James G. Davis Construction Corp. v. FTJ Inc. (Va. May 14, 2020)
Earlier this year, we covered a Virginia Supreme Court decision, Musgrove Construction Co. v. Young, which examined the unjust enrichment doctrine. Now, from the Virginia Supreme Court, a fresh look at that the doctrine . . .
A general contractor, Davis Construction, is working on a condominium project. Davis hires a subcontractor to do the drywall and framing. The subcontractor in turn agrees to buy materials from a particular supplier. And Davis, the subcontractor, and the supplier enter into a joint check agreement.
The agreement provides that the supplier will send its invoices to both Davis and the subcontractor. Davis will then write a check payable to both the supplier and the subcontractor. Davis will deliver the check to the subcontractor, who will endorse it over to the supplier. The joint check agreement also cautions “Nothing contained in this Agreement is intended by the parties to create any contractual relationship or equitable obligation between DAVIS and Supplier.”
The subcontractor later has “payment problems.” It stops paying both its employees and the supplier’s invoices. The supplier asks Davis about the unpaid invoices. Davis says the checks have been written. So the supplier continues to deliver materials that the subcontractor orders. Three months pass. Davis then fires the subcontractor and tells the supplier to stop delivering materials. Can the contractor recover under the doctrine of unjust enrichment?
Virginia Supreme Court: In a sharply divided opinion (4-3), yes.
The equitable doctrine of unjust enrichment creates a “quasi-contract” or “contract implied in law.” In a nutshell, it requires “one who accepts and receives goods, services, or money from another to make reasonable compensation for those services.”
Here, it’s undisputed that goods from the supplier were used to complete the project and that the supplier was not paid for those goods. Nevertheless, Davis argues that unjust enrichment doesn’t apply for several reasons. Among them, an express contract covers the same subject, and an express contract blocks an implied contract claim. Moreover, Davis wound up paying more than the original price to complete the project, so Davis hasn’t been unjustly enriched—in fact, it’s out money.
Not so, rules a narrow majority of the Virginia Supreme Court. As a threshold matter, Davis is correct that, as a rule, “the existence of an express contract covering the same subject matter of the parties’ dispute precludes a claim for unjust enrichment.” But, the majority observers, the joint check agreement itself states that nothing in the agreement is “intended by the parties to create any contractual relationship . . . between DAVIS and Supplier.” Therefore, the majority holds, this express contract “does not foreclose a claim for unjust enrichment when that claim falls outside of the plain terms of the agreement.”
The majority also rejects the argument that Davis “had to pay more than originally projected to finish the job, so it was not unjustly enriched.” The majority reasons that “it the payment for specific supplies that is at issue, not the overall cost of the project.” And it’s undisputed that Davis received the specific supplies and didn’t pay for them. Moreover, Davis gave “assurances” of payment to the supplier. So equity demands that Davis now do so.
The majority concludes by cautioning, however, that its holding is limited to the particular facts of this case, explaining:
We emphasize the limited scope of our decision. In ordinary circumstances, a supplier of labor or materials to a subcontractor will not be able to obtain a judgment against an owner or a general contractor. Moreover, where a contract actually governs the relationship of the parties, it will foreclose relief under an unjust enrichment theory. Contractors, subcontractors and suppliers remain free to structure their contracts and their conduct in such a way as to preclude claims for unjust enrichment. Here, the limited scope of the joint check agreement does not bar the unjust enrichment claim. In addition, unjust enrichment precludes an owner or a general contractor from having to pay twice for a service or supplies. That is not the situation here. Davis knew of the subcontractor’s difficulties and past due invoices, and, to ensure a continued flow of supplies, interacted directly with the supplier and led the supplier to believe that payment for those supplies would be forthcoming. These distinct circumstances permit [the subcontractor] to obtain relief for Davis’ unjust enrichment.
Bottom line: If you’re an owner or general contractor wishing to avoid a similar result, ensure that any contracts your subs enter into with suppliers explicitly preclude both contract and unjust enrichment claims against you. Moreover, to reduce your potential exposure, do not assure the supplier that payment for supplies will be forthcoming. Indeed, the risk-averse will leave all direct interactions with the subcontractor’s supplier to the subcontractor.
Bonus point: The Virginia Supreme Court has seven justices. This decision split the court 4-3, with three justices dissenting.
The dissent makes two core arguments. First, the contract between Davis and the subcontractor was a fixed-priced contract. Davis agreed to pay the subcontractor a fixed price for both the labor and materials. And Davis paid that, and then some. So contrary to the majority’s conclusion, Davis was not unjustly enriched. Second, the dissent disagrees about whether Davis “gave ‘assurances’ of payment to the supplier.” The dissent explains, “The evidence the majority relies upon . . . is wholly insufficient to support this implication.”