The Virginia Supreme Court recently ruled on a case that involved a joint check agreement, although it is not really “about” joint check agreements. James G. Davis Constr. Corp. v. FTJ, Inc., 841 S.E.2d 642 (Va. 2020). It is more about the common law doctrine of “unjust enrichment” and the penalty some owners or general contractors may pay for writing a joint check agreement that provides no rights to the material supplier. A complete copy of this case appears at the end of this newsletter.
The common law is created by the courts over time to resolve particular disputes. This common law then applies to future cases that involve similar facts. Unjust enrichment is the age old concept of a "contract implied in law." If you accept goods, services, or money you must pay reasonable compensation for those services. One person may not "enrich himself unjustly” at the expense of another person. Examples include a payment or overpayment by mistake. A quantum meruit theory is similar. This is all historically explained at some length in the dissent at the end of the opinion below.
Most state courts have decided that a construction subcontractor or material supplier can use an unjust enrichment theory to collect against a property owner that received labor and materials, but has not paid for those labor and materials. This can work, even though the subcontractor or material supplier does NOT have a contract with the owner.
Most state courts have also decided that an unjust enrichment theory cannot force an owner or a general contractor to pay twice. If the defendant already paid, there is no “unjust enrichment.” What is striking about the new Virginia Supreme Court case is the ruling that a defendant must prove a “line item” defense of payment to avoid an unjust enrichment claim. It is not enough that the general contractor had lost money, because of a subcontractor default and the costs of completion. In other words, it is not enough to prove the general contractor does not owe the subcontractor anything.
The Court ruled the payment for the specific supplies is at issue, not the overall cost of the project. The general contractor did not pay anyone for those particular supplies and the general contractor used those supplies. If the claimant had not delivered those materials, the general contractor would have had to obtain them elsewhere and pay for them.
Whether the installation of those materials was done by the original subcontractor or the replacement subcontractor was irrelevant to whether the general contractor was unjustly enriched by possessing them without paying for them. The mere fact that the subcontractor's breach cost defendant more than originally anticipated does not undo the wrongful nature of the retention of the materials. The Court rejected the argument that payment in full of the originally anticipated subcontract price to a new subcontractor negates the obligation to compensate the supplier for the inequitably retained materials. The general contractor was not forced to pay twice for supplies. It was forced to pay once.
The Court seemed to focus on the fact that the general contractor knew of the subcontractor's financial difficulties and past due invoices with the supplier and interacted directly with the supplier and led the supplier to believe that payment for those supplies would be forthcoming. These distinct circumstances do make the refusal to pay for the materials more “unjust.”
When contacted by the supplier about past due invoices, the general contractor responded directly by either paying the invoice or providing assurances that the invoice would be paid. The supplier-creditor’s policy was to stop shipping materials when its invoices had not been paid within a certain time frame. The general contractor's repeated direct dealings with the supplier-creditor and the repeated assurances prompted the supplier-creditor to continue shipping supplies with the expectation that the general contractor would pay for those supplies.
The Virginia Supreme Court also decided another frequently argued topic, whether it is possible to pursue an unjust enrichment theory if you have an explicit written contract. When this law firm needs to file suit in order to help a material supplier collect their balance due, we will typically file a multi-count complaint. It will include a breach of contract count and an unjust enrichment or quantum meruit count. The opposition will sometimes seek to get one of the counts dismissed, on the theory that it is impossible to have an unjust enrichment claim if you have a contract.
We usually argue successfully that these counts are “in the alternative.” We agree that this is a contract case and believe that our relief will be under the contract. But if the explicit written contract fails for some reason, we will proceed on the unjust enrichment count.
The Supreme Court has now supported this, stating that it is "plainly erroneous" to say "there can be no unjust enrichment in contract cases." Unjust enrichment is not precluded where "a valuable performance has been rendered under a contract that is invalid, or subject to avoidance, or otherwise ineffective to regulate the parties' obligations." However, if the express contract covers the same subject matter of the parties' dispute, it does eliminate a claim for unjust enrichment. We believe you can still pursue these counts “in the alternative,” even if the express contract covers the same subject matter. We may have to wait for another Supreme Court decision to find out, although the Virginia Supreme Court Rules and the trial courts seem to consistently support alternative pleadings.
In addition to the unfulfilled assurances of payment, this case may have also been based on the wording of the joint check agreement. That joint check agreement stated that its "sole purpose" "is to assist Subcontractor in making payment to Supplier of invoices on sales of all materials furnished by Supplier to Subcontractor for use in connection with the Project." It also stated that "[n]othing contained in this Agreement is intended by the parties to create any contractual relationship or equitable obligation."
The general contractor went to some trouble to make sure the joint check agreement was not an enforceable contract and then tried to argue that this explicit written contract defeated the unjust enrichment claim. The Court stated that this sought to stretch the plain terms of the joint check agreement far beyond its stated, and limited, purpose. The supplier was not making any claim governed by the contract. For example, the supplier did not contend that the checks issued were not joint checks. The expressly limited contract did not foreclose a claim for unjust enrichment for a claim that falls outside of the plain terms of the agreement. If the joint check agreement had been worded differently, it may have created a contract actually enforceable by all parties that could have shielded the general contractor from both a contract claim and an unjust enrichment claim.
The Virginia Supreme Court emphasized the limited scope of their decision. In ordinary circumstances, a supplier of labor or materials to a subcontractor will not be able to obtain a judgment against an owner or a general contractor. Where a contract actually governs the relationship of the parties, it will foreclose relief under an unjust enrichment theory. Contractors, subcontractors and suppliers remain free to structure their contracts and their conduct in such a way as to preclude claims for unjust enrichment.
It is also interesting to note that this case had a long minority dissent opinion, which you can read below. It is unusual for any state appeals court to have a dissenting opinion. This one is particularly direct, lengthy and joined by three Justices. The dissent may correctly point out that the majority’s requirement of a “line item defense of payment” is at odds with prior Supreme Court case law. This highlights the difficult issues raised by joint check agreements, the use of equitable theories like unjust enrichment, and the “battle between innocents” we often witness in construction projects.
This is an important case, at least in Virginia, about the necessary elements of an unjust enrichment claim. However, it may be a warning and admonition to owners and general contractors about joint check agreements. If the joint check agreement is so one sided that it provides no contractual protection to material suppliers, that may open up unjust enrichment and other alternative theories of recovery.
You can read the full text of the case here: James G. Davis Constr. Corp. v. FTJ, Inc., 841 S.E.2d 642 (Va. 2020).