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(A revised version of this article appears in The Construction Lawyer, Volume 24, No. 1, Winter 2004, published by the American Bar Association's Forum on the Construction Industry.)
By John W. Ralls and John A. Foust
Howrey LLP
A Nevada contractor agreed to construct an apartment building. The contract, which was on a pre-printed form, contained a waiver of the contractor's mechanic's lien rights. It provided that the contractor would "not file a mechanic's or materialman's lien or maintain any claim against [the owner's] real estate or improvements. on account of any work done, labor performed or materials furnished under this Contract." Next to this lien waiver, the parties wrote in that the waiver was valid "to the extent such waiver is in accordance with Nevada law."
During performance of the contract, a payment dispute arose, and the contractor recorded a mechanic's lien against the property. When the contractor brought an action to foreclose, the owner moved for summary judgment on the ground that the contractor had waived its lien rights. The Nevada District Court agreed with the owner and dismissed the contractor's mechanic's lien claim. The contractor appealed to the Nevada Supreme Court. The Nevada Supreme Court affirmed. Dayside,
Inc. v. First Judicial District Court, 75 P.3d 384 (Nev. 2003).
On appeal, the contractor argued that the contractual lien waiver was void because it violated the public policy of promoting payment of materialmen and laborers. The court, however, disagreed. Citing an annotation in the American Law Reports, 76 A.L.R.2d 1087 (1961), the court wrote:
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It is well settled in other states. that a clear and unambiguous provision in a contract whereby a contractor waives his rights to a mechanic's lien or agrees not to file a lien is valid and binding and will preclude the contractor from asserting a right to a lien.
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After noting the absence of Nevada statutory law to the contrary, the court held that a waiver of mechanic's lien rights was not contrary to public policy.
In addition to the public policy argument, the contractor raised a series of other arguments. The contractor argued that the waiver was unenforceable because the owner's non-payment amounted to failure of consideration, invalidating the entire agreement. The contractor also argued that the waiver was unenforceable because it was not backed by separate consideration. The court rejected both of these arguments, holding that the inadequacy of the owner's payment was an issue of breach rather than a failure of consideration and that the owner's promise to pay more than $9 million for the construction of the building was sufficient consideration to support the waiver.
The contractor also contended that it had not voluntarily agreed to the lien waiver because it did not realize the potential import of the waiver. The court quickly dismissed this argument, pointing out that the waiver was clear and unambiguous and that the contractor must have recognized its meaning when the parties altered the pre-printed form to state that the waiver was enforceable to the extent permitted by Nevada law.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com, John Foust in our San Francisco office at 415-848-4901 or at foustj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2004 Howrey LLP
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