Receiving payment for services rendered usually involves a few frustrating circumstances. But some frustrations can be avoided if you closely examine language in documents you sign when submitting progress payment applications. Failure to do so may result in you inadvertently waiving or releasing a claim for additional compensation based on events that occurred during the period covered by the progress payment application.
At the end of a job when negotiating final payment, contractors generally are cognizant their receipt of final payment may constitute a final waiver and release of all claims. However, subcontractors and contractors routinely sign releases and waivers when submitting progress payment application forms required by general contractors and owners without scrutinizing the release language or considering the potential legal effects of the forms they sign.
To reduce their liability exposure to claims from subcontractors, general contractors increasingly are including waiver language in progress payment application forms that are to be submitted by subcontractors as a prerequisite for the general contractor to process the subcontractor's payment request. A subcontractor who fails to review and, when appropriate, revise the language in the payment application, risks losing the right to recover on a claim that can be tracked to an event that occurred during the period covered by the payment application.
Questions to ask
Before executing a partial payment release, examine the release and answer at least these four fundamental questions:
When a subcontractor initiates a lawsuit trying to recover payment, the general contractor may seek to have the lawsuit dismissed based on the waiver language included in payment applications signed by the subcontractor. This is what occurred in Navillus Tile Inc. v. Turner Construction Co.
Navillus Tile Inc., Queens, N.Y., was a subcontractor to Turner Construction Co., New York City, for the construction of a new stadium and related facilities for the United States Tennis Association (USTA) in Flushing Meadows, N.Y. Navillus Tile began work on the USTA National Tennis Center in November 1995. In May 1997, before submitting its final payment application, Navillus Tile submitted a $4 million claim to Turner Construction seeking additional compensation as a result of delays, inefficiencies and extra work. Unable to reach an agreement with Turner Construction, Navillus Tile filed suit to recover its claim.
Rather than delving into the merits of Navillus Tile's claims, Turner Construction sought dismissal of Navillus Tile's lawsuit on the grounds that Navillus Tile had released its claims for additional compensation as a result of its signing 18 progress payment applications.
Each Turner Construction payment application included a "Partial Release and Waiver of Mechanics' Liens and Suppliers' Liens," signed by Navillus Tile, stating in part: "The Undersigned [Navillus] ... waives and releases all liens, actions, debts, claims, demands and other rights now existing, against Owner [USTA] and Contractor [Turner] on account of all work, services, equipment and/or materials performed or furnished by it in connection with the construction of the above-referenced Project through and including the date hereof ... conditioned upon receipt of payment (at which time such release shall be immediately effective and unconditional without further action) ... ."
Turner Construction paid each payment application, which did not seek payment for Navillus Tile's claim. Three of the 18 payment applications were submitted and signed by Navillus Tile after Navillus Tile had written to Turner Construction in May 1997 alleging Navillus Tile was due additional compensation.
Based on the release language in the Turner Construction payment application forms, the trial court judge dismissed Navillus Tile's $4 million claim finding "by the plain language of the releases Navillus unambiguously relinquished any claims it may have had against Turner."
Citing previous New York court decisions, the trial court judge stated in her July 2002 order that a release executed by a subcontractor in favor of a general contractor sufficiently justifies dismissal of claims for additional work, particularly when a subcontractor has ratified the release by accepting contract payments.
In response to Navillus Tile's argument that the language in each payment application stated the release was limited "to the extent of payment actually received," the trial court judge ruled the language made each release conditional on receipt of the amount of the progress payment application. Because Navillus Tile received each payment and stated in the final paragraph of each partial payment release that nothing more was owed, the judge concluded Navillus Tile had released its claims and dismissed Navillus Tile's complaint.
Given that $4 million was at stake, Navillus Tile appealed the trial court's decision. On appeal, Navillus Tile argued the partial releases applied only to the specific progress payments then owed and the parties' conduct indicated their intent was not to waive claims. Turner Construction continued to argue the partial release language was clear and Navillus Tile could not avoid its unambiguous representations that it was not owed any further compensation. The conduct of the parties, relied on by Navillus Tile, was that subsequent to the execution of the last partial release, Turner Construction had issued 12 change orders.
Focusing on the language in the partial releases, the appellate court said Navillus Tile had raised a triable issue of fact because there was uncertainty as to what claims the parties intended to waive when the partial releases were executed. Because "the intent to waive a right must be unmistakably manifested," the appellate court ruled the trial court had erred. Because of the ambiguity in the release language, Navillus Tile's lawsuit was referred back to the trial court where the parties would submit evidence as to what was intended by the partial payment releases.
Although a court's role is to ascertain intent, a court will not look beyond the terms of a written document if there is no ambiguity.
You should expect language in any release you sign to be enforced. An unambiguous, complete release is binding on both parties. Following the same rules of interpretation that apply to all contract documents, courts first will determine whether a document is clear or susceptible to different interpretations. Only if a release's terms are ambiguous will a court allow evidence to be submitted by the parties indicating what they intended by executing the release and facts that support their interpretations.
