Getting paid on a construction project is often more difficult than it should be. As a subcontractor, you have a couple different remedies available to collect in case of nonpayment. One such remedy is called an unjust enrichment claim, which allows a sub to look for compensation straight from the owner, since they benefitted from your hard (unpaid) work.
But when issues come up between the owner and the GC, the ripple effects up and down the payment chain can be disastrous. Take, for example, a recent Ohio Court of Appeals decision that ruled in favor of the owner on a sub’s unjust enrichment claim — because they were also harmed by the GC’s default.
Unjust enrichment claims in construction
If you’re a subcontractor working on a project and you go unpaid by the person you contracted with (mechanics liens notwithstanding), the best option to recover is to sue that party for breach of contract. It’s fairly straightforward: Two parties had an agreement — one to perform work, and the other to pay for the work. If someone doesn’t hold up their end of the deal, they can be forced to do so in court.
But what if that party doesn’t have adequate funds to cover your losses? Cue an unjust enrichment claim. These types of claims allow you to look beyond the person you contracted with to cover your losses; specifically, the party who received some sort of benefit from your hard work; i.e. the property owner. To successfully make a claim under unjust enrichment, a benefit must be conferred upon a party, the party had knowledge of such benefit, and allowing them to retain that benefit without payment would be unjust.
The operative word here is unjust. What is, or more importantly, what isn’t an “unjust” enrichment? And what constitutes a “benefit?” A recent Ohio Court of Appeals case explores these issues in more detail.
When is ‘unjust enrichment’ not an unjust enrichment?
The case in question is Sterling Contracting, LLC v. Main Event Entm’t, LP.
- Owner: Main Event Entertainment, LP (Main Event)
- General contractor: Omni Construction Company, Inc. (Omni)
- Subcontractor: Sterling Contracting, LLC (Sterling)
- Represented by: Robert Wilson & Michael Wilson of Wilson & Wilson Co., LPA
Omni was a general contractor on a project owned by Main Event to build a commercial entertainment center. The original contract price was $8,681,026 with 10% of the contract price withheld as retainage — however with multiple change orders and addendums, the contract price increased to $9,460,969. Omni had subbed the concrete work to Sterling under a $745,000 subcontract, which eventually rose to $32,978 with the aforementioned change orders.
GC exits the project leaving many subs unpaid
Disputes between Omni and Main Event arose, and Omni eventually walked off the project, leaving several subcontractors, including Sterling, unpaid. Sterling in particular was left with an unpaid balance of almost $115,000.
Prior to default, Main Event had paid Omni roughly $7.6 million in project funds, so between the unpaid balance and retainage funds, Main Event had $1,829,123,30 left for the project. As you could guess, a fair amount of mechanics liens were filed against the property, and it cost Main Event $2,030,244.10 to resolve these claims.
For those doing the math at home, that’s $201,120.80 over the contract price to settle the lien claims, not to mention an additional $288,000 needed to complete the project. Sterling, who failed to properly perfect a lien claim, filed an unjust enrichment claim against Main Event.
At trial, Main Event claimed that the “benefit” had not been unjustly retained in light of all the costs required to complete Omni’s work and the exhaustion of the retainage funds, and moved for summary judgment. The trial court granted the motion, and Sterling filed a timely appeal.
Unjust enrichment claim dismissed: Both the sub and the property owner were harmed
The issue on appeal was whether Main Event was indeed unjustly enriched. The court conceded that it is well-established under Ohio law that, “‘[w]hen a subcontractor is not paid by the contractor and the owner has not paid the contractor for some aspect of the job at issue, the subcontractor can look to the owner for payment under a theory of unjust enrichment for the funds or value retained under the unsatisfied contract price.”
Here’s the kicker: Unjust enrichment claims aren’t meant to compensate a claimant for their losses, but rather, compensate them for the benefit they conferred on the other party. So, how exactly did Main Event benefit from Sterling’s work? Yes, Sterling contributed a fair amount of labor and materials to improve Main Event’s property — but at what cost?
Main Event exhausted the retainage funds to satisfy the lien claims, and the unpaid contract amounts were wiped out to complete the project. Thus, although Main Event benefitted to some degree from Sterling’s work that went unpaid, that isn’t enough to justify an unjust enrichment claim.
The court reasoned that Main Event did not unjustly retain a benefit because they paid way more than the value of the contract with Omni to complete the project.
Here’s the reasoning in the court’s own words:
“We cannot award Sterling its requested relief because it cannot demonstrate a superior equity such that it would be unconscionable for Main Event to retain the benefit of the work performed by Sterling.
We find no equitable reason to permit an aggrieved subcontractor to obtain restitution from the owner or lessee who paid more than the contractual price to complete a project after the general contractor breached its independent obligations to both parties, especially after that owner or lessee has exhausted the retainage funds following the breach to satisfy debts owed by the general contractor.
In this situation, no benefit was unjustly retained beyond the benefit originally contemplated under the terms of the construction contract; an amount equal or greater to the value of the contract under which the benefit was created was ultimately paid for the benefit received.”
To sum things up: Both Sterling and Main Event were harmed by Omni’s actions. But a ruling in favor of Sterling would effectively be punishing Main Event for a wrong they didn’t commit. Sterling was harmed for unpaid services and materials amounting to nearly $115,000 while Main Event was harmed in an amount totaling nearly $300,000 to remove the lien claims and complete the project. Accordingly, the court affirmed the trial court’s decision to grant summary judgment in favor of Main Event.
Key case takeaways
Sterling was put in a tough spot here, but there are ways to avoid this situation in the first place.
First and foremost, always look into a general contractor’s creditworthiness before signing on to a project. Prequalifying a GC is an invaluable way to ensure that payment runs smoothly on a project; whether it be reviewing their payment history, or simply reaching out to other subs that have worked with that GC to get a firsthand account of how that particular GC operates.
A second, and perhaps even more crucial step for subs, is to secure your lien rights. If Sterling had properly perfected a mechanics lien, they would have been paid off like the other 30 subs that went unpaid after Omni defaulted.
In Ohio, this means ensuring that a Notice of Furnishing is sent out within 21 days of starting work on the project, and tracking your lien filing deadline, which is 75 days from the last date you performed work on the project.
Whether the GC is a longtime friend, or a first-time customer, securing your ability to file a lien if a payment issue arises is always a smart business decision.