Sauer & Associates

MAKING SENSE OF LIEN WAIVERS AND RELEASES

By Attorney Jonathan Sauer

One of the day to day issues in construction that is both so terribly important and so greatly misunderstood is getting and signing lien waivers and other releases. Subcontractors and material suppliers often sign these documents without knowing what they mean and to the extent that they can foreclose rights. Here’s the technical stuff on this point:

In absence of fraud, person who signs written agreement is bound by its terms regardless of whether person reads and understands those terms. Tiffany v. Sturbridge Camping Club, Inc., 32 Mass.App.Ct. 173, 587 N.E.2d 238 (Mass.App.,1992). In absence of fraud, one who signs a written agreement is bound by its terms whether he reads and understands it or not, or whether he can read or not. Cohen v. Santoianni, 330 Mass. 187, 112 N.E.2d 267 ( Mass.,1953) Where what is given by one to another purports on its face to set forth terms of a contract, one who receives it, whether he reads it or not, by accepting it assents to its terms and is bound by any limitation of liability therein contained, in absence of fraud. Kergald v. Armstrong Transfer Exp. Co., 330 Mass. 254, 113 N.E.2d 53 ( Mass.,1953) Ignorance through negligence does not relieve a party from his contractual obligations, unless the negligence is not inexcusable.

Century Plastic Corp. v. Tupper Corp ., 333 Mass. 531, 131 N.E.2d 740 ( Mass.,1956).

Where what is given to a person purports on its face to set forth terms of a contract, a person assents to its terms by accepting it, whether he reads it or not, and is bound by any limitation of liability therein contained, in absence of fraud; but where what is received does not purport to be a contract the person receiving it is not bound by limitation of liability unless actually known to him. Polonsky v. Union Federal Sav. & Loan Ass'n, 334 Mass. 697, 60 A.L.R.2d 702, 138 N.E.2d 115 ( Mass.,1956).

Therefore, if you sign something in a language you don’t understand: you’re probably bound. You don’t read what you sign: you’re probably bound. And if someone (wanting you to sign it) explains to you what the document means - or what he or she wants you to believe it means - at variance with the correct legal interpretation of its meaning, this won’t excuse your signing the document in the ordinary case.

The purpose of this article then is to serve as an introduction to these topics and to point out some of the issues. This is not intended to constitute specific legal advice and in any particular situation, particularly where there are large sums involved, our readers are cautioned to consult with counsel.

Attached to this article is a good, neutral form of general release for a single job, which favors neither the releasing party not the released. Also attached are partial and complete lien waivers, which are written to favor the general contractor and owner. Comments for each document are included after the document.

Now, what are the questions?

I. What is a ‘lien waiver’?

A lien waiver is simply a document giving up the right to file a mechanic’s lien.

Now, in Massachusetts, that right exists only as to private land. This is because of the specific statutory provision contained in the Massachusetts General Laws:

CHAPTER 254, 6. Public property; exemption

“No lien shall attach to any land, building or structure thereon owned by the commonwealth, or by a county, city, town, water or fire district.”

As statutes go, this provision is short. However, it is clear and unassailable and not capable of more than the plain meaning these words hold. As a matter of statute and of public policy in Massachusetts, there are no mechanic’s lien rights on public lands. (In some states, that may be different: New Hampshire, for example, was - perhaps still is - an exception.) Therefore, when some one attempts to get you to sign a lien waiver on a public job, this is an act that has no legal significance, at least in terms of the mechanic’s lien law. For, you can not release a lien that you never could have filed in the first place!

Therefore, to the extent that documents/contracts pertaining to public jobs discuss/describe/require lien waivers, what is really being required - to one extent or another - is a release.

Now, a lien waiver - reduced to its bare minimum - is only a document in which the releasing party releases mechanic’s lien rights. Therefore, if you have carefully qualified your lien waiver, you have still reserved whatever contractual and bond rights that may be available to you. Also, in a carefully-worded lien waiver, you have not foreclosed other rights that may be available to you to collect your debt such as, for example, trustee process (bank account attachment to fund your expected recovery, if the matter goes to suit) or reach and apply actions (attaching your contracting party’s other contract receivables to fund your expected recovery, if the matter goes to suit).

Issues with regard to lien waivers

Initially, inasmuch as lien waivers frequently overlap with releases (and their issues) and where sometimes through inadvertence or intentionally the party giving you the lien waiver to sign really intends for you to execute a release, to fully understand lien waivers, you have to understand releases and issues pertaining to releases.

