A Construction Law Update

February 2010

A CONSTRUCTION LAW UPDATE: CAN AN UNPAID SUBCONTRACTOR RECOVER FROM AN OWNER W HERE THE SUBCONTRACTOR HAS NO CONTRACTUAL RELATIONSHIP WITH THE OWNER? In this issue: BY: REBECCA ROSS

2 Colorado Update istorically, courts would not allow an unpaid subcontractor (or Arizona Update supplier) to assert a claim against an owner with whom they did not H deal directly. In other words, where the owner and subcontractor 3 lack “privity of contract.” See Bennett Heating & Air Conditioning, Inc. v. Kansas Update NationsBank of Maryland, 674 A.2d 534 (Md. 1996) (acknowledging that the Missouri Update reported decisions involving claims by unpaid subcontractors against owners based on implied contract almost uniformly deny relief). However, in the last 4 several years, cases in numerous states have created exceptions to the general Illinois Update rule and have held that, under certain limited circumstances, a subcontractor

5 can recover from an owner on an implied contract theory (sometimes About Our referred to as an unjust enrichment or quantum meruit theory). Construction Litigation Group

Colorado Update:

As the majority of courts have held, the general rule in Colorado is that an owner is not liable for improvements on its property for which there was no agreement to pay, and that the mere nonpayment of a contract by a general contractor is not enough to require the owner to compensate an unpaid subcontractor.

In Colorado, a subcontractor may recover from an owner under an unjust enrichment theory if the subcontractor shows that: 1) at subcontractor’s expense; 2) owner received a benefit; and 3) under circumstances that would make it unjust for the owner to retain the benefit without paying. The subcontractor must establish, however, some basis for finding “injustice” beyond the simple fact that 1) the owner benefited from services the subcontractor provided, and 2) the subcontractor was not paid for its work. Robinson v. Colorado State Lottery Division, 179 P.3d 998 (Colo. 2008); DCB Construction Co., Inc. v. Central City Development, Co., 965 P.2d 115 (Colo. 1998); Redd Iron v. International Sales & Services, 200 P.3d 1133 (Colo.App. 2008).

Arizona Update:

In Arizona, unjust enrichment exists as a quasi-contractual obligation where services have been performed, the party receiving those services agreed to receive them, and there is an expectation of payment or compensation at the time the services were rendered. Blue Ridge Sewer Improvement District v. Lowery, 718 P.2d 1026 (Ariz.App. 1986). The elements of an unjust enrichment claim are: 1) an enrichment; 2) an impoverishment; 3) a connection between the enrichment and impoverishment; 4) absence of justification for the enrichment and impoverishment; and 5) an absence of a remedy provided by law. City of Sierra Vista v. Coshise Enterprises, Inc., 697 P.2d 1125 (Ariz.App. 1985).

The existence of a contract between a subcontractor and a general contractor does not necessarily preclude a subcontractor from asserting an unjust enrichment claim against an owner. Flooring Systems, Inc. v. Radisson Group, 772 P.2d 578 (Ariz. 1989). Arizona courts have held that the existence of a contract between a subcontractor and a general contractor only precludes recovery for the subcontractor under a theory of unjust enrichment where the owner has fully paid the general contractor and, therefore, the owner has not been unjustly “enriched.” Id.; Commercial Cornice & Millwork, Inc. v. Camel Construction Corp., 739 P2d 1351 (Ariz. 1987); Constanzo v. Stewart, 453 P.2d 526 (Ariz.App. 1969).

Kansas Update:

In Kansas, a subcontractor (or supplier) who has furnished labor or materials for an improvement generally has no right to a monetary judgment against an owner with whom they are not in privity. However, in limited circumstances a subcontractor may bring an unjust enrichment claim against an owner. In Kansas, an essential prerequisite to liability for unjust enrichment in a case between a subcontractor and owner not in privity is the acceptance of benefits under circumstances that reasonably put the owner on notice that the subcontractor expects to be compensated by the owner. Haz-Mat Response, Inc. v. Certified Waste Services Ltd., 910 P.2d 839 (Kan. 1996). Evidence which could support such a claim might be where an owner makes a statement or promise that would lead the subcontractor to believe the owner was responsible for paying the subcontractor or perhaps where the owner mislead the subcontractor into believing that the owner would pay the subcontractor in the event the general contractor failed to pay the subcontractor. Id.

In a recent unpublished opinion, the Kansas Court of Appeals affirmed a subcontractor’s unjust enrichment claim against an owner. The court reasoned that the owner was aware of work performed by the subcontractor on part of its property as evidenced by the written work authorization from the owner and the owner’s statement to the subcontractor. Paul Davis Restoration of Lawrence v. Raney Properties, L.P., 157 P.3d 7 (Kan. App. 2007)

Missouri Update:

In Missouri, whether a subcontractor can recover from an owner under an unjust enrichment theory depends on whether the owner has already paid the general contractor the amount due the general contractor under their express contract. If the owner has paid the general contractor, then the owner’s retention of the services or materials without further payment has been found not to constitute “unjust enrichment.” The burden is on the subcontractor, therefore, to plead non-payment by the owner in order to state a claim for unjust enrichment. Missouri courts have reasoned that such allegations are required to protect the owner from being required to pay for the same benefit twice. Lee Deering Electric Co. v. Pernikoff Construction Co., 247 S.W. 3d 577 (Mo. App. E.D. 2008); International Paper v. Futhey, 788 S.W.2d 303 (Mo.App. E.D. 1990); Green Quarries, Inc. v. Ernie Raasch, 676 SW2d 261 (Mo.App. W.D. 1984).

Illinois Update:

In Illinois, a subcontractor may not recover from an owner under an unjust enrichment theory unless there is no adequate remedy at law. The sole remedy of a subcontractor against an owner is under the Illinois Mechanic’s Lien Act. Failure to comply with the Mechanic’s Lien Act does not warrant relief under the doctrine of unjust enrichment. Further, mere nonpayment to the subcontractor does not constitute an unjust enrichment claim against the owner. Season Comfort Corp. v. Ben A. Borenstein Co., 655 N.E. 2d 1065 (Ill.App. 1995).

Feel free to direct comments or questions to Roy Bash at [email protected] | 816.395.0633, or Gene Commander at [email protected] | 720.931.1160 at Polsinelli Shughart PC.

Construction Litigation Attorneys

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