Karen M. Stemland

Karen M. Stemland
Of Counsel

In Davis Construction Corp. v. FTJ., Inc., the Virginia Supreme Court ruled that a supplier could sue a contractor for unjust enrichment despite lack of contractual privity, i.e. direct contractual relations.

Facts and Procedural Background

A general contractor (“Contractor”) contracted with a subcontractor to complete the drywall and metal framing for the construction of a residential condominium project. The subcontractor contracted with a supplier (“Supplier”) to provide materials. Due to the subcontractor’s financial struggles, Contractor entered into a joint check agreement with Supplier to facilitate payment and timely completion.

Contractor directly assured the Supplier it would pay Supplier’s invoices, leading Supplier to continue to ship materials, despite its normal practice of withholding materials on past-due accounts. Contractor started arranging for direct payment to Supplier. After requesting Supplier’s credit application and W-9 form, Contractor added Supplier to its accounting system. Confident in Contractor’s assurances, Supplier shipped the materials. Contractor ultimately did not pay Supplier for the materials, but Contractor incorporated the materials into the project.

Supplier sued the drywall subcontractor, subcontractor’s principal, and Contractor, alleging breach of contract, unjust enrichment, and enforcement of a mechanic’s lien. The circuit court entered judgment for Supplier on the unjust enrichment claim and for Contractor on mechanic’s lien claim. The Contractor appealed.

Contractor’s Arguments on Appeal

  1. The existence of a contract, the joint check agreement, foreclosed relief.
  2. Contractor ultimately paid more than the original contract price to complete the project.
  3. Contractor argued that there was no reciprocal expectation of payment.

Holdings

  1. The joint check agreement did not preclude the unjust enrichment claim.
  2. The unjust enrichment claim against Contractor could proceed, even if Contractor had to pay more to complete the job through a replacement subcontractor.
  3. Contractor knew of the benefit and reasonably should have expected to pay Supplier.

Legal Analysis

Though traditionally suppliers cannot bypass the line of contractual privity to request payment from an owner or general contractor, the Virginia Supreme Court carved a narrow exception for unjust enrichment. Under the unjust enrichment doctrine, the law creates an implied contract “requiring one who accepts and receives goods, services, or money from another” to provide reasonable compensation.

The test for unjust enrichment is: “(1) the plaintiff conferred a benefit on the defendant; (2) the defendant knew of the benefit and should reasonably have expected to repay the plaintiff; and (3) the defendant accepted or retained the benefit without paying for its value.”

Court’s Rejection of Contractor’s First Argument

Though express contracts generally bar quasi-contractual relief, the joint check agreement did not. To bar unjust enrichment, valid express contracts must cover the same subject matter as the parties’ dispute. The joint check agreement, in contrast, had the “sole purpose” of assisting the subcontractor in paying Supplier, and it expressly avoided creating any contractual relationship between Contractor and Supplier. It also did not “preclude the parties from creating further or other expectations about payment through their actions and communications.” According to the majority of justices, Contractor created additional expectations by repeatedly assuring payment to Supplier.

Court’s Rejection of Contractor’s Second Argument

The Court rejected Contractor’s second argument because Contractor did not pay twice for Supplier’s materials. Contractor’s payment of more than the original contract price to finish the job did not excuse payment for Supplier’s materials. The payment for the specific supplies at issue, rather than full payment of the original contract price, was the relevant line of inquiry (though the dissenting justices cited law to the contrary). The evidence established that Contractor used but did not pay anyone for Supplier’s materials. This use enriched Contractor because it reduced Contractor’s obligations to the owner. Without Supplier’s materials, Contractor would have been forced to purchase materials from another supplier.

Court’s Rejection of Contractor’s Third Argument

The Court rejected Contractor’s third argument by finding that reciprocal expectations of payment did exist. Though the joint check agreement provided that Contractor “will only make payments to Subcontractor and Supplier by joint check to the extent that [Contractor] actually owes money to Subcontractor on the Project,” this did not prove lack of a payment expectation. Contractor repeatedly responded to Supplier’s payment inquiries, provided assurances of payment, and directly encouraged additional shipments. The factfinder, therefore, reasonably could have concluded that Contractor expected to pay for the materials and Supplier expected payment.

Significance of the Case

The case highlights the risk that in certain circumstances, the lower-tier subcontractor or supplier could “’leap frog’ up the chain of privity to recover against a remote party.” But the circumstances are limited to where the higher-tiered party “willingly climb[s] down the chain of privity to deal directly” with a supplier to keep supplies flowing. This limitation is important in minimizing the slippery slope of suppliers bypassing contractual relations and recovering directly from owners or general contractors.

To avoid this slippery slope, owners and general contractors can structure their contracts and their conduct to reduce the likelihood of unjust enrichment claims. For example, joint check agreements could expressly preclude unjust enrichment claims. In addition, owners and general contractors could avoid direct interaction with lower tiers and refrain from directly encouraging supply provision with assurances of payment.


If you have questions about the risk of unjust enrichment claims:
Contact Karen Stemland at kstemland@woodsrogers.com.