A. Make sure the lien waiver is specifically limited to time and lists its consideration. One of the biggest problems with lien waivers is that they are too broadly written. And why not? Since they are prepared by either the Owner or the general contractor, each party is interested in getting the maximum amount of protection that is possible, the biggest bang for parting with the fewest possible bucks. When you are executing a lien waiver, make sure that it is limited to whatever requisition period you are currently involved with. To the extent that the lien waiver is given in advance of the payment - usual situation - make sure that there is language in the lien waiver to the effect that this lien waiver is given “in consideration of a future payment in the amount of X” and that said lien waiver will only take effect on the actual receipt of said payment.

II. What is a ‘release’?

A release is, to one extent or another, a sale of your possible claims. In other words, think of a release as a bill of sale of whatever claim is contained therein. (In fact, when you sign a bonding company release, that form usually is titled “Release and Assignment” in that the claim you are releasing against the principal is sold to - or ‘assigned’ - to the bonding company.) A release is more global in nature than a lien waiver, when each document is tightly and narrowly drafted. A lien waiver, at bare minimum, only indicates that you give up your lien rights, partially or fully. A release indicates that you have given up the underlying cause of action, partially or fully. Therefore, a release is far more serious than a pure lien waiver, keeping in mind that savvy generals and owners often include release language in a lien waiver or simply title their releases as lien waivers. Please keep in mind that when a court construes the import or legal significance of a document, it is more concerned with its content than with its title. Therefore, you may be executing a release even though the document is titled ‘lien waiver’ and the document will be construed by the Court as a release and people often lose big in the process.

Issues with regard to releases

A. Is it a complete release? First of all, is it a complete release of any and all claims and not just limited to a specific job? If that is the case, then most forms for release indicate that the release is a release of all claims “from the beginning of the word to the date executed”. While this may seem somewhat hyperbolic, the key to good legal drafting of this kind of document is to leave no wiggle room. Therefore, if you are looking for a ‘final release’ of any and all possible conceivable claims the party you are paying may have, make sure the release has this type of language in it.

B. Is the release authorized/ratified by the company giving it? Remember that as a matter of corporations’ law, the authority of a corporation is vested in the board of directors only. The corporate seals that many of you may have in your ‘corporation kit’ is evidence of the authority of the board of directors in that the board of directors is presumed to only make the seal available to those acting on its behalf and with its authority. Therefore, and particularly on larger/more troublesome matters, make sure that the release is embossed with the corporate seal of the corporation giving you the release. Otherwise, if something ‘new’ comes up and the party signing the release attempts to wiggle out of it, you don’t want to give the corporation the possibility of raising the argument that the execution of the release was not an authorized act of the corporation - a so-called ‘ultra vires’ act. If the party giving you the release claims not to have a corporate seal or that it isn’t available, insist on a “Corporate vote”, which would be a document evidencing a meeting of the board of directors, signed by the secretary or clerk of the corporation, authorizing the signatory to sign such a document. (An example of a corporate vote follows this paper.)

C. Don’t release too many parties. Many times, releases include a whole kitchen sink worth of people: owners, architects, consultants, lawyers, etc. Check to see who you’re releasing and be sure that you intend on releasing all those indicated. Remember, that a release executed as “a sealed instrument” may deprive any court considering the legal effect of the release from looking into the fact of whether or not there was adequate - or any - consideration flowing from the parties released. (A sealed instrument is a document bearing language such as ‘witness my hand and seal’ or ‘executed as a sealed instrument (or contract)’.)

D. If the release is given with regard to a litigation - a lawsuit - make sure that there is language in the release to indicate that the release covers all claims (or counterclaims) that are contained within a certain case in whatever county bearing whatever docket number (court file number) is associated with the name of the case.

E. If the release is partial only, make sure it is titled that way and that the claims not released are specifically identified and excepted from the release.

Many times releases may not contemplate situations where retention has not been paid and may not be paid for a period of time after the giving of the release. In that case, the release should clearly indicate that “specifically exempted from this release is undersigned’s claim for retention in the amount of X”. Or, there may be a claim (for example, for an extra or equitable adjustment) pending or to be asserted later. To the extent that some claim is not resolved - or may even be asserted after the release is given - this claim or right to make a claim should be reserved and clearly identified. Otherwise, it may be lost.

Conclusion

This stuff is important! If someone gives you something to sign and you don’t know what it means, get someone to explain it to you. This isn’t something you can count on being able to undo once it’s done. Too often, clients go to lawyers to try to salvage Mrs. O’Leary’s empty barn, when the cows have clearly already gone on to better - possibly unreachable - pastures. Put another way, you don’t have to cry over spilled milk, if it doesn’t get spilled in the first place! Onto the forms!