To not waive or release claims that arose during the period covered by a partial payment request, the best practice is to note on the partial payment release any potential claims that may exist and state they are not covered by the release. Even if a potential claim is not yet defined or never submitted, you do not want to find later you are precluded from making the claim as a result of executing a partial payment release.
If a release states claims are excepted, the party seeking to rely on the release cannot argue the claim was waived or released. If a partial payment release form does not state retainage is excepted from the release's scope, a sentence to that effect should be added to ensure a claim for retainage has not been inadvertently waived.
Even if a claim is not specifically preserved on the partial payment release, if the party making payment has timely notice of a claim and the payment release does not indicate all claims are waived or released, you will not be precluded from prosecuting a claim by virtue of accepting a progress payment.
Finding release language in payment applications was ambiguous, the court in the 1996 case Perosi v. Manshul Construction allowed the subcontractor to prosecute its claims. Perosi Electrical Corp., Staten Island, N.Y., an electrical subcontractor, sued the prime contractor, Manshul Construction Corp., Long Island, N.Y., to recover $53,849.43 for extra work Perosi Electrical alleged Manshul Construction directed it to perform.
Manshul Construction contended Perosi Electrical was barred from recovering money for any alleged extra work based on Perosi Electrical's execution of four standardized monthly payment application forms that included the following language: "And to induce the making of the payment hereby requisitioned, [Perosi] represents that it has no claims against Manshul Construction Corp. or the Owner to the date of this requisition and hereby waives and releases any and all claims, obligations, costs, expenses, cause of actions and liens on the premises ... ."
In support of its position, Manshul Construction pointed to another case, Kay-R Electrical Corp. v. Stone & Webster Construction Inc., in which the 2nd U.S. Circuit Court of Appeals found the language in the prime contractor's requisition form to be enforceable to bar the subcontractor's claims. In this case, the requisition form had a number of blank lines where the subcontractor was to note outstanding claims. However, the federal district court in the Manshul Construction case pointed out the standardized release forms Perosi Electrical signed did not contain any space where Perosi Electrical could list extra work claims.
In the Manshul Construction case, the court considered the release to be ambiguous because of the references in the release to "the payment hereby requisitioned" and "to the date of this requisition"—terms the court said were meaningless because Manshul Construction's payments to Perosi Electrical did not usually correspond to the amount of the requisition.
"If anything, that language implies that Perosi was agreeing to waive all claims with respect to payments due under the contract only," wrote the court, adding vague or ambiguous terms will be construed against the party who prepared the contract.
Because language in the waiver forms was subject to different interpretations, the court ruled the release was unenforceable and Perosi Electrical could prosecute its claim.
Make waivers conditional
Many states have statutes that void contract provisions requiring a contractor to waive his lien rights before construction begins or receipt of payment (and even these statutes may not apply to a lien waiver executed during the course of a job). However, there are no similar statutes applicable to construction claims. Parties are free to contract, release and waive claims as they deem appropriate or, as is often the case, based on what they can get another party, knowingly or unknowingly, to sign.
Always make sure lien waivers and any other waivers you execute are conditioned on receipt of payment. This can be accomplished simply by adding language in a waiver stating "upon receipt of payment."
If you execute a waiver not conditioned on receipt of payment, even if the general contractor does not make payment, you may have waived your rights. There are many court cases where an owner fully pays the general contractor; the general contractor did not pay a subcontractor; and the subcontractor is not able to recover its fees because the subcontractor executed a waiver that was not conditioned on receipt of payment. This is what occurred in the 2004 Wisconsin case Tri-State Mechanical Inc. v. Northland College.
In the Tri-State Mechanical case, the subcontractor was required to furnish a properly executed release and waiver of liens as a condition precedent to the accrual of the subcontractor's right to final payment. The subcontractor completed its work and submitted the required waiver. The owner paid the prime contractor the full $5 million contract price, but the prime contractor never paid the subcontractor. The prime contractor went out of business. The subcontractor filed a mechanics lien. The trial court ruled the subcontractor could not maintain a lien claim because of the lien waiver even though a Wisconsin statute voids a contract provision requiring a contractor, subcontractor or material supplier to waive lien rights or a claim against a payment bond before being paid.
On appeal, the appellate court again found against the subcontractor. In an April 2004 decision, the Wisconsin Court of Appeals stated: "A subcontractor facing a void construction lien waiver provision has a choice: it can either tender a lien waiver prior to being paid or refuse to do so until it is paid. By giving the subcontractor a choice, the legislature has essentially made a policy decision that endorses whatever course of action the subcontractor takes."
Here, the court reasoned, the subcontractor chose to accept the risk of nonpayment. The subcontractor effectively had waived his construction lien by furnishing the unconditional final lien waiver even though he was not paid.
California is an example of a state that has enacted a statute prescribing the forms that must be used for a lien or bond claim waiver to be effective. In the December 2004 case Tesco Controls Inc. v. Monterey Mechanical Co., the California Court of Appeals ruled on the question of whether a subcontractor who had received a partial payment for less than the amount owed had waived its claim for the full amount by executing the prescribed lien waiver form.
