Construction Law In the News. In this issue: February 2010

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1 February 2010 In this issue: 2 Colorado Update Arizona Update 3 Kansas Update Missouri Update 4 Illinois Update 5 About Our Construction Litigation Group A CONSTRUCTION LAW UPDATE: CAN AN UNPAID SUBCONTRACTOR RECOVER FROM AN OWNER WHERE THE SUBCONTRACTOR HAS NO CONTRACTUAL RELATIONSHIP WITH THE OWNER? BY: REBECCA ROSS H istorically, courts would not allow an unpaid subcontractor (or supplier) to assert a claim against an owner with whom they did not deal directly. In other words, where the owner and subcontractor lack privity of contract. See Bennett Heating & Air Conditioning, Inc. v. NationsBank of Maryland, 674 A.2d 534 (Md. 1996) (acknowledging that the reported decisions involving claims by unpaid subcontractors against owners based on implied contract almost uniformly deny relief). However, in the last several years, cases in numerous states have created exceptions to the general rule and have held that, under certain limited circumstances, a subcontractor can recover from an owner on an implied contract theory (sometimes referred to as an unjust enrichment or quantum merui theory). KANSAS CITY ST. LOUIS CHICAGO DENVER PHOENIX WASHINGTON DC NEW YORK WILMINGTON DE OVERLAND PARK ST. JOSEPH SPRINGFIELD TOPEKA EDWARDSVILLE

2 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). Page 2 of 6

3 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). Page 3 of 6

4 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 rbash@polsinelli.com , or Gene Commander at gcommander@polsinelli.com at Polsinelli Shughart PC. Page 4 of 6

5 Construction Litigation Attorneys Roy Bash, Chair Eugene R. Commander, Vice Chair Heath M. Anderson Catherine R. Bell William D. Blakely Washington D.C Kevin J. Breer Overland Park John S. Conner Andrew M. DeMarea Overland Park Wayne B. Ducharme Robert O. Dyer Cynthia R. Estrella Brian M. Flaherty Edward R. Glady, Jr Heber O. Gonzalez Matthew R. Hale Thomas K. Irvine G. Edgar James Ryan M. Manies William R. Meyer Christopher J. Mohart Brett C. Randol Overland Park Jeffrey B. Rosen Rebecca A. Ross Spencer L. Sears Craig A. Smith St. Louis Christopher P. Sobba Michael H. Talboy Michael D. Textor Springfield Justin R. Watkins Springfield About Polsinelli Shughart s Construction Litigation Group Polsinelli Shughart PC has significant experience working in the construction industry and brings a great variety of perspective to each project. Our attorneys are an integral part of the industry, which helps us provide the type and depth of service you deserve. Our attorneys are more than just members of associations; many are active participants with leadership roles. Whether from years of experience working with contractors, design professionals, consultants or owners, or through formal education as architects, engineers or construction managers, our attorneys have a fundamental background in construction transactions and claims resolution. Our lawyers offer national and regional seminars and help draft industry-related legislation. This means we have an in-depth understanding of the needs of your business and your project. To learn more about our services, visit us online at Page 5 of 6

6 If you know of anyone who you believe would like to receive our updates, or if you would like to be removed from our e-distribution list, please contact Sarah Blair via at Polsinelli Shughart PC provides this for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship. Polsinelli Shughart is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements. Polsinelli Shughart is a registered trademark of Polsinelli Shughart PC. About Polsinelli Shughart PC With more than 470 attorneys, Polsinelli Shughart PC is a national law firm that is a recognized leader in the areas of business litigation, financial services, bankruptcy, real estate, business law, labor and employment, construction, life sciences and health care. Serving corporate, institutional and individual clients regionally, nationally and worldwide, Polsinelli Shughart is known for successfully applying forward-thinking strategies for both straightforward and complex legal matters. The firm can be found online at Page 6 of 6