As the construction boom continues in Washington (and especially in Seattle), owners and developers look for ways to mitigate risk on projects. Risk mitigation is often accomplished through negotiated terms and conditions of the parties’ contractual agreements. One such risk mitigation tool that should be considered and implemented concerns lien releases.
Lien release forms vary in their terms and effect. Some are little more than receipts for money paid; others release all lien rights and underlying claims for payment with respect to any work done during stated time periods. See A.A.R. Testing Lab., Inc. v. New Hope Baptist Church, 112 Wn. App. 442, 50 P.3d 650 (2002) (lien waivers given with progress payments released lien rights with respect to work through stated dates).
Thus, it appears that lien rights may be freely released even before a lien claim is recorded. But can lien rights be waived or released prospectively, before work begins that creates the lien rights? Technically, the answer is no: a substantive statutory right cannot be waived before that right exists; accordingly, such waivers are void. See Bowman v. Webster, 44 Wn.2d 667, 669, 269 P.2d 960 (1954) (“The right, advantage, or benefit must exist at the time of the alleged waiver.”). Because lien rights are substantive statutory rights, they cannot be waived (unilaterally, without consideration) before they have arisen.
So, can lien rights be released (for consideration) before the work begins? Suppose a construction contract contains the following provision: “contractor agrees not to assert any rights against the project property under Chapter 60.04 RCW.” Would such a provision be enforced in Washington? The lien statute does not directly resolve this question, nor does any published Washington case. The following considerations are relevant, but provide conflicting authorities for and against prospective lien releases:
- The lien statute provides that acts of coercion or attempted coercion, including threats to withhold future contracts made to discourage a person from submitting a pre-claim notice or from recording a claim of lien, are unfair and deceptive acts. RCW 60.04.035. A violation of this statute could result in the imposition of severe penalties, including treble damages and attorneys’ fees, under Washington’s Consumer Protection Act, Chapter 19.86 RCW. This statute, however, does not clearly apply to prospective lien releases, but, even if it does, it seems to say that only “coerced” lien releases are ineffective. Whether a negotiated contractual term for consideration that prospectively forecloses the right to a lien claim constitutes “coercion” is debatable.
- The lien statute expresses a strong policy of protecting potential lien claimants (particularly those with limited bargaining power, like material suppliers, lower-tier subcontractors or laborers) at a very early stage, even before they file a pre-claim notice. RCW 60.04.021. This public policy argument in favor of lien rights may call into question the enforceability of such advance releases, particularly those that may impact lower-tier subcontractors or suppliers through contractual “flow-down” clauses.
- The common law rule is that prospective lien releases are enforceable. See J.A. Bock, Annotation, Validity and Effect of Provision in Contract Against Mechanic’s Lien, 76 A.L.R.2d 1087 (collecting cases). At least one older federal court case in Washington seems to have assumed that prospective lien waivers could be utilized. See Haskell v. McClintic-Marshall Co., 289 F. 405 (9th Cir. 1923) (although in that case, the court held that the lien releases were induced by fraud, but raised no objection as to such waivers generally).
- A subordination agreement, where the parties agree to subordinate lien rights to (usually) a mortgage interest, is enforceable, even if made before the lien rights have arisen. If this very important lien right (priority) can be released before it arises, it would seem reasonable that other lien rights can also be released.
- Most states have restricted the enforceability of prospective lien releases by statute. Since Washington is not one of those states with anti-advance lien waiver or release legislation, an argument could be advanced that restrictions to prospective lien releases should be made clear through legislation on the subject.
Although some of the above considerations suggest that a prospective lien release might be enforced in Washington, the proof would have to be clear and any element of coercion would raise a risk of liability under RCW 60.04.035. Given the lack of clear authority, however, the effectiveness of a prospective release is not assured. The safest course might be to pattern a proposed lien release on forms that have proved effective in disclaiming implied warranties. See, e.g., Mattingly v. Palmer Ridge Homes, LLC, 157 Wn. App. 376, 395-96, 238 P.3d 505 (2010) (disclaimer of implied warranties is effective if conspicuous and bargained for).
As the enforceability of prospective lien releases remains a debatable issue under Washington law, perhaps the safest course for owners and developers entails the execution of conditional and unconditional lien release agreements at each progress payment and in exchange for final payment. Until legislation is promulgated to address the validity of such releases, contracting parties risk running afoul of the underlying protective policy of the lien statutes and potential liability under Washington’s Consumer Protection Act for coercion in contracting.
Originally published as “OP-ED: Advance contractual lien releases in Washington” on January 18, 2018, by the Daily Journal of Commerce.