Given the amount of leftover Halloween candy in our house, you bet that I can make some deals with my kiddos: “If you do this, I will give you some candy” … or … “If you don’t stop doing this … I won’t give you any candy.”  You see, there are conditions attached to the reward or consequence.

The Supreme Court of Vermont recently held that the conditions attached to a contractor’s payment of retainage to a subcontractor violated the state’s Prompt Pay Act.  In J&K Tile Company v. Wright & Morrisey, Inc., the dispute involved the parties’ separate agreement wherein the contractor committed to pay the subcontractor for delay damages that were beyond the subcontractor’s reasonable control. When the subcontractor was delayed, it submitted claim for $42,00 for the 21 days of delay damages.  By letter to the subcontractor, the contractor refused to pay the additional monies.

In the same letter as its refusal, the contractor said it would release the retainage payment “which was pending receipt of a Waiver of Lien. This payment represents payment in full of your current [contract] amount ….” The following week, the contractor sent the subcontractor the retainage check, even though the subcontractor had not signed the waiver of lien.  Here’s what happened next:

  • The subcontractor not cash the retainage check. Instead, the subcontractor sent contractor a letter, stating that they were “reluctant to … cash the check before there is acknowledgement by [contractor] that the act of cashing the check is not considered … to be a waiver or an accord and satisfaction of the dispute” regarding unpaid funds.”
  • The contractor did not reply. Two months later, the subcontractor sent another letter to the contractor, stating that the “refusal to allow the check to be cashed [was] a wrongful withholding” under the Vermont Prompt Pay Act.
  • The contractor responded to that letter: “Execution of the Waiver and subsequent cashing of the check will not affect your ability to initiate and prosecute your claim against [us.”
  • The subcontractor then cashed the retainage check.

The court held that the general contractor violated the Prompt Pay Act when it insisted that cashing the check would constitute an accord and satisfaction.  That violation was later cured by the general contractor when it confirmed that negotiation of the check would not affect the subcontractor’s rights. Thus, the court held that the contractor had violated the law for a period of about four months and awarded interest to the subcontractor.

The lesson from J&K Tile is one we have discussed before: the “paid in full” principle is not just an old wives’ tale.  Depending on your state’s law, if you negotiate a check that is marked “paid in full” or even “final payment” then you are risking the fact that you may be settling any claims you have.  And now we know the opposite to be true: if you insist on adding conditions to final payment, you may have a violation of your state’s prompt pay act on your hands.