On June 12, 2008, the Nevada Supreme Court issued its ruling in what is expected to be one of the last cases arising out of the construction of one of the largest casino-resorts in Las Vegas. The dispute, which began in 2001, resulted in the filing of over $300 million in mechanic’s liens by the casino’s construction manager and its subcontractors and a counterclaim by the owner for more than $220 million for defective and delayed construction.

Although the central issue in dispute between the parties was decided in June 2003, when a jury awarded the construction manager and its subcontractors $44.2 million in contract damages, the Supreme Court’s recent ruling signaled a decisive end to the enforcement of prospective lien waivers and pay-if-paid provisions in construction contracts under Nevada law.

The decision follows the enactment of statutes by the Nevada legislature between 2001 and 2003 designed to eliminate the use of prospective lien waivers and pay-ifpaid provisions in construction contracts, and brings Nevada into conformity with the existing mechanic’s lien laws of many of its neighboring states, including California, in connection with the prohibition against these contract provisions.

THE UNDERLYING FACTS OF LEHRER MCGOVERN BOVIS, INC. v. BULLOCK INSULATION, INC.

On February 15, 1997, the owner of one of the largest casino-resorts on the “Strip” in Las Vegas entered into a Construction Management Agreement with Lehrer McGovern Bovis, Inc. (“Bovis”), under which Bovis agreed to manage the remaining construction of the casinoresort (the “Resort”). Bovis later subcontracted with numerous subcontractors, including the firestopping subcontractor Bullock Insulation, Inc. (“Bullock”).

The subcontract between Bovis and Bullock incorporated the general conditions of the Construction Management Agreement between the owner and Bovis, which included one of the two provisions central to the Supreme Court’s ruling. The subcontract agreement incorporated the Construction Management Agreement’s prospective lien waiver clause, whereby both Bovis and Bullock promised “not [to] suffer or permit any lien or other encumbrance to be filed” against the project. Although the lien waiver clause was located in the agreement immediately following other provisions addressing final payment terms and conditions precedent to final payment, the lien waiver itself was not dependent upon Bullock’s receipt of any payment for its labor or materials.

The subcontract also contained a pay-if-paid provision, under which Bullock’s right to payment from Bovis for its work was contingent upon Bovis’ receipt of payment from the owner.

The dispute arose out of Bovis’ direction to Bullock to perform certain firestopping retrofit work to comply with Clark County Building Department requirements. Retrofitting the walls required a substantial amount of work, as most of the rooms at the Resort had already been completed.

Following completion of the retrofit work, Bullock recorded a mechanic’s lien on the project in the amount of $1,636,170.57 and, thereafter, filed a district court complaint against Bovis for breach of contract and the owner for foreclosure of the mechanic’s lien, respectively. At trial, the district court struck down the lien waiver and pay-if-paid provisions, concluding that Nevada public policy, as codified in 2001 and 2003 by the Nevada legislature, prohibited the enforcement of both clauses.

Bovis then appealed the district court’s rulings.

PROSPECTIVE LIEN WAIVERS FOUND TO BE AGAINST PUBLIC POLICY IF CONTRACT PROVISION FAILS TO PROVIDE SECURITY FOR PAYMENT OF CONTRACTOR

The Nevada Supreme Court, reviewing the district court’s rulings de novo, affirmed the decision, based on a review of the public policy underlying Bullock’s right to payment and ability to secure this right through the recording of a mechanic’s lien.

A contractor has a statutory right to a mechanic’s lien for the unpaid balance of the price agreed upon for labor, materials, and equipment furnished. “The object of the lien statutes is to secure payment to those who perform labor or furnish material to improve the property of the owner.”

“. . . [public] policy strongly supports the preservation of laws which give the laborer and materialman security for their claims.” Underlying the policy in favor of preserving laws that provide contractors secured payment for their work and materials is the notion that contractors are generally in a vulnerable position because they extend large blocks of credit; invest significant time, labor, and materials into a project; and have any number of workers vitally depend on them for eventual payment. (Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc. (2008) 124 Nev. Adv. Rep. 39.)

