Nevada Supreme Court Decides Enforceability of Contractual Lien Waiver Provisions

The Nevada Supreme Court recently addressed two issues of concern to contractors and owners: (1) the enforceability of lien waiver provisions, and (2) the enforceability of pay-if-paid provisions. Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 124 Nev. Adv. Op. 39 (June 2008), is the latest saga from the Venetian mechanics' lien lawsuits. The case involved the owner and general contractor attempting to foil a subcontractor's lien foreclosure and breach of contract claims by asserting a lien waiver provision and a pay-if-paid provision in the subcontract agreement. The Court declared that Nevada's public policy "favor[s] contractors' rights to secured payment for labor, materials, and equipment furnished." Based on this policy, the Court struck down both the lien waiver provision and the pay-if-paid provision. The subcontract agreement at issue predated the legislative amendments to the mechanics' lien statutes, NRS Chapter 108, requiring specific forms for lien waivers and predated the amendments to NRS Chapter 624, which created Nevada's prompt payment statutes. Although not at issue, the Court thought it necessary to state, without explanation or analysis in what will become known as the infamous Footnote 33, that the amendments to Chapter 624 creating the prompt pay statutes, "make pay-if-paid provisions entered into subsequent to the Legislature's amendments unenforceable."

Mechanics' Lien Waivers
The subcontract agreement between subcontractor Bullock Insulation and general contractor Bovis incorporated a provision from the general conditions in which Bullock Insulation promised "'not [to] suffer or permit any lien or other encumbrance to be filed' against the project." The Court noted that the "lien waiver provision applies regardless of whether Bullock Insulation received any payment" and therefore concluded that "such provision violates public policy, as it fails to secure payment for Bullock Insulation."

The Court assured that not every lien waiver provision violates public policy and that the enforceability of a lien waiver clause must be decided on a case-by-case basis. Limiting the enforceability of lien waiver provisions to the facts of each case seems like a fair result, but the Court gave no guidance as to what types of lien waiver provisions would be enforceable without payment in full. The public policy proclamation coupled with NRS 108.2453(1), which prohibits the waiver of mechanics' lien rights unless the appropriate forms specified in Chapter 108 are completed and payment made, suggest that without payment in full, mechanics' lien rights can not be waived.

Pay-If-Paid Provisions
More disturbing than the Court's treatment of the lien waiver provision is its decision on the pay-if-paid provision. The subcontract agreement contained a pay-if-paid provision whereby Bullock Insulation's right to payment for its work was contingent upon payment by the owner to Bovis. The Court held the provision unenforceable because "a pay-if-paid provision limits a subcontractor's ability to be paid for work already performed" and therefore "such a provision impairs the subcontractor's statutory right to place a mechanic's lien on the construction project." Rather than limit the holding to a case-by-case analysis, however, the Court concluded that all pay-if-paid provisions that were entered into before the amendments to NRS Chapter 624 are unenforceable.

What's more, in Footnote 33, the Court proclaimed,

We note that in 2001, the Legislature amended NRS Chapter 624 to include prompt payment provisions contained in NRS 624.624 through 624.626, which make pay-if-paid provisions entered into subsequent to the Legislature's amendments unenforceable. (emphasis added).

The Court acknowledged that the amendment to Chapter 624 "does not affect our analysis here because it is not retroactive." Yet, the Court rang the bell anyway.

A major problem with Footnote 33 is that the prompt payment statutes in Chapter 624 do not render pay-if-paid clauses unenforceable. In fact, NRS 624.626(1)(b) recognizes that pay-if-paid or pay-when-paid provisions regularly exist in subcontract agreements and grants the subcontractor the remedy of stopping work when a higher-tiered contractor does not timely pay a lower-tiered contractor even if the higher-tiered contractor has not been paid by the owner. Additionally, pay-if-paid provisions do not necessarily eliminate a subcontractor's mechanic's lien rights. Even with a pay-if-paid provision in a subcontract agreement, the subcontractor remains able perfect and foreclose on its mechanic's lien against the owner. Despite these remedies, Footnote 33 effectively makes the general contractor a lender of the owner by requiring general contractors to pay subcontractors when the general has not received payment from the owner. This is true even if the subcontractor has assumed the risk of nonpayment by agreeing to a pay-if-paid provision.

Where To Go From Here
Undoubtedly, the Bovis decision will draw a lot of criticism. A motion for rehearing would not be surprising. The decision makes it more important than ever for general contractors to verify the financial viability of owners to complete a project. So far, the decision appears favorable to subcontractors that are subject to now-unenforceable lien waiver and pay-if-paid provisions. Owners should expect post-Bovis contracts to attempt to allocate more heavily to the owner the general contractor's risk of liability to subcontractors for owner nonpayment. But even a reallocation of risk cannot protect a general contractor from an insolvent owner.