“Up-the-Chain” Claims by Lower-Tier Subcontractors and Suppliers

By Brent Carpenter, Attorney

This article was originally published in the November 20, 2020 edition of the DJC Oregon.

It is unfortunately common for general contractors on construction projects to fail to pay subcontractors and suppliers. Subcontractors and suppliers have a remedy for nonpayment in the form of a lien on the property on which the project is situated, in the case of private construction projects, or a claim on the prime contractor’s payment bond, in the case of public construction contracts. In Oregon, a subcontractor or supplier must record a lien within 75 days or send a notice of bond claim within 180 days of the last day it supplied labor, material, or equipment to the project.

Preserving these lien and bond rights is important as they provide security to subs and suppliers in the event of nonpayment by the general contractor. This is particularly the case if you are a “down-the-chain”—i.e., lower-tier—subcontractor or supplier, as failure to preserve lien and bond rights may adversely affect other potential sources of recovery for such a sub or supplier.

There are numerous factual scenarios under which this may be the result. For example, a prime contractor on an Oregon public works project hires a subcontractor to perform asphalt paving work. During the course of the project the subcontractor becomes insolvent and fails to pay its aggregate supplier. The aggregate supplier fails to send a notice of bond claim on the prime contractor’s payment bond within the 180-day deadline, thereby waiving any bond claim. Instead it files a lawsuit against the prime contractor for breach of contract and unjust enrichment (or quantum meruit), a legal doctrine in which the plaintiff alleges that it conferred a benefit on the defendant and it would be unjust for the defendant to retain that benefit without paying for it. Given that the subcontractor is insolvent, the supplier does not bother to bring an action for breach of contract against the subcontractor. The prime contractor will likely argue in response that the supplier’s unjust enrichment claim was barred by the supplier’s failure to exhaust its statutory and contractual remedies; that is, make a claim on the prime contractor’s payment bond and bring a breach of contract action against the subcontractor.

This argument would find support in case law in Oregon, as Oregon courts have held that a materials supplier’s unjust enrichment claim against a property owner was barred because the supplier failed to exhaust its remedies, as it failed to record a construction lien and did not sue the general contractor. Tum-A-Lum Lumber v. Patrick, 95 Or App 719, 721–22, 770 P2d 964 (1989). In other words, a party seeking to recover “up the chain” of contracting parties must exhaust its contractual and statutory remedies before any enrichment can be unjust. Further, it must plead and prove that it has exhausted those remedies. Id. In another similar case a subcontractor had recorded a lien, but failed to foreclose the lien, instead bringing an unjust enrichment claim against the owner. L.S. Henriksen Construction, Inc. v. Shea, 155 Or App 156, 158, 961 P2d (1998). The subcontractor argued that it had exhausted its remedies by repeatedly demanding payment from the general contractor, delivering a notice of lien, and naming the general contractor in the same suit. Id. at 160. However, the court held that “initiating a remedy, however, is not exhausting that remedy, and it is exhaustion that the law requires.” Id.

Under the case law cited above, the aggregate supplier in the example above would likely be left without an avenue of recovery against the prime contractor. First, unless the prime contractor, for example, stepped into the shoes of the insolvent subcontractor and ordered additional aggregate from the supplier, it is unlikely that the supplier has a viable breach of contract claim against the prime contractor, as there is no contractual privity between them. Second, by failing to name the insolvent subcontractor as a defendant, the supplier failed to exhaust its contractual remedies. Had the supplier done so, and obtained a default judgment against the subcontractor, it would at least have exhausted its contractual remedies. However, even had it done so, it failed to exhaust its statutory remedies by timely submitting a notice of bond claim. Thus, both the supplier’s breach of contract and unjust enrichment claims would be subject to dismissal.

This example illustrates how important it is for lower-tier subcontractors and suppliers to preserve their lien and bond claim rights. Key to that preservation is being familiar with the various deadlines and notice requirements, which I have discussed in previous articles. If subcontractors and suppliers are knowledgeable and diligent in this regard, they can insulate themselves from the effect of “up-the-chain” nonpayment.

Brent Carpenter is a shareholder at Jordan Ramis PC and focuses his practice on construction law. Contact him at 503-598-7070 or brent.carpenter@jordanramis.com.