This article originally appeared in the March 13, 2017, edition of the Oregon State Bar Construction Section Newsletter.
“A person who has been unjustly enriched at the expense of another is required to make restitution to the other.” In the construction context, subcontractors working on private projects have lien rights securing payment. However, it is not uncommon for subcontractors to void their lien rights inadvertently. In that scenario, when the subcontractor remains unpaid by the general contractor, because of insolvency or another reason, the subcontractor may look to the owner for payment under the theory of unjust enrichment. Whether the subcontractor will be successful in that claim is another story.
The three common elements of an unjust enrichment claim are: (1) a benefit conferred, (2) awareness by the recipient that it received the benefit, and (3) it would be unjust to allow the recipient to retain the benefit without requiring payment. In construction disputes, the first two elements are almost always satisfied: owners clearly receive benefits from the materials and services the subcontractor provides and owners are generally aware it is receiving those benefits. The key issue in almost all disputes involving unjust enrichment in a construction context, is whether the owner’s retention of the benefit without payment would be “unjust.” In other words, at the heart of an unjust enrichment dispute is the question of what makes enrichment unjust.
There are three elements to determine if an enrichment would be unjust: “‘(1) the plaintiff had a reasonable expectation of payment; (2) the defendant should reasonably have expected to pay; or (3) society’s reasonable expectations of security of person and property would be defeated by non-payment.’”
In the construction context, an injustice may also exist when a subcontractor has no remedy against the general contractor. For example, in Tum-A-Lum v. Patrick, the plaintiff was a material supplier for the construction of a barn on the defendant’s property. The general contractor ceased working on the project, and the owner would not pay for the materials provided for the project. The material supplier sued the owner for unjust enrichment. In reviewing the claim, the Court observed as follows:
We adopt the majority rule and hold that, under facts such as pled here, a material element that must be alleged and proved for a claim of unjust enrichment to succeed is that the remedies against the contractor were exhausted. * * * [A] furnisher of materials must exhaust all remedies against the contractor before the ‘enrichment’ can be ‘unjust.’
Thus, before an owner’s enrichment will be considered “unjust,” the unpaid subcontractor must first “exhaust” its remedies against the general contractor.
What is exhaustion of remedies?
At one end of the spectrum, the Courts hold that simply naming the general contractor in the lawsuit is not exhaustion. Beyond that, the Oregon courts have not ruled on what it means to “exhaust” remedies. Nevertheless, the two primary authorities cited by the Court in Tum-A-Lum, Idaho Lumber, and Paschall may provide some additional guidance.
First, the court in Idaho Lumber adopted the same exhaustion requirement and found it satisfied by the general contractor's bankruptcy:
Similarly, the court in Paschall determined the plaintiff-subcontractor could recover from the property owner with whom it had no contractual privity because the contractor had thwarted the subcontractor's efforts to collect payment by subsequently declaring bankruptcy.
The question remains, however, whether the remedies are “exhausted” at the filing of the bankruptcy petition or must the supplier or subcontractor pursue their claims to completion in the bankruptcy proceeding prior to seeking payment from the owner. Again, while there is no Oregon case on point, sister jurisdictions have addressed this issue. For example, in UTCO Associates LTD. v. Zimmerman, the Court confirmed an aggrieved subcontractor under Utah law would have to see the bankruptcy proceeding through to the end before it could assert its unjust enrichment claim against the owner unless pursuit of a claim in bankruptcy would, “‘in all likelihood, be fruitless.’”
The substantive principles distilled from Idaho Lumber, Paschall, and UTCO, are as follows: (a) it is not unjust for an owner to retain the benefit of a subcontractor without payment unless the subcontractor cannot obtain payment from the general contractor; and (b) the general contractor’s bankruptcy exhausts the subcontractor’s remedies against it where pursuit of the claim in bankruptcy would be fruitless. Viewed in this light, the exhaustion requirement has a practical element: in order for the owner to be unjustly enriched, the subcontractor must have no practical remedy against the general contractor.
