Consider this scenario: an Owner hires a Contractor to build a project, and periodically pays the contractor’s invoices as the work progresses. At the end of the project, they do a walk-thru together, and a final payment is made, paying the full contract price. Later the Owner learns that a lot of the work she paid for was done incorrectly. The Contractor refuses to fix it, and she sues. His defense is: “You paid for it after inspection, so you must have found it satisfactory.” Will this defense fly?
Before diving into this “voluntary payment” defense, a distinction needs to be made between problems that are visible at final inspection and problems that first surface later -- such as a heating system that was working fine at the walk-thru and malfunctioned later. The Contractor’s warranty should cover the latter eventuality. And the “payment” defense doesn’t work.
The thornier question arises when the defect is patent rather than latent, ascertainable by any reasonably thorough inspection. Our Supreme Court has employed this definition of "latent" in the context of a subsequent purchaser of a house with defects: “Where all of the relevant facts underlying the alleged defect are known or discoverable to the subsequent purchaser upon reasonable inspection at the time of the purchase, no claim for latent defects can later arise.” Page v. Willey, 139 N.H. 33, 35 (1994). The same definition is appropriate when paying a contractor as when paying the seller of a house.
In commercial construction it is common for a third-party inspector, such as an architect or engineer, to do the final walk-thru and approve final payment (or hold back a portion of it pending completion of a punch list). In residential construction, that rarely happens. A building inspector might do an inspection to search for code violations, or a construction lender’s rep might take a look at the final product before authorizing the last draw on the loan, but even they can miss patent issues. And when it is just the untrained eye of the owner, more can be missed.
Owners have the legal right to withhold payment for patently deficient work, and if they do not exercise that right, courts will sometimes conclude that they have knowingly and willfully waived it, in effect accepting the condition of the work as it is. To date the New Hampshire Supreme Court has not directly tackled this issue in the context of a construction case, but our common law in general has treated voluntary payments made under no duress as nonrefundable. E. D. Clough & Co. v. Boston & Maine Railroad, 77 N.H. 222, 251 (1914) (“It is the settled law of the state that money voluntarily paid (that is, without coercion of any kind) cannot be recovered back.”).
At the same time, there is another strain in the law holding that "A willful act, however, does not include 'an accident or an act committed on the basis of a mistake of fact." New England Homes, Inc. v. R.J. Guarnaccia Irrevocable Trust, 140 N.H. 732, 740 (2004), The mistaken impression that workmanship is fine when it isn't surely counts as a mistake of fact.
There is an obvious tension between these competing legal principles. Without more guidance from our Supreme Court, it is difficult to predict how the courts will interpret the making of payment for defective work that was discoverable by the payer on a reasonable inspection, or whether a different standard will be applied to residential owners without sophistication in construction or agents helping them inspect the work.
Parties can deal with this uncertainty by inserting provisions in their contract addressing whether payment is or is not deemed acceptance of the work. I have seen many commercial contracts with such anti-waiver provisions. Section 9.4.2 of the AIA form A133 (2019), for example, states "Payment by the Owner of any Certificate for Payment shall not be deemed to waive any of the Owner’s rights to later claim that the Work covered by a Certificate for Payment was not properly completed or not completed in accordance with the Contract Documents."
Before diving into this “voluntary payment” defense, a distinction needs to be made between problems that are visible at final inspection and problems that first surface later -- such as a heating system that was working fine at the walk-thru and malfunctioned later. The Contractor’s warranty should cover the latter eventuality. And the “payment” defense doesn’t work.
The thornier question arises when the defect is patent rather than latent, ascertainable by any reasonably thorough inspection. Our Supreme Court has employed this definition of "latent" in the context of a subsequent purchaser of a house with defects: “Where all of the relevant facts underlying the alleged defect are known or discoverable to the subsequent purchaser upon reasonable inspection at the time of the purchase, no claim for latent defects can later arise.” Page v. Willey, 139 N.H. 33, 35 (1994). The same definition is appropriate when paying a contractor as when paying the seller of a house.
In commercial construction it is common for a third-party inspector, such as an architect or engineer, to do the final walk-thru and approve final payment (or hold back a portion of it pending completion of a punch list). In residential construction, that rarely happens. A building inspector might do an inspection to search for code violations, or a construction lender’s rep might take a look at the final product before authorizing the last draw on the loan, but even they can miss patent issues. And when it is just the untrained eye of the owner, more can be missed.
Owners have the legal right to withhold payment for patently deficient work, and if they do not exercise that right, courts will sometimes conclude that they have knowingly and willfully waived it, in effect accepting the condition of the work as it is. To date the New Hampshire Supreme Court has not directly tackled this issue in the context of a construction case, but our common law in general has treated voluntary payments made under no duress as nonrefundable. E. D. Clough & Co. v. Boston & Maine Railroad, 77 N.H. 222, 251 (1914) (“It is the settled law of the state that money voluntarily paid (that is, without coercion of any kind) cannot be recovered back.”).
At the same time, there is another strain in the law holding that "A willful act, however, does not include 'an accident or an act committed on the basis of a mistake of fact." New England Homes, Inc. v. R.J. Guarnaccia Irrevocable Trust, 140 N.H. 732, 740 (2004), The mistaken impression that workmanship is fine when it isn't surely counts as a mistake of fact.
There is an obvious tension between these competing legal principles. Without more guidance from our Supreme Court, it is difficult to predict how the courts will interpret the making of payment for defective work that was discoverable by the payer on a reasonable inspection, or whether a different standard will be applied to residential owners without sophistication in construction or agents helping them inspect the work.
Parties can deal with this uncertainty by inserting provisions in their contract addressing whether payment is or is not deemed acceptance of the work. I have seen many commercial contracts with such anti-waiver provisions. Section 9.4.2 of the AIA form A133 (2019), for example, states "Payment by the Owner of any Certificate for Payment shall not be deemed to waive any of the Owner’s rights to later claim that the Work covered by a Certificate for Payment was not properly completed or not completed in accordance with the Contract Documents."
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