Beware Partial Releases and Waiver of Claims are Enforceable, But Can Be Waived

In the construction industry, the payment application process usually requires contractors and subcontractors to complete a great deal of paperwork. In addition to submitting traditional payment applications that identify the contractor’s or subcontractor’s schedule of values, work completed to date, and balance to finish, contractors and subcontractors may also be required to submit certain lien waivers, certifications, affidavits, and other types of sworn representations. While these additional submissions may seem clerical, or even ceremonial in nature, they can have serious legal ramifications.

For example, many owners, construction managers, and prime contractors are now requiring that contractors and subcontractors sign “partial releases” and “waivers of claims” each month as a condition precedent to payment. Typically, these releases and waivers require the contractor or subcontractor to affirmatively acknowledge that it is waiving all claims for delay, inefficiencies, or other additional costs through the date of the release in exchange for the money requested in the payment application.

Generally, courts have enforced progress payment releases that waive delay and disruption claims. In Kleinknecht Electric Co. v. Jeffrey M. Brown Assocs., Inc., No. 4997 (C.P. Philadelphia April 10, 2006), the general contractor required, as a condition for payment, that its subcontractor provide partial releases with each of its payment applications. During the course of the project, the subcontractor executed 25 consecutive partial releases. Each partial release stated that upon payment of the amount set forth therein, “all rights and claims on the project are released [through the date of the release].” Despite the releases, the subcontractor submitted a “cost impact” claim for $2.8 million for damages it allegedly suffered as a result of delays and impacts it encountered on the project. On a motion for summary judgment, the trial court dismissed the subcontractor’s delay and impact claim, because the court found that the subcontractor waived its right to assert such a claim by executing the partial releases. Although this ruling could be construed as harsh, the court’s decision was consistent with similar holdings. G.R. Sponaugle & Sons, Inc. v. Hunt Constr. Group, Inc., 366 F.Supp.2d 236, 237 (M.D. Pa. 2004); ILM Systems, Inc. v. Suffolk Constr. Co., 252 F.Supp.2d 151, 158 (E.D. Pa. 2002); Academy Electrical Contractors, Inc. v. Nason & Cullen Group, Inc., No. 3252 Commerce Program (C.P. Philadelphia January 14, 2004).

Recently, the United States District Court for the Eastern District of Pennsylvania held in Lydon Millwright Services, Inc. v. Ernest Bock & Sons, Inc., 2013 U.S. Dist. LEXIS 65019 (E.D. Pa, May 7, 2013) that partial releases and waivers, in certain situations, are enforceable and can preclude a contractor or subcontractor from asserting a delay claim. This court, however, also found that a prime contractor or owner can waive the enforcement of the release through its actions, course of conduct, and/or other communications.

In Lydon Millwright, a subcontractor filed a lawsuit against a general contractor for approximately $2 million in damages allegedly incurred as a result of certain delays encountered on a construction project. During the course of the project, the subcontractor executed and submitted 54 releases to the general contractor that stated in relevant part:

the undersigned does hereby release all . . . claims as against the Contractor . . . resulting or arising from labor . . . and/or materials, subcontract work, equipment or other work, rentals, services or supplies heretofore furnished by or on behalf of the undersigned in and for the construction, design, improvement, alteration, additions to or repair of the above described Project including but not limited to any claims arising from delay . . . incurred by the undersigned on the Project from the beginning of time thru [the date of the release].

The releases submitted by the subcontractor also provided that:

this instrument shall constitute a complete release of all . . . claims. . . of the undersigned against the Contractor . . . in law or in equity arising out of or pertaining to the above referenced Project that the undersigned may have, whether known or unknown, through the date of this release (which includes the period above). To the extent that there are claims that the undersigned wishes to reserve and except out of this release, they are detailed with specificity on the reverse side of this release [which the subcontractor left blank].

Based on the language cited above, the general contractor filed a motion for summary judgment and argued that the subcontractor’s execution of monthly releases precluded the subcontractor from moving forward with its delay claim. In its ruling on this motion, the Court acknowledged that the language in the releases would ordinarily bar the subcontractor’s claim. The Court, however, denied the motion, because there was an issue of fact as to whether the general contractor waived its right to rely on the releases by, inter alia: (1) making overtures that it would “take care” of the subcontractor; (2) discussing the possibility of entering into a “liquidating agreement” and proceeding jointly against the owner; (3) engaging in settlement discussions; and (4) representing in other legal proceedings that the owner was liable for the subcontractor’s claim.

As a result of the decision in Lydon Millwright, contractors and subcontractor need to understand that executing monthly releases and waivers are not clerical tasks, and carelessly signing these documents can have serious ramifications. Similarly, owners and contractors that want to enforce these releases need to be very careful in how they acknowledge or review subsequent claims.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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