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On June 23, 2022, the Eighth District of Ohio affirmed the Cuyahoga County Common Pleas Court’s summary judgment rulings in favor of the Project Owners in Sterling Contracting, LLC v. Main Event Entertainment, LP, et al.
, CA No. 110965, 2022-Ohio-2138
. Frantz Ward LLP Construction Partners Ian H. Frank and Allison Taller Reich represented the Defendants/Appellees.
Subcontractor Cannot Prevail on Unjust Enrichment Claim Against Owner/Developer Who Paid In Excess of the Original Contract Price to Complete the Project After the General Contractor’s Default
In Sterling Contracting
, the Subcontractor entered into a contract with the General Contractor, which entered into a contract with the Owners. The General Contractor defaulted and abandoned the project near completion, without paying amounts due to its lower-tiers. After paying lower-tiers to complete the remaining work on the Project, paying to remove liens, and taking into account the amounts the Owners had already paid to the defaulting General Contractor, the Owners had paid well in excess of their contract amount to receive the finished project they had bargained for.
The Subcontractor (who had failed to record a mechanic’s lien) filed suit against the Owners for unjust enrichment. The Subcontractor claimed that the Owners were unjustly enriched because they had not paid the retainage allegedly due to the Subcontractor to the General Contractor nor the Subcontractor, nor had the Owners paid anyone else to complete Subcontractor’s work.
The Owners presented evidence that they had not been unjustly enriched because they had paid more than bargained for to receive the finished project and argued that equity did not require the Owners to pay even more and sustain additional damages to make the Subcontractor whole. The Cuyahoga County Court of Common Pleas entered summary judgment in favor of the Owners and the Eight District Court of Appeals affirmed those rulings.
In coming to this conclusion, the Eighth District agreed with and cited several Ohio precedents including:
- “[U]njust enrichment is an equitable claim that applies when one retains a benefit that ‘in justice and equity belong[s] to another’ and that restitution is afforded as a remedy ‘to prevent one from retaining [a benefit] to which he is not justly entitled.’”
- “[T]he purpose of such claims ‘is not to compensate the [subcontractor] for any loss or damage suffered by him but to compensate him for the benefit he has conferred on the [owner].”’
Reviewing cases cited by the Subcontractor, the Court of Appeals distinguished the present facts from other cited cases where the owner retained a windfall, realized a savings, or paid itself from the contract balance, stating it may hold differently under other circumstances. However, here, because the Owners and Subcontractor were both harmed by the General Contractor’s default and contractual breaches, forcing the Owners to pay the Subcontractor in whole, upon the General Contractor’s obligation, solely at the Owners’ expense, would punish the Owners for a wrong they did not commit, and such a result would not be equitable.
Practical Implications of Eighth District Decision for Owners in Ohio
Based on the facts and outcomes of this case, it is important for Owners to:
Practical Implications of Eight District Decision for Subcontractors in Ohio
- Consider adding contract provisions that permit owners to directly pay lower-tiers and/or issue joint payment to lower-tiers and contractors;
- Consider contract provisions permitting audits/requests for assurances that lower-tiers are being paid;
- Negotiate and withhold retainage for the purpose of resolving disputes and claims;
- Consider prompt payment terms in contracts defining the time in which lower-tiers must be paid after the owner pays the general contractor;
- Prepare, serve, and record notices of commencement (some lenders may require this to maintain priority) before any work starts;
- Track all notices of furnishing, request and confirm all conditional lien waivers with payment applications and final lien waivers with final pay application; and
- Know when to engage counsel if there become issues about payment/remaining funds/liens/defaulting contractors.
Subcontractors bear the risk of defaulting contractors and contracting parties and cannot always be saved by suing upstream. It is important for Subcontractors to:
- Research and understand the solvency and financial status of your contracting partner and the project owner;
- Consider contract provisions that permit you to request an audit or assurances of ability to pay, availability of funds, and/or solvency of the general contractor and/or owner;
- Serve your Notice of Furnishing before commencing work or at least within 21 days of commencing work on the owner and anyone between your contracting partner and the owner;
- Make sure all change orders and extra work orders are timely approved and timely paid/funded;
- Know your lien recording/serving deadlines and make sure you have all the information you need in advance of those deadlines; and
- Know when to engage legal counsel to understand your rights and options.