SAMPLE RELEASE LIMITED TO ONE JOB

RELEASE

In consideration of ____________________ dollars ($ ), to be paid by insert your business name, a corporation (hereinafter referenced as RELEASEE) and for other valuable consideration, the receipt whereof is hereby acknowledged, insertthe name of the party releasing your company, a corporation, (RELEASOR) hereby remises, releases and forever discharges the said RELEASEE from all debts, demands, actions, causes of action, suits, dues, sum and sums of money, accounts, reckonings, bonds, specialties, covenants, contracts, controversies, agreements, promises, doings, omissions, variances, damages, extents, executions and liabilities and any and all other claims of every kind, nature and description whatsoever, both in LAW and in EQUITY, which against the said RELEASEE or its heirs, executors, administrators, bonding companies, banks, successors or assigns RELEASOR now has or ever had from the beginning of the world to this date on account of RELEASOR’s having supplied labor, equipment and materials for a certain project known as ________________________________________________________________________

(Project). If there is a lawsuit involving this matter, have your lawyer check the release out to make sure that it includes the claims included in the lawsuit. Typically, here there would be language such as follows: “The claims released include all claims asserted in Suffolk Superior Court, Civil Action Number X, being a case named Acme Building Company v. Last Chance General Contractor.”

Signed and sealed in _______________, _________________ this ___________ day of

__________________, 2000

___________________________________

(insert the name of the party signing the releaseand make sure that this signature is embossed with that company’s corporate seal or that you get a corporate vote )

By a corporate officer

Subscribed to and sworn before me this ____________ day of _______________, 2000

______________________________________

NOTARY PUBLIC

My commission expires:

The form for release above is fairly neutral. It is not intended to benefit either party particularly over the other. Now, this release is limited to a specific job, meaning that the releasing party may have claims by against the party being released on other jobs. If you wanted to convert this release from being limited to one specific job to “any and all claims as to any and all jobs”, then you would put a period after the word ‘date’ three lines above the bold language in the release form and then delete the language as follows from the release presently after the word ‘date’: “on account of RELEASOR’s having supplied labor, equipment and materials for a certain project known as. . .”

FINAL RELEASE OF CLAIMS

(This has a lien waiver built-in with release language as well)

WHEREAS, the undersigned insert the name of party signing the document has been engaged by insert your corporate name as a subcontractor or material supplier to perform services or supply materials in connection with a project located at or identified as follows: _____________________________ _____________ (Project).

The undersigned herein certifies and agrees that the work for which this payment is made has been completed and that all charges for labor, material, services and charges of every kind or nature in connection with undersigned’s performance of any contract applicable to Project and/or in connection with Project, whether directly or indirectly, have been paid in full with the exception of the following:

The undersigned also certifies that he/she/it has complied with all Federal, State and local tax laws (including sales tax laws) and, without limitation, with all Social Security Laws, Unemployment Laws and has paid any prevailing wages required of he/she/it for Project, if applicable. The Undersigned hereby agrees to defend, indemnify and hold harmless insert your corporate name and any Owner, Lender or bonding company associated with Project (jointly and severally referenced hereinafter as “Indemnified Parties”) and to be responsible for any attorneys’ fees incurred by Indemnified Parties should any statement in the preceding sentence be alleged by any third party to be untrue and/or actually prove to be untrue. The indemnification obligation assumed in this paragraph is both corporate and personal as to the person executing this lien waiver.

Signed by the undersigned (if a corporation, by its duly authorized officer) this _____________ day of __________________, 2000.

_____________________________________

insert the name of the party signing the lien waiverand make sure that this signature is embossed with that company’s corporate seal

By: _____________________

Title: ____________________

State of ____________________

County of __________________

Sworn to and subscribed before me this ___________ day of __________________, 2000 by the above signatory who stated that the execution of this document was his/her free act and deed and that he/she is authorized by the above business entity to execute this Final Release on its behalf.

________________________________

Notary Public (Emboss with seal)

My commission expires:_____________

Now, this document above was prepared with an idea for giving more rights to the party receiving it, which would typically be a general contractor. Please note that only some of the language in bold in the second paragraph of the form pertains to mechanic’s lien rights: everything else is surplusage. Everything else is oriented towards the signing party’s giving up potential rights and/or assuming some potential liabilities. Note, that the last two paragraphs contain representations that the bills have been paid and that the proper wage rates - important on public work - have been paid. These paragraphs could be added to the release, as well. Also, the indemnification language includes hold harmless and defend (meaning, that the party being released would have a claim for defense costs if it turns out, for example, that a materialman or subcontractor of the releasing party has not been paid) and would include counsel fees to the released party if adverse claims come up. The fact that the indemnification is to be personal as well as corporate suggests that should the corporation signing the release be without assets - or out of business - there would be at least an arguable personal obligation of the party signing the document.

