ConstructionPro Week, Volume: Construction Advisor Today - Issue: 34 - 12/17/2009

Can A Contractor Reserve A Claim While Accepting Final Payment?

Under the terms of virtually every construction contract ever drafted, the contractor’s acceptance of final payment operates as a waiver and release of any existing claims. A Texas contractor recently tried to have it both ways. The contractor submitted an invoice for the contract balance. But, the transmittal letter said the contractor reserved its rights under an existing,

unresolved differing site condition claim. The owner issued a check for the invoiced contract balance and the contractor deposited it. The contractor then argued that this had not been true “final payment” because the reservation of rights letter notified the owner that the contractor expected additional compensation.

 

Is there any way a contractor can legally and ethically accept final payment without releasing existing claims -- and a bar against future claims? This language is consistent with a general rule of contract law. The project owner is entitled to closure. It is a final payment.

As always, I invite your comments below on this topic.

 

Don't miss next week's issue of Construction Claims Advisor:

  • Retainage of Disputed Change Order Amounts Upheld
  • Contractor Lost Rights against Sub’s Performance Bond
  • Bid Disqualified Due to Incomplete Questionnaire

 

Bruce Jervis, Editor
Construction Claims Advisor

 

Comments


The contractor should have eliminated "final payment" terminology, requisitioned for the balance of 100% of the contract amount and reserved the right to his claim for unresolved issues on the requisition. If the owner paid the requisition then the owner would have accepted the contractor's intent to pursue payment for the unresolved issues. If the owner did not pay the requisition, the contrator would have to merge the requisitioned amount with his claim for the unresolved issues.

 

I m an Indian Expatriate from United Arab Emirates involved in te field of Contracts Management. According to Fidic conditions and those modified to suit locally, the validity of Contract extends till the end of defects liability period. Hence the Contractor reserves his right on variation claims. However, any claim related to time, the claims needs prior to taking over of the project.

 

The Contractor must frame its decision based upon the contract language. Any modification of or amendment to the contract would require the agreement of both parties. Assume that the contract stipulates that the contractor's "...acceptance of final payment waives all rights and/or remedies...". A cover letter would not suffice in modifying this provision since the contractor cannot unilaterally modify the terms and conditions of the contract. An amendment executed by both parties would be required. On the other hand, the Owner does not have the contractual right to withhold final payment hostage until the contractor acquiesces. To avoid such practices, the contract should carefully address how disputes are resolved, including those remaining unresolved when final payment is due.

 

We just had this happen on a contract. When we received the last payment the government had language on the check from the county "Final payment". We sent a letter back and stated, there was still a claim out and by cashing this check we are not giving up our right to the claim process, we gave them 48 hours to respond if they disagree.
They sent back a response to not cash the check, our attorney sent them back a letter reminding them, they have to pay for undisputed work of which had been done. Their attorney agreed and told us to cash the check. Most contracts and all AIA contracts that I have seen do not allow for the owner to with hold funds on undisputed work. If it is work that is in dispute, they have to put a fair value on that work and can only hold out that amount of money.

 

A contract is a contract and should be held to the terms of the agreement...A claim or disagreement is a seperate item and should be treated as such and can be settled any time during or after the contract.. Final payment can be a seperate disagreement ......And there is the withholding of 10% that might also come in to play..BUT...If you can't trust your contractors,, who can you trust ???

 

“Yes” any contractor can claim additional money after payment of final bill provided he give his intention in writing before the receipt of payment and also he has submitted written confirming he has no further claims

 

Final Payment is just that, final so long as it is paid within the terms of the contract. To reserve ones rights does not uilaterally change the terms of the contract. It is highly advised that some sum of the contract amount remain open, even a dollar, thus making the contract still in force. Even from the standpoint of the owner, they may want this condition as well in order to uncover latent defects. But terms should be kept in force by mutual agreements. Likewise, this places some items in question as well, such as substantial completion, start of warrenty, project turn-over etc. It is a two bladed sword. You play with fire when you do not fully agree with both parties.

 

This is another question which comes down to taking the individual circumstances into account. Anything else is just general hypothesizing. No matter what, the devil is always in the details. In this case, it appears that the contractor over-extended his services during the coures of the project by performing work related to an existing, unresolved differing site condition without a processed change order. If this is the case and the parties involved are at an impass, then the contractor should have seeked legal council for advice on how to proceed for this individual case, and accodingly, explain his position and outline his course of action to the owner, as advised.

 

All the above advice is fine BUT many owners will not issue the retainage until the disputes are resolved. Make sure your contract specifies that retainage is to be released upon substantial completion, save for double the amount sufficient to cure any outstanding punchlist items. Then, as one writer observed, this is just one more progress payment.

 

To follow up on several of the comments, in the case in question the contractor avoided using "final payment" language. But the court said an invoice for the contract balance could be nothing else, substance over form, etc. Also, the contract stated (as so many do) that acceptance of final payment operated as a waiver and release of any further claims. The court said the contractor could not unilaterally alter the terms of the contract with a transmittal letter.
Also, I agree with the commenters who pointed out that there are frequently contractual and statutory prohibitions on withholding funds for undisputed work.

 

The discussion was interesting and raises many valid points. However, in the State of new York, and probably in other jurisdictions as well, there are court decisions whihc say that, at least in the arena of public contracts, clauses which provide that acceptance of final payment consittutes a release of all pending cliams are enforceable, and that a contractor's unilateral attempt to except its claims from its payment application are ineffectual. Many modern contracts, however, including City of New York contracts, have provisions that can be used to ameliorate the harsh effects of such clauses. For example, some have procedures for the reservation of claims at the time of submission of a substantial completion payment requisition, and which reduce retainage to 1%, wherein the contractor reserves its claims by specifying them in a "bill of particulars" submitted with its substantial completion time extension request. He then gets retainages brought down to only 1%. He still cannot accept the last 1% final payment without waiving his claims, however, unles he commences suit, and by motion convinces the court to severs his cause of action for the remaining 1 % contract balance, allow him to accept the City's check, and have the balance of his claims preserved. It is soemtimes possible to enter into a stipulation with the municipality through its counsel that eliminates the need for such a procedure, but they will rarely do so if the contractor ahs already blown it by accepting the final payment. In some case, the municipality has been prohibited from enforcing the clause where the fianl payment was not clearly desginated as a "Final Payment."

 

 

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