One of the most common and avoidable mistakes made by construction contractors and subcontractors involves the execution of overly broad “partial” lien release documents in order to receive progress payments. Typically, the partial release document provides that the party receiving payment releases all claims of any type arising out of work performed through the end of the monthly payment period. While, at first blush, this may seem to be a reasonable and innocuous request in order to receive payment for work performed during that month, this type of release also has the unintended effect (from the contractor’s perspective) of releasing the contractor’s claims for work performed prior to the end of the month, but for which no payment has been received, such as pending change orders or unpaid retainage.
This very scenario occurred in the recent unpublished Washington appellate decision, Exterra, LLC v. Cle Elum Gateway Property, LLC, __ P.3d. __, 2014 WL 6601992 (2014) (Unpublished Opinion). In Exterra, an excavation subcontractor working on a McDonald’s restaurant project in Cle Elum filed suit to foreclose its $48,704.00 mechanic’s lien. The project’s general contractor filed a motion for summary judgment to dismiss the suit based on two conditional and three unconditional lien waivers the subcontractor had signed to receive progress payments in the amount of only $14,315.27. The last of the waiver documents released all of the subcontractor’s claims for work performed on the project through the date of December 31, 2010. The conditional waiver form the subcontractor executed provided a blank space for the subcontractor to identify as an exception to the waiver any items that were in dispute. The subcontractor left the blank spaces empty. The subcontractor’s lien identified January 4, 2011 as its last day of work, but in a response to a discovery request that asked the subcontractor how it calculated its lien claim, the subcontractor identified invoices and change orders showing the last day of work to be November 16, 2010, six weeks prior to the date in the signed release document.
The subcontractor attempted to get around the releases by claiming that its understanding of the release was that it was only releasing its rights as to amounts it had been paid, and that it was not releasing rights for monies that had not been paid. The subcontractor also claimed the releases were ambiguous because they contained language stating that the releases were “partial” and that the unpaid balance of the subcontract would be paid upon final completion. Division III of the Washington Court of Appeals held that the subcontractor’s understanding of what the releases meant to be irrelevant to interpreting the plain language of the signed document, which released all claims in exchange for payment. Further, the Court ruled that the references to a partial release and payment of final completion referred to work performed by the subcontractor after the release date and did not make the release ambiguous.
Not only did the subcontractor lose any right to collecting any of its unpaid claim as the losing party in the lien action, the subcontractor was ordered to pay $25,607.74 to the general contractor for its attorneys’ fees in the trial court, plus any additional fees incurred in the appeal.
Comment: Many contractors, subcontractors, and suppliers will involve company owners, upper management, and legal counsel in negotiating the terms of their initial contracts, yet delegate the review and ultimate execution of partial waiver and release documents to lower-level project managers or office accounting staff as mere routine paperwork associated with monthly billing. Execution of overly-broad partial lien release documents – such as what occurred above – may be the single biggest and most common mistake we see in our practice and is completely avoidable. A short communication and review by experienced construction counsel the first time a partial waiver form is proposed is all that is required to ensure that the party receiving payment does not inadvertently waive claims for amounts in dispute or which have not actually been paid.