Construction projects notoriously involve multiple parties. The lender is lending money to the property owner, who hires a general contractor, who hires subcontractors, who in-turn hire sub-subcontractors and suppliers. The contracting chain can go on-and-on for seemingly forever.
While all parties to a project are interconnected by the project’s budget, schedule, payment processing procedure, and more, when it comes time to get paid, they are each quite limited in who they can legally approach for payment.
Under the “privity of contract” theory, which is recognized in every state, a party can only seek recovery from parties they have a contract with. If there is no “contractual privity” between two parties, they cannot seek legal recovery from one another for a contractual breach (i.e. non-payment).
Practically speaking, this means that a subcontractor can sue a general contractor for non-payment, but not the property owner. A sub-subcontractor can only sue a subcontractor, and cannot seek payment from a general contractor; and so on and so forth.
If the party you have contractual privity with goes bankrupt, is judgment proof, or has solvency problems…what can you do? That brings us to the exceptions to the contractual privity rules, and an interesting case in Washington where two of these exceptions intersect.
Unjust Enrichment and Mechanics Liens Circumvent The Privity of Contract Theory
The law provides a variety of ways to get around the privity problem, but qualifying for these exceptions is quite tricky. This blog post is going to discuss the two primary privity exceptions found in construction disputes.
The unjust enrichment concepts sounds like a perfect fit for construction project participants. Any unpaid party can easily argue that the the property owner benefited from their work or materials, and that compensation is required in the interests of justice and fairness. The rigid test controlling what qualifies for unjust enrichment, however, usually holds this exception out of reach. First, Unjust Enrichment is the principle that if one party is benefited by something at the expense of another party, without compensating the providing party, justice and fairness require a compensation absent any contractual relationship. A “quasi-contract” is established between the two parties, and recovery is possible if certain elements are met.
The unjust enrichment concepts sounds like a perfect fit for construction project participants. Any unpaid party can easily argue that the the property owner benefited from their work or materials, and that compensation is required in the interests of justice and fairness. The rigid test controlling what qualifies for unjust enrichment, however, usually holds this exception out of reach.
This exception requires certain elements be met, which usually include all of the following:
- One party must receive a benefit (easy)
- The benefit must be received at the other party’s expense (easy)
- The circumstances make it unjust for the one party to receive the benefit without payment…which requires a review of the justness for both parties, and oftentimes requires that the party shouldering the expense have no other legal theories to recover the amount due. (very hard)
This third very hard element is the reason why we said the below in an article last year titled “Is Unjust Enrichment an Alternative to Mechanics Lien Claims?:”
As a last resort, looking to the unjust enrichment jurisprudence in a project’s state may be worthwhile if you’re left with a claim and no mechanics lien rights. However, it should only be relied upon as a last resort.
In general, it’s very difficult to use unjust enrichment theories to recover against a party you did not contract with on a construction project. Preserving and enforcing your mechanics lien rights would clearly give you this remedy, and therefore, if you can file a mechanics lien it is a much better course of action.
This quote is a great transition into the second exception to contractual privity theories, the Mechanics Lien. The United States has a long history of supporting mechanics lien laws, which stand for the principle that those furnishing labor and materials to the project should be paid no matter what. Accordingly, if you file a mechanics lien claim timely and properly, you’ll be able to circumvent all of the contractual privity problems and recover money directly from the property owner, the general contractor, the property itself, or the lender.
That is a broad statement, and there are certainly a lot of details that creates wrinkles (i.e. Lien Priority, Unpaid Balance States, etc.). Nevertheless, the mechanics lien remedy is strong, and is explicitly designed as an exception to the privity of contract problem for construction project participants.
Washington Appeals Decision Suggests Contractors May Rely On Unjust Enrichment Against A Lender If They Were Promised Payment
The Washington Appeals Court, Division III, recently decided CC&H Investments v. RCS Northwest, LLC. Ahlers & Cressman’s blog published a pithy and informative post on the case with a great explanation of its effect: Contractor May Sue Construction Lender for Unjust Enrichment Based on Lender’s Verbal Assurance of Payment.
There are two very interesting aspects to this decision.
First, a practical aspect. While it is not a good practice for anyone to make out-of-contract promises to other parties, when the going gets touch on construction projects, it seems pretty common for parties to promise payment to other parties if they just keep working. At some point cash flow gets dry and the general contractor, developer, and lenders are all pressured to get the job done, but don’t have the ability to shower every party with the full amounts they seek. They bridge this gap with promises.
Subcontractors and suppliers are all too familiar with getting promises of payment dangled in front of them “if they finish,” or “if they continue to supply,” etc. Accordingly, while this case seems to have pretty small applicability at first blush, when you consider the reality of construction discussions, it may be more common than Division III is thinking. Further complicating the results, is that it leaves open the possibility for parties to create he said / she said arguments about whether payment was verbally assured.
Second, a legal aspect, whereupon the “elements” to an unjust enrichment claim are discussed by the court and arguably softened to accommodate this lender’s alleged verbal promise. Here is what the court had to say about legally qualifying for unjust enrichment:
The general rule is subject to an exception, however, where the third person benefiting has engaged in some misleading act…Among the misleading acts that will support a claim of unjust enrichment is for a lender to urge a contractor to continue working in circumstances similar to those in this case. See Irwin Concrete, Inc. v. Sun Coast Props., Inc., 33 Wn. App. 190, 653 P.2d 1331 (1982) (lender encouraged continued work knowing that foreclosure was looming); cf. Town Concrete, 43 Wn. App. 493 (lender was not unjustly enriched as long as it did nothing to mislead the contractor).
Here, Mr. Hewitt has testified that he was encouraged by Mr. Coles to continue his work, with the clear implication from Mr. Coles being that Mr. Stricklin could be counted upon to perform and pay. He claims to have completed the infrastructure in reliance. These facts, if true, are sufficient to support a claim of unjust enrichment for the incremental benefit, if any, that was conferred by Mr. Hewitt after the conversation with Mr. Coles took place.
Unjust Enrichment Maybe A Little More Interesting Now in Washington, But Still A Long Shot. File Your Lien
What should the construction take from this decision? Probably nothing.
As the title to this conclusion section states, the unjust enrichment remedy may now be a little more interesting for litigants in Washington if they have the right set of facts, but these claims are always a long shot. File your mechanics lien, because it’s still a much better chance than the unjust enrichment claim…but, if it doesn’t work out, as is the case in the August 2013 CC&H Investments case, see if the facts line up to make an unjust enrichment claim.