Articles

PLEASE RELEASE ME – LET ME GO

Kevin J. Taylor, Esq,

In the course of my practice I am often asked questions about releases and their effects, what language should they include or what should be agreed to or rejected.  I am surprised at how often even the most sophisticated client has misunderstandings or misconceptions regarding the law relating to releases. This article attempts to clarify some common misconceptions that I have had occasion to address. By no means is this meant to be a full or final discussion on the topic.

A Release is a Contract

A release is a document which, depending on its terms, usually has one party agreeing to forgo, release or waive some legal rights in exchange for payment from the other party.  A release and a waiver are essentially the same thing.  A release, or waiver, is a contract, i.e. one party agrees to do something in exchange for the other party doing something. Accordingly a release is construed under the rules of contract law.

Contract law holds that the specific relationship between two parties, including their  rights and obligations, are determined by the language of the agreement.  As such the words in a contract or release must be thoughtfully chosen. When choosing those words it is imperative to remember every word counts.  So, regardless what was discussed before the contract was signed, or what one feels is normally done in any particular situation, the actual language in the document is what controls the situation.  If a contract states that you will sell your car to someone for $50 – you must sell you car to them for $50.   If the terms of this auto sale contract are clear and unambiguous the courts will enforce those clear and unambiguous terms.  Similarly, a release which states a party has been paid in full and as such waives any further rights for collection, will be construed to mean the party has been paid in full, and any subsequent action for collection will be prohibited.

Further, if the terms of the contract, or release,  are clear and unambiguous, the law does not allow someone to explain “what the agreement really meant” later.  This is called the parol evidence rule and it bars parties from offering testimony or other evidence as to the “true meaning” of the agreement.  The actual language of the agreement. or release,  is considered to be the true meaning and will govern.

The strict construction of the language of a release can be problematic. As example, a party has submitted a pay requisition for $1000 on September 30, with payment to be made within 30 days.  During October an additional $1000 worth of work is performed.  On October 30 payment is tendered for the September 25^th requisition. In exchange for that payment a release is signed stating the payee has been paid “for all labor, material and services provided through the date of the release”.  In essence the party has released their right for payment of the work performed in October.

To slightly modify the above scenario, say there is a pending change order on the project. The change order was verbally approved and the work was done and the change order submitted September 15. The requisition is submitted September 30, but does not include the change order as it is still pending.  On October 30, payment is tendered, and  the release has a “worked through date “ of September 30.  In this case the party did not release the work it performed in October, but did, at least technically, release payment for the change order work.

These scenarios beg the question – “Should the release reflect the amount of money being received or should it reflect the date the payment was made.?” The answer to that question is – it depends.  Either is really ok if the parties are acting in good faith and are cognizant of the implications of the release. Releasing rights through a date is not a problem if the release notes exceptions, i.e. unpaid change orders, work provided after the requisition date but before the payment date, retainage, and so on.

Consideration

Another basic element of contract law is the concept of “consideration”. Consideration in a construction contract setting is generally the exchange of money for labor, material or services. However consideration could also be an agreement to forgo legal rights, to forbear on enforcing legal rights, and other like “benefits”.  So while consideration is necessary for an enforceable release, it does not have to be an exchange for money.

Very often, parties will provide a $10 release.  Meaning the consideration for the release is recited as “in exchange for $10 and other valuable consideration”. This is unnecessary and in fact may prove detrimental.   If a party is exchanging a release for a sum of money, and the parties feel a need to recite a dollar figure, the release should specify the actual amount of money being provided.  I know of a situation where a party provided a “ten dollar release” and was not paid. When arguing the release was not enforceable the other party said  “OK, here is Ten Dollars, now the release is enforceable.”  There is really no good reason to do a “ten dollar release”.   If you are the paying party it would be helpful to have the release reflect exactly what was paid so there is no confusion later. If you are the payee you want the exact amount of the payment so if you do not receive that full amount, the release will fail for “lack of consideration”. This lack of consideration defense is discussed further below.

What Can Be Released?

A party to a construction contract has lien or bond rights, contract rights and equitable rights.  Further, a party could have causes of action in negligence, which are also known as “torts”.  A release can release any or all of those rights.

For clarification, equitable rights are those which arise from equity or fairness. A typical equitable claim is titled “unjust enrichment”.  A claim for unjust enrichment is exactly what it sounds like. If a party received a benefit and did not pay for it they would be “unjustly enriched” by the value of the benefit received. The law surrounding equitable claims is far beyond the scope of this writing but is mentioned as those are valuable legal rights which can be forever waived if the language of the release specifies it.

A lien release provided under §713.20, discussed further below, is exactly that – a lien release. It does not, without added language, release contract or equitable rights. Nor does it bar a claim in negligence or other tort.  To be effective as to all claims, the release must specify that.   Sample verbiage which would be effective to bar all claims could read something like: “this release shall relate to any and all claims, demands, damages, actions, causes of actions, or suits in law or equity, or whatsoever kind or nature.”   Lastly, the release should be as specific as it can be, naming the project, including the address if practical,  the names of the parties to the release, dates, amounts, etcetera.

While a release should include all claims the parties wish to extinguish, the release can also carve out any claims, causes of actions or other issues the parties wish to retain. For example, say the parties to a final release want to release each other except for future warranty issues. That could easily be accomplished by simply including a sentence which carves out those issues.  Likewise, the party giving the release could easily carve out claims they want to retain or otherwise exempt from the release. These could include claims for wok performed but not paid, retainage, unpaid change orders or others extras, etcetera.  To beat a dead horse even deader, as with any contract, the language of a release can be crafted to fit any situation and the specific language governs.

