Supreme Court of Virginia Upholds Unjust Enrichment Claim by Downstream Supplier
A slim majority of the Supreme Court of Virginia recently affirmed a judgment in favor of a supplier against a general contractor for materials that a subcontractor had ordered from the supplier but not paid for. The case, Davis v. FTJ, is a cautionary tale for those who expect their legal obligations to end with the contracts they make. Under this case, “implied” contracts – i.e., fictional contracts implied by law – may carry those obligations much further.
The general contractor in Davis engaged a subcontractor to provide drywall and metal framing for a project in Arlington County, Virginia. The subcontractor agreed to purchase materials for the project from a specific supplier. The subcontractor then completed a “Credit Application and Agreement,” through which it promised to pay the supplier for the materials.
For its part, the general contractor executed a joint check agreement (“JCA”) with the subcontractor and supplier. By virtue of the JCA, the general contractor agreed to add the supplier as a payee of any checks cut to the subcontractor for materials. The JCA “[did] not constitute an assignment of fund[s],” and it did not “create any contractual relationship or equitable obligation between [the general contractor] and Supplier.” The JCA basically just prevented the subcontractor from absconding with money it received from the general contractor for the materials provided by the supplier.
The supplier began shipping materials in 2016 and, after repeated payment delays, reached out to the general contractor in November 2016, December 2016, and January 2017. Each time, the general contractor responded that a joint check had been or would be written. The supplier, in turn, shipped more materials.
In early 2017, the general contractor learned that the subcontractor was having “payroll payment problems,” and was struggling to supply enough manpower to complete the project. By March, it was clear the subcontractor could not pay for materials, either. The supplier knew none of this, however.
On March 22, 2017, the general contractor notified the supplier that it was having problems with the subcontractor. During the call, the general contractor did three things: 1) it asked the supplier not to ship any more materials on the joint check account, 2) it requested a credit application for purposes of ordering materials directly, and 3) it assured the supplier that there were ample funds to pay the outstanding invoices.
The general contractor never ordered any materials directly from the supplier. It did, however, continue to discuss payment of the outstanding invoices with the supplier, and informed the supplier that those invoices were being processed.
Meanwhile, the general contractor terminated the subcontractor and hired a replacement to complete the project. The cost of doing so resulted in the general contractor paying slightly more to complete the subcontractor’s scope of work than the general contractor would have otherwise paid the now-insolvent subcontractor. Because there were no longer “ample funds” to cover the subcontractor’s scope of work, the general contractor never paid the supplier for the materials it had provided for the project.
The supplier sued the general contractor under a theory of unjust enrichment and won. The general contractor appealed.
A majority of the Supreme Court affirmed. It “emphasize[d] the limited scope of [its] decision,” noting that ordinarily “a supplier of labor or materials to a subcontractor will not be able to obtain a judgment against an owner or a general contractor.” But this case was different. The majority emphasized that the general contractor “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.” The majority felt that these “distinct circumstances” permitted the supplier to obtain relief from the general contractor because, based on the parties’ communications throughout, the supplier reasonably expected to be paid by the general contractor for the materials, and the general contractor should have reasonably expected to pay the supplier for them.
Three justices dissented. The dissent questioned how the general contractor could have been “unjustly enriched” when it “fully paid the defaulting subcontractor everything the subcontractor was owed and suffered a loss on top of that.” The dissent also noted that the general contractor never agreed to be liable in the event that its subcontractor did not pay the supplier. This was particularly troubling to the dissent because the supplier neither provided materials directly to the general contractor nor provided any materials after the general contractor’s prediction that there would be ample funds to pay the supplier. From the dissent’s perspective, the general contractor’s payment obligation was to the subcontractor only, and it should not have been stuck with the bill that the subcontractor was contractually required to pay.
Take-aways:
This case opens the door for suppliers and sub-subcontractors in certain circumstances to bring unjust enrichment claims against general contractors who they do not have a contract with, and potentially for subcontractors and suppliers to bring unjust enrichment claims against owners, as well.
Owners and general contractors should be careful not to deal directly with parties they are not in contractual privity with, as much as possible, and not to promise or guarantee payment to anyone they are not in contractual privity with, whether they have a joint check agreement or not. They should avoid “climb[ing] down the chain of privity to deal directly with a supplier in order to keep supplies flowing.” If they decide to climb down that chain, their legal obligations might not end with the contracts they actually make.
