I just helped a contractor win almost $700,000 for the value of its construction work, even though it had no contract with the losing company, and no construction lien or bond rights. That is a pretty rare occurrence in construction cases, but it worked by using an ancient legal doctrine called “quasi-contract” and a related legal theory called “unjust enrichment”. Understanding how these concepts work may help you get paid in similar situations, or alternatively, help you make sure you don’t get trapped into paying someone else.
The idea behind “unjust enrichment” is that a party who performs work with the realistic expectancy of being paid for it should still recover for its value even without a contract of any kind. Basically, the court makes up an “imitation contract”, more properly known as “quasi-contract”, and then imposes a duty on the party who received the benefit of the work to pay for it. A classic example would involve an unconscious person who is taken to a hospital in an ambulance. Even though the unconscious person did not request the ambulance, the court presumes he would have done so if he were conscious, and imposes a duty on him to pay for the ride.
The courts are also bound by strict limits on the theory’s use. A key limitation, in New Jersey and New York, is that the beneficiary of the work would ordinarily recognize an obligation to pay the provider of the work. For this reason, a contractor cannot typically use it to jump over another contracting party in the contracting chain (called “privity of contract”). So, it is hard for a sub-sub to jump over a sub and recover directly against a GC; for a sub to jump over a GC and recover from an owner, or for a contractor to jump over an original project owner and recover from a newer owner.
In one classic court decision, a landscaper placed some shrubbery around a home, but the homeowner died before paying for it. The home was then sold, but the new homeowner refused to pay the landscaper even though the new owner had gotten the benefit of the shrubbery. Here, the court refused to hold the new homeowner liable in quasi-contract to the landscaper because the new owner had no direct dealings with the landscaper. Thus, the new homeowner had no had no reason to believe it could be liable to the landscaper. This is one reason why contractors should be more diligent about filing construction liens and bond claims—jumping over is sometimes permitted.
For quasi-contract to apply, the work must also be performed directly for the party who should pay. Back-up promises or “guarantees” by someone else must ordinarily be in a writing they sign, with one major exception mentioned at the end of this article. For example, a GC’s “guarantee” to pay a sub-subcontractor for the work the sub-sub performs for a subcontractor is ordinarily only binding on the GC if in an authorized writing the GC signed. But, if the work performed by the sub-sub was directly for the GC, no signed writing is needed.
So how did we help win almost $700,000? The two key words are “direct relationship”. Instead of the GC following the typical chain of contracting, and directing the sub to direct the sub-sub, the GC cut the sub out and both communicated and directed the sub-sub’s performance. As for the sub’s subcontract with the GC, it was ignored for this work. The GC told the sub-sub what work to do; scheduled the sub-sub’s work; spoke and wrote to the sub-sub, usually outside of the sub’s presence; met with the sub-sub, and did all the things a GC would ordinarily do with a direct sub—except enter into a contract with the sub-sub. Instead, after directing and controlling the sub-sub’s work, the GC tried to deflect any payment obligations by claiming they were the sub’s responsibility. The court would have none of that, finding in favor of the sub-sub and against the GC.
To win these sorts of cases, the key question is whether there was a direct relationship created with another entity outside the ordinary contract chain, which resulted in their direction and control of your work? And, if you are a GC who wants to avoid this potential trap, make sure that the sub is the only one who actually receives direction and control from you, even while letting the sub-sub know what is expected. For example, make sure all communications are directed to the sub, and cc the sub-sub. Similarly, any meetings must be with the sub who is given the direction, but can also include the sub-sub. Do not direct the sub-sub in the field, only the sub. Convey concerns to the sub and make sure the sub then addresses them with the sub-sub. Or, consider firing the sub and entering into a new subcontract with the subsub.
Finally, don’t make oral promises to pay for someone else’s work in any event. While guarantees must be in writing to be enforced, another legal doctrine called “promissory estoppel” can still bind you to oral promises in some cases. You can find out more about it in our earlier print newsletter edition of Plumb Law, issue 51, entitled “Watch Me Pull a Contract Out of My Hat” where it is discussed in the context of both public bidding and performance of a project.