release and waiver of liens “as an explicit condition precedent to the accrual of Jones' right to final payment.”

Jones performed all the necessary work and submitted the final mechanic's lien waiver. While Northland paid Tomlinson the full contract price of nearly $5 million pursuant to their contract, Tomlinson never paid Jones and Tomlinson went out of business. Jones then filed a mechanic's lien against Northland, and another subcontractor, Tri-State Mechanical, Inc., also filed a lien and started a lawsuit.

In court, Northland argued that Jones' mechanic's lien waiver extinguished all mechanics's lien rights. The court agreed, and ruled that Jones could not maintain a lien claim because of the mechanic's lien waiver.

Jones appealed, arguing that a Wisconsin law invalidated the mechanic's lien waiver provision in its subcontract. The appellate court agreed that the Wisconsin law invalidated provisions in construction contracts that required a subcontractor to waive its right to a construction lien before payment. The appellate court, however, disagreed with Jones' argument that the Wisconsin law consequently made the Jones' lien waiver void. The appellate court found that the Wisconsin law provided a subcontractor facing a void mechanic's lien waiver provision with a choice: “it can either tender a lien waiver prior to being paid or refuse to do so until it is paid. By giving the subcontractor a choice, the legislature has essentially made a policy decision that endorses whatever course of action the subcontractor takes.” The appellate court concluded that because Jones furnished the mechanic's lien waiver before receiving payment, it also accepted the risk of nonpayment. Jones was left without the ability to file a lien against the property and without the ability to collect money because the general contractor was out of business.

How Problems Arise:

Nearly all construction contracts require the contractor to provide a partial mechanic's lien waiver in order to receive payment. It is a routine part of the construction process. The fact that it is routine is also why it can be so dangerous. A contractor must use care when agreeing to sign a mechanic's lien wavier prior to receiving payment because a contractor who fails to review (and if necessary revise), the waiver risks losing the right to recover on future claims.

Tips for Avoiding Trouble:

1. In some jurisdictions, you should insist on payment. In the case presented above, Jones would have been better served by refusing to sign the mechanic's lien waiver until payment was made, or insisting on use of an escrow agent to facilitate payment prior to release of the lien waiver. In Minnesota, the law protects contractors who are forced to sign a lien waiver prior to receiving payment. (Minn. Stat. § 337.10) In Minnesota, a contractor can sign a partial mechanic's lien waiver without jeopardizing its right to seek payment. If, however, an owner or purchaser takes some action in reliance on the partial mechanic's lien waiver, the mechanic's lien waiver will be enforced.
2. Avoid signing lien waivers that cover “all claims” if there are additional claims for work performed or if there is future work to be performed. If there has been or will be additional work performed, add details regarding this to the waiver to put the owner on notice.
3. Avoid release language. A “release” is much broader than a “lien waiver,” and will be interpreted as such by the courts.
4. Add language such as “released upon receipt of payment” to clarify that the lien waiver is conditioned on your receiving payment.
5. If you have questions about the language in a mechanic's lien waiver or the timing of providing a mechanic's lien waiver, you should seek competent legal advice.

(This article contains a general discussion of the law. This article does not constitute and should not be treated as legal advice as to any particular situation.) Readers are encouraged to submit any comments to the attorney listed below.

View Biography Marnie E. Fearon

612.373.8405 Minneapolis Office

mfearon@felhaber.com

Founded in Saint Paul in 1943, Felhaber, Larson, Fenlon and Vogt, P.A. has offices in Minneapolis and Saint Paul. With over 55 attorneys, the firm serves clients in the areas of corporate and commercial law, employee benefits, employment law, estate planning, health care, intellectual property, labor law representing management, litigation, real estate, transportation law, and workers' compensation.