Contractors spend considerable time negotiating contracts before signing up to do a project. Particular attention is often paid to provisions that shift risks between the parties, such as liability for damages, non-payment, insurance, delays and concealed job-site conditions. By the time a contractor executes a contract, he usually knows exactly what he is signing. But the same attention may not be given to language in other contract documents that are signed during the course of constructing the project, such as payment applications and releases. Provisions that a contractor accepts after thorough negotiations can be drastically modified with the simple stroke of a pen if these other documents are signed without understanding what they mean. If a contractor fails to fill out other contract documents accurately, unintended consequences can result.
Payment Applications It is common for contractors to have to certify in payment applications that the work is complete and that the contractor has paid all its debts through the date of the previous payment application. However, it may be difficult to estimate the percentage of work in place, and contractors may rely on subcontractors to develop the percentages. Further complications arise when a contractor has to withhold funds from a subcontractor for non-performance after the owner pays those funds to the contractor.
The problem lies in the certification language often found in payment applications. The application may require the contractor to swear that the statements in the applications are accurate. During a dispute at the end of a project, a contractor’s credibility – along with the quality of documentation – will be key to his or her success. If an arbitrator, judge or jury can’t trust the contractor or the contractor’s records, the contractor will have less of a chance of winning even if the claim is completely legitimate.
Payment applications also serve as snapshots of when a contractor performs work. The application should help the contractor accurately determine deadlines for notices of lien and bond claims. If the information regarding percentage of work complete is not accurate, contractors may unknowingly miss deadlines and fail to secure liens against the project. It will be difficult to convince an owner or the court that you performed work in the following month when there is a sworn payment application that states otherwise.
If a contractor cannot swear to statements contained in the payment application, the contractor should readjust the figures in the application or revise the certification language to carve out exceptions. This will help the contractor maintain accurate records and avoid missing a deadline to make a claim.
Releases Partial and final releases often contain language that can create difficulties if not understood prior to execution. Although releases often look the same from one project to the next, they deserve more attention than they are typically given. Contractors often view releases, particularly partial releases, as simply releasing a claim, but only up to the amount paid and nothing more.
There is more to releases than the amounts written into the blanks. Many releases are broad form waivers, requiring a contractor to release all claims that may exist up to the date of the release. In this regard, the release is not really tied to the amount paid.
Courts have held that a properly drafted release, even if in the form of an interim, partial release, can effectively bar all claims of any nature arising prior to the date of the release. This would include claims related to the schedule, unresolved changes, unforeseen conditions, breach of contract by the owner, design related claims and damages associated with each, just to name a few. In this sense, a release can extinguish rights the contractor previously negotiated into the contract – including the right to make claims, apply for payment and resolve disputes – without anything more than a simple signature.
Contractors should negotiate the terms in partial and final release as if negotiating the contract itself. Making the necessary and appropriate revisions will avoid the risk of unintentionally signing away rights.