Does exhaustion include pursuing lien rights?
Again, the issue is unsettled in Oregon. The Court in Tum-A-Lum Lumber references lien rights and exhaustion in an ambiguous manner. The Tum-A-Lum Lumber opinion states the plaintiff “could have filed a construction lien against defendants’ property pursuant to ORS 87.001, et seq.” and then notes that “plaintiff did not sue the contractor or file a lien against the property,” which “clearly establishes that plaintiff did not exhaust its remedies against the contractor.” This suggests the Court in Tum-A-Lum Lumber equated a failure to properly perfect a construction lien with a failure to exhaust available remedies.
However, the Court’s observations were relegated to a series of footnotes. Had the Court desired to equate a failure to perfect a construction lien with a failure to exhaust available remedies it could easily have done so in clear simple language: the issue of exhaustion and valid lien rights was squarely before the Court. Further, the Court made clear that, before proceeding against the owner in unjust enrichment, the subcontractor was required to exhaust its remedies “against the contractor.” A lien foreclosure claim is not necessarily a remedy against the contractor. While a general contractor would be a necessary party to a lien foreclosure action by an aggrieved subcontractor, the foreclosure claim itself is not against the contractor per se—the lien simply serves as a security device if the claimant otherwise proves its entitlement to recovery of amounts owed by the contractor. Should the sale of the property upon foreclosure satisfy the amounts owed the aggrieved subcontractor, no further recovery would take place against the contractor.
Thus, whether an element of a subcontractor’s unjust enrichment claim includes pursuit of lien rights is a subject of continued litigation.
Is payment to the general contractor an element of the unjust enrichment claim or a defense?
Perhaps the most commonly asserted fact—in cases where it is such a fact— is the issue of owner’s payment. Specifically, where the owner already paid the general contractor for all, or at least a substantial part of, the amount due, does equity require the owner to pay twice? Related to this issue is who has the burden to prove payment: does the subcontractor need to prove that the owner did not pay the general contractor or does the owner need to prove that they did pay the general contractor?
Not surprisingly, there is no clear answer to these issues under Oregon law. National authorities suggest the owner’s full payment to the general contractor defeats an unpaid subcontractor’s unjust enrichment claim, but a partial payment does not. The requirement for full payment makes sense because in a partial payment scenario, the owner is retaining a benefit it otherwise agreed to pay for. No published Oregon opinion has decided this issue.
As noted above, the third element of an unjust enrichment claim is that “‘it would be unjust to allow the recipient to retain the benefit without requiring her to pay for it.’” This element does not indicate whether an owner’s payment to the general contractor is an element of the claim. However, if the owner already paid for the improvement, it may not be unjust for him to retain the benefit without paying again for the same improvement: “unjust enrichment claims distill to the issue of the ‘acquisition or retention’ of property under circumstances where injustice would result if the defendant was not forced to return the property to the plaintiff.”
Nevertheless, Oregon is no stranger to requiring an owner to pay twice for the same work. Further, to cast the burden to prove the negative (i.e., the owner did not pay the general contractor) upon the subcontractor raises an almost insurmountable obstacle to the subcontractor’s recovery. Typically, a subcontractor would not be aware of whether the general contractor was paid, in part, in full, or not at all. It would be next to impossible for the subcontractor to prove this negative fact because they do not traditionally have access to those payment documents.
Where the substantive law does not dictate which party has the burden of proof on an issue, the Oregon Courts take the following factors into consideration when allocating the burden of proof:
Thus, issues over whether owner’s full or partial payment is an element of the unjust enrichment claim or defense and who has the burden to prove payment will be hotly contested.
Obviously, the unpaid subcontractor’s best option for recovery is to timely perfect and pursue its lien rights. Where that is not possible, and the general contractor is insolvent or otherwise a fruitless source of recovery, the subcontractor can turn to the owner for payment under a theory of unjust enrichment.
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