The court also addressed and explicitly overruled the earlier Nevada Supreme Court decision in Dayside Inc. v. District Court (2003) 119 Nev. 404, in which the court held that

“[a]bsent a prohibitive legislative proclamation, a waiver of mechanic’s lien rights is not contrary to public policy” and will be enforced if it is clear and unambiguous. Because Nevada’s public policy favors contractor’s rights to secure payment, because Dayside removes public policy from the analysis of the enforceability of particular lien waiver provisions, we now overrule Dayside and find that it is appropriate for the district court to engage in a public policy analysis particular to each lien waiver provision that the court is asked to enforce. (Id. at 22.)

Interestingly, the Supreme Court emphasized that not every lien waiver provision violates public policy. “The enforceability of each lien waiver clause must be resolved on a case-by-case basis by considering whether the form of the lien waiver clause violates Nevada’s public policy to secure payment for contractors.” Specifically, the court referred to a series of California cases and statutory lien waiver forms designed to permit lien waivers executed by the lienholder in conjunction with payment, or a promise of payment. (See, e.g., Cal. Civ. Code §3262(d); see also William R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882.)

Stirred to action largely due to this dispute, which began in 2001, and the urging of numerous subcontractor interest groups, the Nevada legislature enacted certain amendments to Chapter 108 of the Nevada Revised Statutes (NRS) to prohibit lien waivers unless such waivers comply with the statutory requirements outlined in NRS 108.2453 and NRS 108.2457. (2003 Nev. Stat., ch. 427, §§25-26, at 2590-95.) As such, the statutory scheme applies to any contract entered into after 2003 and the Supreme Court’s decision, which is consistent with the policy underlying the statutes, applies to any contract entered into prior to 2003.

PAY-IF-PAID PROVISIONS ALSO FOUND TO BE AGAINST PUBLIC POLICY AND UNENFORCEABLE UNDER NEVADA LAW 

As with the legislation spurred by this dispute in connection with lien release clauses, the Nevada legislature also 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. (See 2001 Nev. Stat., ch. 341, §§5-6, at 1615-18.)

Although the statutes were amended well after execution of the Construction Management Agreement and subcontracts incorporating the payment terms of that agreement, the Nevada Supreme Court’s analysis of the enforceability of the pay-if-paid clause followed the policy behind enactment of the amendments. In particular, the Supreme Court stated in Lehrer:

Because a pay-if-paid provision limits a subcontractor’s ability to be paid for work already performed, such a provision impairs the subcontractor’s statutory right to place a mechanic’s lien on the construction project. Nevada’s public policy favors securing payment for labor and material contractors. Therefore, we conclude that pay-if-paid provisions are unenforceable because they violate public policy. (Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., supra, 124 Nev. Adv. Rep. 39 at 26.)

As with its prospective lien waiver clause analysis described above, the Supreme Court held that public policy underlying the statutory amendments by the legislature similarly supported its holding invalidating the subcontract’s pay-if-paid provisions.

CONCLUSION AND RECOMMENDATIONS FOR CONTRACT DRAFTING FOLLOWING LEHRER

The Lehrer case resolves the ambiguity regarding the use and enforceability of prospective lien waiver provisions created in light of the Nevada Supreme Court’s earlier ruling in Dayside. Both the Nevada legislature and judiciary have now issued clear declarations against the use of blanket prospective lien waivers and mandated that all lien waivers are made in conjunction with payment or a promise of payment to the subcontractor.

Similarly, both branches of the Nevada government have expressly prohibited the enforcement of pay-if-paid provisions as contrary to public policy.

Parties to construction agreements under Nevada law should pay particular attention to the requirements of NRS 108.2453 and NRS 108.2457 prior to negotiation of an agreement that includes any type of lien waiver provision.