Up Front Waivers – Know The Consequences
If you are asked to give a waiver either by an owner or a general contractor before payment is received there are consequences that you need to be aware of. Most likely the form waiver will state the amount you are receiving and recite that you acknowledge receipt of the same. This is true for either a partial or final waiver. If you are giving the waiver up front you are acknowledging receipt of payment even though you have not received the funds. If the check is received then “no foul, no harm.” But what if you don’t receive payment?
While you can attempt to condition the waiver i.e. state that the waiver is not good unless payment is received, most title companies look for this type of language and will not accept a conditional waiver. If you give the waiver and the owner relies upon it in paying the general contractor and the general does not pay, you have waived out your mechanic’s lien rights. If you are a material supplier and the general pays the subcontractor to whom you have issued the waiver and the sub fails to pay you then your lien rights are waived. In these situations you have no recourse as against the owner or if you are a material supplier as against the general contractor I am told it is becoming commonplace to be required to furnish these up front waivers. If you do and are not paid what do you do?
The Illinois mechanic’s lien act has two provisions that address obtaining a waiver and then not paying. One provision provides that if a general contractor or if the gc is a corporation any officer or employee who with intent to defraud induces a subcontractor to execute and deliver a waiver of lien for the purpose of allowing the general contractor to obtain payment and upon the representation that the gc will from such payment pay the sub the amount owed and who willfully fails to pay the subcontractor in full within 30 days after such payment is received is guilty of a Class A misdemeanor.
In Illinois a Class A misdemeanor can be punishable by a prison sentence of less than one year and a fine not to exceed $2500. While this provision of the Act may sound onerous note what has to exist. There has to be “intent to defraud” and a “representation” of payment and then a “wilful” failure to pay. An action to enforce this provision of the Act would have to be brought by the State’s Attorney of the County where the situation arose. My experience is that State’s Attorneys offices are not inclined to become involved in this type of situation. My opinion is that if all of these elements are present and can be proven you would have a common law action for fraud. Note that if a corporation is involved it is the individual who is liable and the corporate shield from personal liability does not apply. Given that many companies now do business as LLC’s I think the form of that type of entity would also be disregarded by the courts. In addition to the actual damages sustained if you can prove the elements listed in the Act I believe a claim could be made for punitive damages. To date there are no reported cases dealing with this provision of the Act.
Another provision of the Act provides that if a waiver is requested and delivered and used to obtain payment then the moneys that are received are held in trust for the benefit of the entity that gave up the waiver. Commingling of the funds is not a violation of the Act. However, if the moneys are not paid over then any owner, contractor, subcontractor or material supplier who knowingly retains or used the money held in trust for any purpose other than paying is liable for all damages sustained.
There is one reported case out of the Bankruptcy Court that has dealt with this provision of the Act. Let’s say a general contractor requires a waiver from a sub and receives payment. The general puts the money in its bank account but does not pay the sub. The general files bankruptcy. If the sub can trace the funds based upon this case an argument can be made and would most likely succeed that those funds are not the general contractor’s but held in trust for the subcontractor and are not subject to being used to pay other creditors of the general.
While the Act provides for remedies where an up front waiver is given and payment not received as can be seen the road to a recovery is not going to be easy. The better practice is to not provide a waiver until payment has been received or simultaneously for payment. As we all know the “real world” does not operate this way. You are going to encounter situations where you have to give a wavier “up front”. In doing so now you know the consequences.