July 11, 2005
The California Court of Appeal recently issued a ruling that defines the scope of the Conditional Waiver And Release Upon Progress Payment under Civil Code section 3262(d)(1).
In Tesco Controls, Inc. v. Monterey Mechanical Company, 122 Cal. App. 4th 1467 (2004), defendant Monterey Mechanical Company was hired by the City of Chico to expand the City’s wastewater treatment control plant. Monterey entered into a subcontract agreement with Stratton Electric, Inc. for the electrical work. Stratton, in turn, issued a purchase order to plaintiff Tesco for certain electrical instruments and controls for the project. The purchase order provided that Stratton would pay Tesco in monthly progress payments equal to 90 percent of labor and materials which had been placed in position. Subsequently, Monterey and Stratton entered into a joint check agreement for the benefit of Tesco under which Tesco would send its invoices to Stratton with a copy to Monterey, and Monterey would pay Tesco by joint check.
Tesco began shipping equipment to the project site in November 1998 and invoiced for its shipments. Tesco received one payment from Stratton directly, but another check from Stratton to Tesco in the amount of $194,762, for work performed prior to January 31, 1999, failed to clear the bank. As of March 11, 1999, Tesco was owed $468,946. On March 15, 1999, Tesco gave Monterey a lien waiver and release conditioned upon receiving a progress payment of $50,000. The release covered labor, services, equipment and material furnished to Stratton through January 31, 1999. At the conclusion of the project, Tesco remained underpaid by $194,762 (the amount of the bounced check) and filed an action against Monterey’s payment bond. Monterey claimed that the waiver and release furnished by Tesco barred it from recovering payment for any work performed prior to January 31, 1999. Tesco argued that the waiver applied only to the extent of the work represented by the $50,000 progress payment for which the waiver was furnished. The Court of Appeal agreed with Monterey. It held that Tesco, by executing the lien release dated March 15, 1999, waived its mechanic’s lien rights, bond rights and stop notice rights for services rendered and materials supplied up to January 31, 1999. But the Court of Appeal allowed Tesco to recover the amount owed from Monterey on the basis that Monterey breached the joint check agreement under which it was obligated to pay Tesco the full amount of the Tesco invoice when normal progress payments were otherwise due.
The Tesco decision provides important guidance on the scope of a conditional waiver and release furnished upon receipt of a progress payment. It is now clear that the waiver and release -- which must follow the statutory language set forth in Civil Code section 3262(d)(1) to be enforceable -- applies to all labor, services, materials and equipment provided through the date set forth in the waiver and release (i. e., the “through date”) regardless of whether the amount of the progress payment is sufficient to cover all work provided before that date. Contractors must accordingly take steps to confirm, prior to furnishing a Waiver and Release Upon Progress Payment form, that the amount stated in the release represents the balance due for labor, services, materials and equipment provided through the “through date”, and that the progress payment check matches the amount stated in the release. The only exceptions to the scope of the release are retention extras furnished before the release date for which payment has not been received, and items furnished after the through date.