Departments — January/February 2007

Traps for the Unwary Contractor: Releases in Project Documents

Change orders and payment applications often force contractors to release some rights agreed upon in the original contract documents

J. Bradford McIlvain ATTORNEY AT LAW McIlvain is deputy chair of Dilworth Paxson's Litigation Department and co-chair of its Construction Group. His practice focuses on representing owners and contractors in disputes involving an array of construction projects. E-mail: jmciIlvain@dilworthlaw.com

Natalie D'Amora ATTORNEY AT LAW D'Amora is a member of Dilworth Paxson's Litigation Department and its Construction Group. Her practice includes litigation in state and federal courts relating to contractual, construction, commercial lending and insurance coverage disputes. E-mail: ndamora@dilworthlaw.com

Many documents are generated, issued and signed during the course of a construction project. Some standard documents, like change orders and payment applications, may contain provisions that release important contractor rights. A release may be overlooked by a contractor who views such provisions as irritating legalese or form language.

However, contractors who ignore such language do so at the peril of losing important rights, including the potential to recover for additional work or claims for compensation for delays, impacts or inefficiencies.

Recognizing Releases

Contractors should be wary of contract provisions that contain terms like release, waive, surrender, relinquish or abandon. A release is where one party relinquishes all rights to a claim or some limited rights, like recovering claims from delays or extra work. Releases typically arise in two types of project documents-change orders and payment applications.

Although change orders are a common occurrence, their significance should not be underestimated because a provision in a change order can alter or release rights outlined in the original contract.

As a condition for payment, a contractor may be required to submit a payment application and, where applicable, a lien waiver for the payment amount. A payment application may also include more general release provisions beyond the lien waiver, such as statements that the release is provided in consideration of the amounts and sums received by the contractor, and that the contractor agrees to release all claims arising from the project.

Legal Effect of Releases

By signing a document that contains a release, contractors may waive their right to recover on extra work and delay claims. The scope of a release will generally cover only those claims expressly identified in the release.

Courts can enforce releases even if a party claims it didn't intend to release certain rights, which means that contractors cannot successfully claim they didn't know about the release or hadn't read it before they signed it. Some courts also will enforce clearly drafted releases even if the circumstances indicate that the contractor did not intend to release the claims.

For example, in one case, a subcontractor sued a general contractor to recover claims for extra work, delays and inefficiencies. During the project, the subcontractor executed payment applications that contained broad releases of the contractor's right to recover such claims. However, at the same time, the subcontractor provided oral and written notice to the general contractor about its extra work, delay and inefficiency claims.

The subcontractor argued that its timely conduct of submitting delay claims proved it did not intend to release the claims at issue. The court refused to consider the parties' intentions and held that the clear language of the release prevailed; therefore the subcontractor's claims were barred.

Limitations

Releases contain some important legal limitations. They apply only to claims that arise on or before the date of the release. Another more limited protection for contractors is that releases can be narrowly interpreted to prevent overreaching by the party benefiting from the release, meaning that a court will not stretch it to cover situations not detailed in the release. A release is not effective if it was executed and procured by fraud, duress, accident or mutual mistake. However, those defenses are generally very difficult to prove, particularly in disputes between sophisticated businesses.

Protecting Your Rights

The best way to avoid problems with releases is to negotiate a contract that does not require you to sign a release before receiving progress payments. In addition, agree on the forms you will use for change orders and payment applications before entering into a contract with the owner. Unfortunately, this is sometimes not possible in bidding situations where the contract terms are not negotiated, and the contract presents a "take-it-or-leave-it" situation.

After you enter into the contract, you may still have an opportunity to negotiate with the owner about the forms for payment applications and change orders. You can suggest using the standard change order forms and payment applications, which do not contain releases, and adequately protect all parties involved. You can also try to get the owner to include a statement that explicitly reserves your rights.

As a last resort, if presented with a change order or payment application that contains a release, you can refuse to sign it, but you should do that only after consulting with counsel because the owner may have the contractual right to refuse payment for work you have performed or for additional work. Because a contractor signs the release just to get paid is generally not reason enough to void the release.

On the other hand, an owner who refuses to make undisputed progress payments solely because you refused to sign the release may be at risk for violating your state's prompt payment act. In a recent decision, a court decided that a general contractor who withheld money to obtain a release had engaged in coercive negotiation tactics that violated the state's prompt payment act.

Releases should be entered into only after careful consideration of your rights. Read your change order and payment application forms at the beginning of each project so that you can take all necessary steps to protect your rights.