Partial Releases of Liens May Limit Claims

By: Nicole H. King, Esquire nhk@muslaw.com

Partial releases and waivers of liens have become commonplace as a requirement for subcontractor payment. A recent ruling in Philadelphia County imposed significant restrictions on a subcontractor’s ability to recover payment for delay and impact claims when such releases are signed.

In Kleinknecht Electric Co. v. Jeffrey M. Brown Associates, Inc. and Federal Insurance Company, Kleinknecht Electric entered into an electrical subcontract with Brown, the general contractor. The actual cost of work exceeded the original contract price, thus requiring Kleinknecht to submit change orders. Throughout the project, Brown required Kleinknecht to submit partial releases and/or waivers of liens as a pre‑condition to payment.

At the conclusion of the project, Kleinknecht filed suit against Brown and its surety, Federal Insurance Company, to recover payment for extra work performed by Kleinknecht. Kleinknecht also sought to recover money for an impact claim – valued at nearly $3,000,000 – that it had previously asserted against Brown in a change order.

Strictly construing the language in the partial release, the court held that Kleinknecht was barred from pursuing any claim – including its impact claim – that existed at the time it executed the partial release. The court reasoned that since Kleinknecht had previously asserted the claim in a change order, it was undoubtedly aware of the existence of its claim and had failed to reserve its rights or limit the terms of the release. Consequently, the court held that Kleinknecht was barred from pursuing its impact claim.

The court rejected Kleinknecht’s defenses of economic duress and unknown value. Specifically, the court held that Kleinknecht was aware, at the outset of the contract, that it would be required to sign partial releases. It did not matter if Kleinknecht needed the money to finish the project and therefore felt coerced to sign the partial releases. Similarly, the court rejected the notion that the unknown value of Kleinknecht’s impact claim preserved the claim. It did not matter that Kleinknecht could not have known the value of the claim until the conclusion of the project.

The court did note, however, that Kleinknecht could have preserved its claim by limiting the terms of the release or reserving its rights to bring a claim at a future date. Of course, whether a contractor will issue payment upon receipt of a qualified partial release is always an open question. In the meantime, however, contractors and subcontractors must consider the consequences of signing any partial release or waiver of liens without preserving existing claims. If the claim is reserved, there is a question of whether payment will be made. However, if the claim is not reserved, it could be waived.

For more information about the Kleinknecht case or construction law issues, contact Nicole H. King at 412-456-2559 or nhk@muslaw.com.