If you're not being paid, then don't provide lien waivers saying that you are. That's the clear lesson in a recent case, J.H. Larson Electrical Company v. Rochon Corporation. In J.H. Larson, the Minnesota Court of Appeals rejected the bond claim of an electrical subcontractor's supplier because the general contractor had relied upon full lien waivers from the supplier when making progress payments to the subcontractor. Leonard, Street and Deinard successfully represented the contractor in making this argument.
The supplier never complained about being unpaid, and did not file a bond claim, until after the electrical work was complete and the contractor had paid the electrical subcontractor over 97% of the subcontract price. The supplier then served a $167,969.12 bond claim against the contractor's payment bond surety.
In refusing to pay the bond claim, the contractor argued that the supplier should be "estopped," or barred, from collecting on the claim. During the project, the electrical subcontractor had provided the contractor with lien waivers from the supplier stating that the supplier had been paid in full and leaving blank the space for filling in the amounts still owed by the subcontractor. If the supplier had not provided these lien waivers or had otherwise complained about not being paid, the contactor argued, the contractor would have issued joint checks or taken other steps to ensure that the supplier was paid.
The Court noted that contractors customarily insist upon lien waivers on both public and private projects as a way to monitor payments from subcontractors to lower-tier subcontractors and suppliers. If the lien waivers do not indicate the balance, or if the lower-tier subcontractor or supplier does not otherwise complain about being unpaid, the contractor will justifiably assume that the lower-tier supplier has been paid and will pay the subcontractor.
The J.H. Larson case illustrates how insisting upon lien waivers can help protect projects from mechanic's liens and payment bonds. This particularly applies to suppliers who furnish materials to subcontractors for a number of different jobs. When the subcontractor's payments begin to slow, the supplier may threaten to stop delivery on active jobs unless the subcontractor keeps paying off old jobs. The subcontractor then uses money from current jobs to pay off old jobs; and the supplier knows it can rely on the payment bond on the current job to be made whole. (The supplier doesn't have any legal obligation to file a bond claim until 120 days after last furnishing materials.) The supplier doesn't complain to the contractor because it knows that, if it does, the contractor will start issuing joint checks and the subcontractor won't be able to pay off older jobs on which the supplier's lien and bond rights have already expired. At the end of the job, still within the 120 days, the supplier may file a bond claim for a large percentage of the materials that were furnished to the current job. In the J.H. Larson case, the contractor and surety were surprised by the unexpected bond claim; but they were protected by the lien waivers.
Lien waivers are a valuable tool, but contractors cannot rely upon them in the face of other information indicating that the subcontractor is not paying its lower-tier subcontractors and suppliers. If the supplier provides a full lien waiver, but also complains to the contractor about not being paid, the contractor must investigate the supplier's payment status. If the supplier is in fact not being paid, then the contractor should issue joint checks, pay the supplier directly or take other steps appropriate to avoid lien or bond claims.