Real Estate Law

Working Without a Safety Net: Can Subcontractors and Suppliers Still Sue an Owner for Quantum Meruit and Unjust Enrichment in Virginia

By Robert E. Travers, IV

Subcontractors and suppliers provide labor, equipment or materials on construction projects without direct contractual relationships with the project owner, the ultimate beneficiary of that work, equipment and materials. In the event of payment disputes, those subcontractors and suppliers will often look directly to the project owner, as the ultimate beneficiary, for payment. Payment may be sought by filing a Mechanic's Lien and thereafter suing to enforce the lien. To enforce the Mechanic's Lien, however, the lienor must comply with strict statutory provisions and deadlines. Failure to comply with these statutes often invalidates the lien. Consequently, cautious lienors also include in their enforcement lawsuits a separate claim for quantum meruit, meaning "what has been earned", as a safety net in the event their mechanic's lien action failed. Now, however, as a result of a recent, unpublished Virginia Supreme Court decision, that safety net may be gone.

In December 2012, the Virginia Supreme Court issued its opinion in Smith v. Owens, 2012 Va. LEXIS 150 (2012) [enhanced version available to subscribers], and limited the ability of a third-party claimant, i.e., one not in a direct contractual relationship such as a subcontractor or supplier with a project owner, to pursue a claim of quantum meruit. In Smith, a residential contractor, Owens, and Walter Smith executed a contract for the construction of a home to be built on property jointly owned by Smith and Sara Hill. Hill did not sign the construction contract, but was extensively involved in the design of the home and the construction process. Ultimately, Smith did not pay Owens, and Owens filed suit against Smith for breach of the written contract. Owens also filed suit against Hill, with whom Owens did not have a contract, for quantum meruit recovery on the grounds that she benefited from Owens' work and should pay him the reasonable value of his services.

Prior to Smith, the law in Virginia provided that a plaintiff could not bring a quantum meruit claim against a defendant when an express contract already existed with that same defendant. A quantum meruit claim, however, could be brought against a third party not a party to the contract, such as Hill in this case, who allegedly benefited from the plaintiff's work. In this case, Hill argued that the rule should be expanded to bar any claim for quantum meruit against a party if an express contract for the same work already existed. The trial court rejected Hill's argument.

On appeal, the Supreme Court reversed and ruled that the subject matter of the express contract - not the identities of the parties to the agreement - determines the viability of a claim for quantum meruit. In other words, if the work that forms the basis for the quantum meruit claim is the same work contemplated by a preexisting written agreement, then the quantum meruit claim is barred. The Smith Court would not imply a contract with Hill when an express contract for the work already existed with Smith.

Does this ruling mean that subcontractors and suppliers who lose their mechanic's lien rights are out of a safety net to go against a project owner for payment recovery? Interestingly, Smith is an unpublished Virginia Supreme Court opinion. Although unpublished opinions lack precedential effect, they provide insight into the disposition of the Court and can be predictive of future rulings. To that end, if quantum meruit is precluded when an express contract is present, does the Supreme Court also intend to bar unjust enrichment claims under similar circumstances? Maybe. Does this ruling indicate that the Supreme Court views the Mechanic's Lien as the only method for an unpaid third party subcontractor or supplier to pursue a project owner in the absence of a direct contract? Perhaps.

Adding further uncertainty to the answer is the fact that Circuit Courts in Virginia and the Supreme Court of Virginia have used the terms quantum meruit, implied contract, quasi-contract, and unjust enrichment interchangeably for decades without explanation. The terms describe technically distinct causes of action. The use of the terms as synonyms by the Courts may be due to the fact that the desired result of quantum meruit, implied contract, quasi-contract, and unjust enrichment is the same; i.e., the third party subcontractor or supplier who provides the benefit is paid, and the owner who receives the benefit does not get it for free.

The widely accepted distinction between claims for quantum meruit and those for unjust enrichment is as follows: quantum meruit is based on a contract "implied in fact," and unjust enrichment is based on a contract "implied in law." An "implied in fact" contract is an actual contract that is neither written nor oral, but demonstrated by the actions of the parties. The parties to an implied contract do not articulate the amount of consideration due. As a result, the Court implies just compensation - or quantum meruit - based on the reasonable value of the work performed. On the other hand, a contract "implied in law" is often referred to as a claim for "unjust enrichment." A contract "implied in law" is not an actual contract, but an obligation implied by the Court to require the recipient of a benefit to pay for its value.

The question now becomes whether the practice of using these terms interchangeably was intentional or the inadvertent consequence of imprecisely using similar terms. If the Supreme Court intends the terms quantum meruit, unjust enrichment, implied contract and quasi-contract to be synonyms describing a broad equitable concept to prevent the unjust retention of benefit, then the ruling in Smith probably foretells a blanket limitation on a third-party subcontractor's or supplier's remedy against an owner - in the absence of a direct contractual relationship - to the statutory Mechanic's Lien. (Of course, we are assuming that the other party who is in privity with the subcontractor or supplier is judgment proof, e.g. bankrupt.) If, however, the Supreme Court draws a distinction between contracts "implied in fact" and "implied in law," then a third-party contractor, not in privity, may still proceed against owners for unjust enrichment based on a quasi-contract theory. Until the Supreme Court of Virginia provides clarification, those parties with Mechanic's Lien rights should vigilantly guard those rights or risk being unable to recover from project owners.

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