April 7, 2016

What you need to know about progress payments

Marston

The Washington construction industry is now in the era of Johnson vs. Spokane County.

This 2003 Washington Supreme Court decision (rightly or wrongly) eliminated many common law construction principles limiting the enforcement of contract waiver provisions when no “prejudice” (financial loss due to untimely notice) could be shown. It instead ushered in an era of rigid enforcement making it important to understand (among other things) the proper use — and potential for abuse — of progress payment lien releases.

Contractors (and subcontractors) are frequently required to submit conditional (or unconditional) “progress payment lien releases” with their pay applications as a condition of payment. It is helpful to understand the limited legitimate purpose of such documents, when to use them, and how to avoid unintended waivers when using them.

The legitimate purpose of progress payment lien releases is to compel monthly disclosure by contractors of known, unresolved issues that could provide the basis for a request for additional compensation. This protects owners (or contractors, with respect to subcontractors) from being “blind-sided” with an unexpected claim at the end of a project and enables the party requesting the release to take timely action to reduce losses by investigating, mitigating and documenting the situations.

Disclosure is compelled by including language in the lien releases waiving the contractor's (or subcontractor's) right to seek additional compensation or make lien or bond claims for unreserved issues. Such language might read: “Upon receipt of payment in the amount of $_______, Contractor (or Subcontractor) waives and releases any contract, bond, and lien claims it may have arising out of the work through the date of this pay application.”

Submission of the above signed form — followed by actual receipt of payment — would ordinarily waive the contractor's claim and lien rights arising through the date of the pay application.

The wording and effect of these forms varies between the different organizations using them. For instance, some waive only lien and bond claim rights, but not underlying contract claims. Others may waive both contract claim and lien rights, but only to the extent of payments received (and so merely function as receipts).

A contractor (or subcontractor) can reserve claims (i.e., avoid their waiver) by stating on the form itself an intention to exclude certain issues from the progress payment lien release's waiver and then identifying the reserved issues. Some forms include language expressly providing for such reservations; many do not. Though a particular form may not say unresolved issues can be reserved by listing them (and may not provide a space for doing so), the better view is that specific reservations can always be inserted.

If a particular lien release form does not include language stating identified issues can be reserved by listing them, the contractor (or subcontractor) should add (interline) express reservations before signing and submitting the release. If insufficient space is available on the form, a notation should be added to the form stating reserved claims are identified on an accompanying sheet. Always keep file copies of signed lien release forms and their attachments.

It is reasonable and proper for an owner to require a general contractor (or a general contractor to require a subcontractor) to sign a release of known, unreserved claims as a condition of payment (assuming the contract requires it). However, it is not reasonable to require a contractor (or subcontractor) to release expressly reserved claim items to obtain payment for work already under contract and performed.

Conversely, it is just as unreasonable (and often a breach of contract) to refuse to sign the lien releases, to delete the waiver language from them, or to insert language purporting to make non-specific, general reservations, rather than to make specific reservations of identified incidents. Doing so would defeat the legitimate purpose of compelling disclosure of known, unresolved issues. Whether a description of a particular issue is sufficiently clear to preserve it will depend on the circumstances of the event and the wording used. As a general proposition, the more specific, the better.

The contractor (or subcontractor) may be provided with two release forms, one labeled “conditional” and the other “unconditional.”

The “conditional lien release” is intended for routine progress payments before the work is completed and before final payment is requested. The second, “unconditional lien release,” is intended for use only after completion of the work when final payment is requested.

The conditional lien release (for routine progress payments) usually includes language only waiving claim rights for incidents that arose before the date of the pay request, not for incidents arising later. (They also normally include language reserving the right to payment of retainage.)

The unconditional lien release (for final payment) usually includes language waiving claim rights for all incidents throughout the project.

The two alternative release forms are often seen printed side-by-side on a single sheet within narrow-lined boxes.

Whether on one sheet or two, the contractor (or subcontractor) should sign only one of these forms per pay application — never both. Unless the application being submitted is for final payment, only sign the conditional lien release. If the pay application is for final payment, only sign the unconditional lien release. But before signing either, always consider whether any unresolved issues exist that should be reserved from the waiver and, if so, insert wording on the form identifying and reserving them.

The above advice is general only and should not be relied upon without first obtaining the advice of competent legal counsel.

Terry Marston is an attorney with the Kirkland construction law firm of Marston Legal PLLC. He has represented general contractors, subcontractors and custom fabricators in Washington and Alaska for 30 years.

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