A recent decision from a federal court applying Virginia law
underscores the legal significance of lien waivers and the
importance of following change order provisions in a contract. In
Artistic Stone Crafters, Inc. v. Safeco Ins. Co., et al.,
a subcontractor signed a subcontract requiring (1) that it submit a
lien waiver to the general contractor as a condition of receiving
payment, and (2) that claims for extra work would not be valid
unless authorized by a written change order.
The subcontractor worked for four months, then left the job because
it had not received payment for extra work. At the time of the
subcontractor's departure, the general contractor had issued
two written change orders to the subcontractor and had paid the
subcontractor the original subcontract sum and the amounts
reflected on the two change orders, but had not paid for the extra
work. Regarding the extra work, the subcontractor asserted that it
had repeatedly requested a written change order from the general
contractor but that the general had not issued a change order
because of "clerical problems". Nevertheless, according
to the subcontractor, the general contractor orally authorized the
subcontractor to proceed with the extra work and promised that the
general contractor would pay the additional costs of such
work.
Prior to receiving its last payment from the general contractor,
the subcontractor signed and submitted a "Subcontractor
Final/Partial Waiver of All Claims for and Right of Lien"
which provided that, in exchange for subcontractor's receipt of
payment, "the undersigned hereby waives, releases, and
relinquishes all claims for labor performed, materials furnished,
equipment and/or machinery supplied..." to the project.
In defense of a suit by the subcontractor to collect payment for
that extra work, the general contractor argued two points: (1) the
subcontractor had waived its claim for extra work by signing the
lien/claim waiver; and (2) the subcontractor had failed to obtain a
written change order for the extra work. The court agreed with the
contractor on both points and dismissed the case.
As to the lien/claim waiver, the court noted that the language was
clear and unambiguous and held that the subcontractor had waived
all claims for labor, materials, equipment and machinery provided
on or before the date of signing the waiver. Because the
subcontractor's claim was for extra labor and materials
furnished prior to the date of the lien waiver, it was barred, even
if the general contractor knew that the subcontractor contested the
notion that the amount that it was being paid at the time it signed
the waiver was its final payment on the project.
The court also ruled that, even if the subcontractor had not waived
its claim by signing the lien/claim waiver and accepting payment,
its claim would still fail because the subcontractor had not gotten
a written change order for the extra work. Under Virginia law,
ruled the court, contract requirements for change orders are
binding and are meant to promote order and predictability in the
construction process. The court rejected the subcontractor's
argument that oral promises from the general contractor to pay for
the work constituted a waiver of the written change order
requirement. In making this ruling, the court noted that the
parties had twice followed the change order process for extra work
and that the general contractor had not paid any claims for extra
work without a change order. The burden was on the subcontractor to
show by clear, unequivocal and convincing evidence that the parties
had waived the requirement for a written change order. The court
ruled that the subcontractor could not meet this burden.
This case is a useful reminder of two basic good practices. First,
contractors and subcontractors must read and understand the
language in form lien waivers. When signed, these forms often
release not only mechanic's lien rights, but all legal claims
through a certain date. If there are unresolved claims involving
work performed prior to the date of a lien waiver, and such
disputes are not carved out of the lien waiver, there is
substantial risk that these claims will be lost if the lien waiver
is signed and payment is accepted.
Second, contractors and subcontractors must read, understand and
follow the change order requirements of their contracts. As this
case makes clear, an oral authorization to proceed and promise to
pay will usually not be enough to create a legally enforceable
right to payment if there is a contractual requirement that all
changes be in writing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.