It is ordinary for a subcontractor or supplier to execute a lien waiver after it receives payment for services and/or materials. Construction contracts, however, sometimes go one step further by requiring a subcontractor or supplier to waive its lien rights as a condition of accepting the contract.
There is some question in Louisiana jurisprudence as to whether these provisions are enforceable or unenforceable.
The 2004 5th Circuit Court of Appeals case that muddied the water on this issue was captioned Shaw Constructors v. ICF Kaiser Engineers, Inc. In deciding whether a pre-work lien wavier would be valid, the court turned to Louisiana jurisprudence on the requirements for a valid waiver in general.
Generally speaking, a “waiver” in Louisiana occurs only when there is “an existing right, a knowledge of its existence and an actual intention to relinquish it or conduct so inconsistent with the intent to enforce the right as to induce a reasonable belief that it has been relinquished.” Steptore v. Masco Constr. Co., Inc., 643 So.2d 1213, 1216 (La. 1994).
In Shaw Constructors, the court reasoned that when the subcontract at issue was formed, Shaw had no known existing legal right to file a claim or lien against the property because no work had been performed. Without an “existing right” to file the lien, there could not be a waiver of that right.
The Court also attacked the pre-work lien waiver from a different angle, by reasoning that the defendants had an obligation to pay Shaw under the contract wherein Shaw waived its lien rights. By not paying its subcontractor, it failed to perform on an obligation of the contract, thereby giving Shaw the right to dissolve the contract entirely. The dissolution of the contract would, according to the 5th Circuit, also dissolve the lien waiver.
The 5th Circuit Court of Appeals therefore held that the lien waiver provision could not be enforced against Shaw.
This ruling should not affect the enforceability of lien waivers executed by subcontractors or suppliers after work is performed.
In contrast to pre-work waivers, post-work waivers occur after the right to lien has vested with the subcontractor/supplier. As a result, the subcontractor or supplier has an actual right to waive, and the waiver would likely be valid.
Furthermore, it is worthwhile to note that while the Shaw decision weighs heavily against “no liens” clauses in contracts, it’s not necessarily the final word on the issue.
First, Shaw was decided by the Federal 5th Circuit and not by a Louisiana court. In its decision, the 5th Circuit simply attempts to “predict” what a state court would do if faced with the same legal question. If and when the “no liens” clause issue gets to the state courts, there might be a different outcome.
Second, the Shaw court hints that circumstances might exist when it would uphold a “no liens” clause. In its comparison of the Louisiana Private Works Act to the similar statutes in Illinois, the court highlights that subcontractors and suppliers in Louisiana can lien a project even when there is no breach in the contract. If a sub or supplier finds itself in this situation, and his claim rights were vested at the time of signing the contract, it is possible that the “no liens” clause would be enforced against it.
For all intents and purposes, however, the Shaw decision places great restraints on “no liens” clauses in contracts.
Generals may want to explore other methods of protecting jobs against liens, and will specifically want to get post-work lien waivers from the subs and supplier regardless of whether they have a pre-work lien waiver.
On the other hand, subs and suppliers should discuss their lien rights with an attorney before the expiration of their claim period even if they signed a contract with a “no liens” clause.
- How To Prepare For A Non-Paying Project (constructionlawmonitor.com)
- Preserving and Executing Lien Rights Leads to Prompt Payment (constructionlawmonitor.com)