Lien Rights

It is important to note that a party cannot release their lien or bond rights in advance. I have seen, though rarely, contract clauses which state that the contracting party agrees to not file a lien claim on the project. This is unenforceable in Florida.

The Florida Legislature has provided suggested forms for lien releases. These forms are included in Chapter 713 of the Florida Statutes which governs Construction Liens. Hence any language or guidance provided within this chapter applies only to lien releases.  §713.20 provides a form release for progress payment (subsection (4)) and a form release for final payment (subsection (5)).

Subsection (6) provides:

(6) A person may not require a lienor to furnish a lien waiver or release of lien that is different from the forms in subsection (4) or subsection (5).

However, subsection 8 states:

(8) A lien waiver or lien release that is not substantially similar to the forms in subsections (4) and (5) is enforceable in accordance with the terms of the lien waiver or lien release.

The two sections seem to conflict.  One says a person cannot require a lienor to execute a release different than the forms provided, but the other says that a release different from the forms is still enforceable. The key word is require.  There is nothing in the statute that says that the parties cannot agree to another form of release which does not comport with the suggested forms.

The parties can agree to any language, and even if the language is different from the statutory forms it will be enforceable. The most common way I have seen this done is by attaching a suggested release to the contract.   Once the contract is signed, the release has been agreed to. Another way I have seen this handled is the paying party will require two documents. One is the statutory lien release and the other contains language to release contract and equitable rights. There is no statutorily suggested, or mandated, language for releases which waive a party’s contract or equitable rights

A satisfaction of lien is a document which must be recorded to extinguish a recorded claim of lien. Like any other release, the satisfaction can be quite specific as to its intent and effect. If a party has recorded a lien, but agrees to satisfy the lien to cooperate with the owner, say to allow payment from a lender, a satisfaction can, and should, say just that. A typical satisfaction has verbiage indicating the Lienor has received payment. That language can be removed and replaced with something along the lines of: “Lienor has not received payment and is recording this satisfaction as an accommodation to the Owner. Lienor does not release any of its rights of collection and reserves the right to record another lien for all amounts unpaid.”  Please note this will not extend the 90 day window in which a lien must be recorded.

Conditional v. Unconditional

More often than not releases flow up – then the payment flows down.  As such, it is not uncommon for parties to sign releases acknowledging they have received payment, when payment has not been received.  This is based, at least partially, on the fiction that actors in the construction process pay those downstream prior to their being paid.  The reality is the opposite. Rarely do you find a project being funded up front by the contractors, with the contractors waiting to be reimbursed by the Owner.  This fiction causes more heartburn and legal entanglements than almost any other aspect of the construction process.

This could all easily be avoided by simply recognizing this fiction and utilizing “conditional “releases in the process.   A conditional release is a release which includes language indicating that the release is not effective until the payment it was exchange for is actually received. Hence the release is “conditional” on payment.  This conditional release would be given as the first release with an unconditional following after the payment is received.  To illustrate, Gerry GC forwards its first requisition for payment with a conditional release, and a conditional release from any subs or suppliers for whom payment is being sought. Gerry GC’s second request would be forwarded with an unconditional releases from itself and the subs for the amounts paid in requisition #1 and a conditional release for the amounts being sought in requisition #2  and so on.  The foregoing scenario would eliminate a lot of the friction between GCs and subs.

Reliance and Lack of Consideration

As with any ‘”hard and fast” rules of law there are exceptions, and sometimes exceptions to those exceptions. The most common exceptions regarding the enforceability of releases are reliance and lack of consideration.

I have often heard: “I signed that, yes, but they know I was not paid”.  If it can truly be shown that the person getting the release knew that the person giving the release has not been paid, and they did not “rely “ on the  release, they cannot use the release as a defense to payment.  The reliance defense occurs when someone did not rely on the release to take a particular action, let’s say payment. In the construction hierarchy, the reliance exception is mostly commonly available in situations where the parties are in contract with each other. Say the Owner / GC or GC/Sub relationships.  In that setting the fact that the other party knew the release was forwarded prior to payment, they will not be allowed to use the release as a defense.

Where reliance is less effective is in the Owner/Sub situation. Typically, the Owner will request releases from the GC prior to the Owner forwarding payment to the contractor.  If the  Owner receives a release, which states that  the releaser has been paid, and he relies on that language to forward payment to the GC, the sub has released his rights as to the Owner and the reliance defense will not be effective.

Similar to a contract, a defense to the enforcement of a waiver occurs if the payment is not actually received. As discussed, a release is a contract and if the payment has not actually been received then the release fails for “lack of consideration”.  Also keep in mind the previous discussion concerning $10 releases, if someone wanted to be cute they could just hand over $10 and cure the lack of consideration.

Conclusion

It is imperative that prior to drafting, or signing a release, the parties to that release contemplate exactly what they want accomplished. Further, remember that understandings that are not included in writing in the release may very well have no effect.  Lastly, always remember that the happy trusting team that starts a project all for one and one for all often disintegrates into bickering lawyered up individual members as the project progresses. Better to be safe than sorry.

As was stated in the beginning, this article is an attempt address different scenarios I have seen over and over through the years. Hopefully it will clarify certain aspects of the law concerning releases.