If I were the subcontractor’s counsel, I would try to eliminate the hold harmless and defend indemnification language and would not give either personal indemnification or the corporate indemnification.

PARTIAL RELEASE OF CLAIMS

WHEREAS, the undersigned insert the name of the party signing the document has been engaged by insert your corporate name) as a subcontractor or material supplier to perform services or supply materials in connection with a project located at or identified as follows: _____________________________ _____________ (Project).

NOW, THEREFORE, for and in consideration of the sum of ______________, the receipt whereof is hereby acknowledged and for other valuable consideration, the undersigned does hereby irrevocably waive and fully release any lien (including mechanic’s lien) or claim of any kind it may have for labor, equipment, material or any combination furnished by the undersigned to Project, being premises owned by __________________ and against any funds remaining in the hands of the Owner, Lender or insert your corporate name and against any payment bond supplied by insert your corporate name for Project, if any, for the purposes of the construction of Project but strictly limited as only for the time period of up to and including the date this partial release is executed except for any claim for retention it might have as for monies earned up to and including the undersigned date but not yet paid, which claims are reserved and not herein released.

The undersigned also certifies that he/she/it has complied with all Federal, State and local tax laws (including sales tax laws) and, without limitation, with all Social Security Laws, Unemployment Laws and has paid any prevailing wages required of he/she/it for Project, if applicable. The Undersigned hereby agrees to defend, indemnify and hold harmless insert your corporate name and any Owner, Lender or bonding company associated with Project (jointly and severally referenced hereinafter as “Indemnified Parties”) and be responsible for any attorneys’ fees incurred by Indemnified Parties should any statement in the preceding sentence be alleged by any third party to be untrue and/or actually prove to be untrue. The indemnification obligation assumed in this paragraph is both corporate and personal as to the person executing this lien waiver.

Signed by the undersigned (if a corporation, by its duly authorized officer) this _____________ day of __________________, 2000.

_____________________________________

insert the name of the party signing the lien waiverand make sure that this signature is embossed with that company’s corporate seal

By: _____________________

Title: ____________________

State of ____________________

County of __________________

Sworn to and subscribed before me this ___________ day of _________________, 2000 by the above signatory who stated that the execution of this document was his/her free act and deed and that he/she is authorized by the above business entity to execute this Partial Release on its behalf.

________________________________

Notary Public (Emboss with seal)

My commission expires:_____________

This is essentially the same language as the Final Release of Claims except for the language added in by large italics, which is the language which makes this ‘partial’. Otherwise, same comments as would be made about the Final Release.

CORPORATE VOTE

A meeting of the Board of Directors of Last Chance Construction Co. Inc. was called for and took place at two o’clock pm on Monday, July 3, 2000. A legal quorum was present and all attending waived any irregularities, informalities or notice requirements as to the calling or conducting of the meeting.

The only item on the agenda was the consideration of the authority of I. M. Biggs to execute a certain release with regard to construction work performed by Last Chance Construction Co. Inc. with regard to a certain contract between Last Chance Construction Co. Inc. and New Fenway Park, Inc. dated January 1, 2000 with regard to the construction of New Fenway Park, Boston, MA.

It was voted unanimously as follows: That I. M. Biggs, President, be authorized to execute all such documents as are necessary to release New Fenway Park, Inc. with regard to any claims that Last Chance Construction Co. Inc. might have with regard to the above-referenced contract and the performance of construction work thereunder.

There being no other business before the Board of Directors, it was voted to adjourn.

The above represents a true and accurate accounting of the action of a meeting of the Board of Directors of Last Chance Construction Co. Inc. on Monday, July 3, 2000.

________________________

Clerk

(Emboss signature with corporate seal, if available)

Essex , ss July 3, 2000

Then appeared before me the clerk’s name, personally known to me, who after being duly sworn stated that he is the Clerk of Last Chance Construction Co. Inc. and that his signature above represents his free act and deed and that the above corporate vote is a true record of the meeting of the Board of Directors of Last Chance Construction Co. Inc. and is in full force and effect as of the present date.

_________________________

Notary Public

My Commission expires:

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This article is intended to be general information and does not constitute specific legal advice. If you need legal advice, your interests would be best served by consulting with an attorney knowledgeable in the area of your concern.

Jonathan P. Sauer
Attorney at Law
Suite 416.1410 Providence Highway
Norwood , MA 02062
Phone: 781-255-0222 / Fax: 781-255-9777