Monterey Mechanical Co., Oakland, Calif., was the prime contractor to the city of Chico to expand the city's wastewater treatment plant. Stratton Electric Inc., Chico, was a subcontractor to Monterey Mechanical. Tesco Controls, Sacramento, Calif., was a subcontractor to Stratton Electric. On March 12, 1999, Tesco Controls received a $194,762 check from Stratton Electric. On March 15, 1999, to obtain a joint check from Monterey Mechanical payable to Tesco Controls and Stratton Electric, Tesco Controls gave Monterey Mechanical a lien wavier and release conditioned on receipt of a progress payment of $50,000. The release covered all work performed through Jan. 31, 1999.
At the job's conclusion, because the $194,762 check from Stratton Electric had not cleared the bank, Tesco Controls filed suit on Monterey Mechanical's payment bond. The trial court allowed Tesco Controls to prosecute its suit, ruling Tesco Control's waiver was effective only as to the $50,000 actually received by Tesco Controls. However, the California Court of Appeals ruled Tesco Controls could not pursue a mechanic's lien or bond claim because its March 15, 1999, waiver stated it covered all work performed through Jan. 31, 1999, which encompassed the time period and work covered by the $194,762 check.
The California Court of Appeals ruled the release covered all labor, materials and services provided through the date stated in the waiver and release regardless of whether the amount of the progress payment was sufficient to cover all the work performed through that date.
Watch the language
The release language you are asked to sign might not be limited to claims that arose before signing the release document but could apply to future claims if you still are working on a job. Again, the document's language must be scrutinized.
In the 2004 Massachusetts case, McElectric Inc. v. Travelers Casualty & Surety Co. of America, McElectric, Boston, a sub-subcontractor on a bonded job, signed a release, drafted by Travelers Casualty & Surety Co. of America, St. Paul, Minn., before McElectric completed its work.
The release stated McElectric "releases and forever discharges Travelers ... from all claims, demands, or suits ... in any way connected with the Performance Bond … issued by Travelers."
The release included language stating that it was "expressly intended to cover and release all claims, past, present or future, either known or unknown, which may presently exist or may exist in the future against Travelers" and said McElectric would not bring or prosecute any suit against Travelers Casualty & Surety Co. of America.
After signing the release, McElectric remained on the job for another month to complete work orders it had received before the release was signed. About three months after signing the release, McElectric filed suit for work performed between January 2002 and June 2002. McElectric did not believe this work was covered by the release. In opposing Travelers Casualty & Surety Co. of America's motion for summary judgment in the trial court, McElectric's president submitted an affidavit stating McElectric's settlement did not apply to all of its work.
Although the trial court denied Travelers Casualty & Surety Co. of America's motion on the grounds that the affidavit raised a factual issue regarding the parties' intent, the Massachusetts Appeals Court granted Travelers Casualty & Surety Co. of America's motion based on the release's clear language. The appellate court said the release unequivocally terminated any and all claims, past, present and future, either known or unknown, that McElectric had. The court also pointed out that when the release was signed, the parties contemplated additional work would be done.
Given the express language in the release and absence of language that limited its application to particular work or to work done as of a specific date, the court enforced the terms of the release as written, seeing no reason to allow McElectric to submit any evidence as to its intent.
The McElectric case underscores the need for contractors to closely examine document language when obtaining payment because courts generally will enforce an unambiguous release. Only in rare and unusual circumstances will a court not enforce an unambiguous release that does not contravene a statute.
In the 1974 case of New Again Construction Co. v. City of New York, New York City was stopped from enforcing a waiver of claim for extras where city officials had engaged in unconscionable conduct by giving the contractor oral assurances the waiver language was meaningless. "Economic duress" is a legal theory contractors sometimes use to try to avoid the effect of a release. Although it is a valid legal basis to render a release inoperable, contractors rarely succeed in voiding an otherwise enforceable release based on economic duress because of the stringent standards required by courts to establish economic duress. The party seeking to set aside a release based on economic duress must show the duress resulted from the other party's conduct; assent to the release was involuntary; no alternative was available; and the other party engaged in coercive and wrongful acts that caused the circumstances leading to the involuntary execution of the release.
You need to be vigilant when submitting and signing progress payment application forms prescribed by general contractors. Although release of lien claims up to the amount of and conditioned on receipt of a requested progress payment is not a problem, be sure you are not agreeing to waive claims that arose during the period covered by the progress payment and for which no payment is being made and the release is effective only on receipt of payment. If the release is clear and unambiguous, its terms typically will be enforced even if its scope is much broader than what you intended or thought was encompassed.
When faced with broad release language drafted by a general contractor, narrow a release's scope before executing the document so the release applies only to what you intend. If you are aware of existing change order requests or circumstances that arose during the pay period that might be the basis of a claim, note the existence of such requests and potential claims as an exception to the release if the general contractor uses expansive language and you are unable to narrow the release's text.
Stephen M. Phillips is a partner with the law firm Hendrick, Phillips, Salzman & Flatt, Atlanta.