General Contractor’s Statements to Supplier Sustain Claim for Unjust Enrichment
A recent case from the Supreme Court of Virginia illustrates a twist on a common scenario in the construction industry and also serves as a warning to general contractors who directly deal with lower tier subcontractors and suppliers.
The facts are simple: the general contractor engaged a subcontractor, who then engaged a supplier of drywall and metal framing. Due to the questionable ability of the subcontractor to pay, all three parties entered into a joint check agreement. When the supplier began experiencing delays in payment from the subcontractor, it reached out to the general contractor for assistance. In response, the general contractor directly provided assurances to the supplier that its invoices would be paid. From the court's opinion, “[general contractor’s] assurances to [supplier] resulted in [the supplier] continuing to ship materials to [the subcontractor] rather than withholding materials because the account was past due.”
When a supplier has not been paid by a subcontractor, it typically has three avenues for recourse: (a) a direct contract claim against the subcontractor, (b) a bond claim, and/or (c) a mechanics’ lien claim against the owner. Here, however, the supplier also filed a claim for unjust enrichment against the general contractor, with which it obviously was not in privity, based on the repeated assurances made by the GC. The trial court awarded damages based on the unjust enrichment claim and the Virginia Supreme Court affirmed.
The court rejected the general contractor’s arguments that the joint check agreement constituted a contract between it and the supplier sufficient to preclude unjust enrichment, noting that the joint check agreement by its own terms stated that it was not intended to create any contractual relationship or equitable obligation. Furthermore, the supplier was not making any claim governed or addressed by the joint check agreement itself. The court also noted that the general contractor was not being compelled to pay twice for the materials and that the subcontract cost had not yet been fully paid to the subcontractor.
The court’s comment in response to the GC’s argument concerning a lower-tiered supplier proceeding against a remote higher-tiered contractor is perhaps most poignant: “But here it is [the general contractor] that willingly climbed down the chain of privity to deal directly with the supplier in order to keep supplies flowing. [The general contractor] then used the supplies to complete the project without paying anyone for those supplies.”
General contractors often need to interact directly with lower tiered subcontractors and suppliers in order to keep the project moving forward. However, they should be aware that sometimes their statements can give rise to legal duties to pay those lower tiered subcontractors, with which they are not in contractual privity, when the subcontractors and suppliers are not paid by their direct counterparties.
The case is James G. Davis Const. Corp. v. FTJ, Inc., and can be found here.