Subcontractors on stilts installing drywall

The Virginia Supreme Court recently upheld a decision allowing a material supplier to make an unjust enrichment claim against a general contractor with whom they did not have a contract. The supplier provided materials to a subcontractor on the project for which they were never paid. The court held that a sub-tier material supplier was allowed to recover directly from the general contractor.

Unjust enrichment claims

Generally speaking, in the construction industry, to file a lawsuit to recover payment, the action will be limited to the party with whom you contracted with. This is known as privity of contract. When there is no privity of contract, there is one option for recovery under unjust enrichment, but only under specific circumstances.

To be successful in an unjust enrichment claim, there are three basic elements that must be proven:

  1. The defendant received some sort of benefit
  2. They knew of the benefit and should have reasonably expected to pay
  3. The defendant accepted the benefit without payment

This doesn’t require privity of contract. But there must be some sort of relationship between the parties. If so, the law will declare an implied contract between the parties and allow for recovery. However, this is only available under very limited circumstances.

A recent case out of Virginia dealt with such limited circumstances. The decision held a general contractor liable for construction materials provided by one supplier to one of the GC’s subs. This was due to the existence of a joint check agreement and multiple assurances of payment.

Subcontractor default leaves unpaid balance to supplier

The case in question is Davis Constr. Corp. v. FTJ, Inc. f/k/a Ciesco, Inc.

Project Snapshot:

Davis was acting as the general contractor for the construction of a condominium complex. They hired H&2 to perform metal framing and drywall who, in turn, contracted with FTJ to supply the drywall materials. According to the parties, a joint check agreement was entered into to “ensure the smooth operation of the project.”

The agreement was fairly standard. It stated that payments for materials would be made by a check payable to both parties and that payments would be made when payment is due to the subcontractor.

General contractor assures supplier of payment

Construction began, and FTJ started shipping materials to the job site. As the project progressed, invoice payments became increasingly delayed. FTJ reached out to Davis about the payment problems and they were reassured that they would be paid. H&2 eventually defaulted. Upon default, Davis informed FTJ to stop delivering materials to the project and assured them that they would be paid for any outstanding invoices.

However, after the sub was terminated, Davis had incurred additional costs to replace the subcontractor. They informed FTJ that they were unable to pay the full amount of the past due invoices. FTJ filed suit against Davis for, among other things, unjust enrichment.

The trial court ruled in favor of FTJ. Davis appealed.

Virginia Supreme Court allows unjust enrichment claim due to GC’s actions

On appeal, Davis argued that unjust enrichment isn’t available based on three main arguments:

  1. The joint check agreement was a valid contract, and therefore the unjust enrichment claim should be barred.
  2. If they were forced to pay, they’d be paying more. Thus, they were not “unjustly enriched.”
  3. The joint check agreement stated that payments were only required to be made when Davis owed money to H&2. So there was no expectation that Davis was going to pay FTJ.

The court rejected all of these arguments.

As for the first argument, the Virginia court agreed that typically, the existence of a written contract will preclude any claims for unjust enrichment. However, the joint check agreement only governed the form of payment. A claim for nonpayment of delivered materials falls outside the scope of the agreement.

Furthermore, the court explained that Davis was unjustly enriched. The dispute was over the specific materials, not the entire project cost. The materials were delivered and used. Had FTJ not delivered the materials, Davis would have had to purchase them elsewhere.

Lastly, although the joint check agreement specifically stated that payment would only be made when owed to the subcontractor (i.e. H&2); Davis’ conduct toward FTJ and repeated assurances that they would be paid were the reason the supplier continued to provide materials. This, in the court’s eyes, is enough to establish that FTJ expected Davis to pay them, and vis-a-versa.

The lower court’s decision was upheld.

Contractor payment promises can expose them to unjust enrichment claims

This is an interesting decision, to say the least. Keep in mind, the court emphasized that this was a narrow decision, based on the particular facts and joint check agreement. So for those reading this, do not assume that unjust enrichment claims are available under every joint check agreement.

However, this decision can serve as some guidance for contractors and suppliers when a subcontractor defaults. Many times a GC will convince suppliers to continue delivering materials by reassuring them that they will be paid. This practice is now complicated by this decision.

While suppliers should always be wary of promises to pay, general contractors will now need to use a little more caution going forward when trying to maintain material deliveries when a sub defaults.