What happens if a lower-tiered contractor provides higher-tiered contractor with an unconditional release of mechanics lien rights in exchange for payment by check, only to have that check returned for insufficient funds? This was the scenario presented to the Nevada Supreme Court in Cashman Equipment Co. v. West Edna Assocs., 132 Nev. Adv. Op. 69.
The case involved the construction of the new Las Vegas City Hall. Whiting Turner Contracting (“WTC”) served as the Project general contractor. WTC selected Mojave Electric (“Mojave”) to serve as the Project electrical subcontractor. Cashman Equipment Company (“Cashman”) originally submitted a winning bid to Mojave to provide specialty materials. However, WTC mandated that Mojave involve disadvantaged business entities, so Cam was selected for this purpose to serve as an intermediary between Mojave and Cashman.
Pursuant to their respective agreements, Mojave paid Cam (the intermediary) for services provided by Cashman. In turn, Cam issued a check to Cashman for the equipment provided. Cashman executed an unconditional release of its mechanics lien rights in exchange for the check. However, Cam’s check to Cashman was returned for insufficient funds, and Cashman’s subsequent efforts to obtain payment were unsuccessful (Cam’s owner absconded with the payment from Mojave). As a result, Cashman recorded a mechanics lien and eventually filed suit to foreclose the lien.
The trial court refused to enforce Cashman’s mechanic’s lien and upheld the unconditional release despite the fact that Cashman had not received payment for its work. The trial court also found that Mojave’s payment to Cam constituted payment to Cashman because Mohave’s check to Cam was honored. Cashman appealed to the Nevada Supreme Court.
The Nevada Supreme Court reversed the trial court decision and held that the unconditional release was void. The Court compared the subject release to a “pay-if-paid” provisions commonly found in construction contracts. In a separate case, the Court previously had held that “pay-if-paid” provisions were unenforceable because they violate public policy. Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 124 Nev. 1102, 1118, 197 P.3d 1032, 1042 (2008). Similarly, the Court found that enforcement of the subject release would violate Nevada’s public policy favoring mechanics liens to ensure payment to those who provide labor or furnish materials to improve property. The Court further found that the subject release was statutorily unenforceable pursuant to NRS 108.2457(5)(e), which precludes enforcement of a waiver when the payment exchanged for the release is in the form of a check that fails to clear the bank “…for any reason.”
Although not specifically discussed in this case, Cashman ultimately prevailed because it complied with the specific requirements set forth in Nevada’s mechanics lien statutes. This case is also illustrative of Nevada’s strong public policy protecting contractors’ payment rights.