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Be Careful With Lien Releases, They Can Do More Than Release Just Liens

7/9/2014 | Construction Blog

Executing releases of mechanic’s liens is an all too common part the application for payment process on construction projects. Often times, payment is not released by the party upstream until that release of liens is submitted. Contractors and subcontractors alike should be particularly careful, however, when signing these lien releases. They are powerful documents that can result in a complete dismissal of much more than just the right to file a mechanic’s lien.

The recent holding in Conestoga Ceramic Tile Distributors, Inc. v. Travelers Casualty and Surety Company of America reinforces the aforementioned concept. The background of the case is not an unusual occurrence and can easily happen to the lackadaisical or unsuspecting contractor. After payment was slow in coming, a deal was reached in which the subcontractor was to, among other things, submit a lien release to have the disputed payment released. The payment never came; but the surety issuing the payment bond was also found to have been free of liability because of the language in the release of liens.

The case arose out of a project done by IMC Construction for the Pennsylvania College of Technology. IMC provided the college with a payment bond issued by Travelers, pursuant to which Travelers agreed to accept liability if IMC defaulted on any of its obligations to Pennsylvania College or its requirement to pay the subcontractors and suppliers. IMC then contracted with Profast Commercial Flooring for a portion of the work; and Profast entered into a sub-subcontract with Conestoga to provide the tile for the project.

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A payment dispute arose and was allegedly settled between the parties. As part of the agreement to resolve the issue, Conestoga agreed to and in fact signed a “Lower Tier Vendor Final Waiver and Release”. The release contained language which stated that Conestoga “forever releases and discharges IMC, Profast, and Penn College from all claims, demands, and causes of action, arising from or relating to Conestoga’s labor, materials, and/or services provided to the project.” Two joint check agreements were also signed by which Conestoga was to be paid. Despite signing the release and the join check agreements, Conestoga was still not paid approximately $170,000.00 by Profast.

Assuming its lien rights to be waived, Conestoga submitted a claim to Travelers for payment under the Payment Bond issued for the project. Travelers denied the claim. A Complaint was thereafter brought against IMC, Travelers, Penn College, and Profast for payment of the balance owed. Before the case could really get underway, the Court granted judgment on the pleadings as to all Defendants based on the language in the release of liens. The dismissal even included Travelers as the surety.

The Court held that the typical language in a payment bond which states that if a general contractor pays its subcontractor in full that the surety has no further obligations served as protection for the surety. In this case, the Court dismissed all of Conestoga’s claims, including those against parties with whom Conestoga did not have a contract. The decision was based on the release of liens, which the Court held was a contract requiring enforcement of clear and unambiguous language. The release of liens had to be enforced no matter how “improvident” it later turned out to be for Conestoga. As a result, a simple release of liens was expanded to cover the surety and the owner, thereby depriving Conestoga of any ability to get paid for work it performed despite an acknowledgment the money was owed.

The moral of the story is simple: be very careful about signing lien releases. Words matter, and the language in a lien release is sometimes crafted more broadly than is necessary to achieve the limited objective of releasing a lien. If the language is too expansive, it can result in a release of claims against the payment bond too. It is also worth eliminating the need to sign lien releases on public projects where mechanic’s liens are not permitted at the time of contract formation. Do not assume that because the document appears superfluous it will have no affect on you.

In short, think hard before you sign any document that uses the words “waiver” or “release”. The consequences can be more far reaching than expected.