There is an expression in the law that most litigation occurs because of missing facts or missing documents. A written notice for an extra item or for a time extension was not sent; both parties did not sign the contract; the owner denies that the light fixtures delivered were the ones he or she orally approved.

There are equitable legal theories to help a contractor in these and other such circumstances: "Actual" notice in place of written notice; subsequent confirmation of the agreement by the party who did not sign; the "completed contract" theory to substitute for a written contract. These alternative approaches are employed when a degree of careful documentation is lacking. None guarantees a fair result.

The idea of many equity theories is that a wrongdoer should be prevented (estopped) from raising certain valid legal defenses in order for the court to do equity. For example, if an owner orally directs extra work to be performed, knowing the work is not covered by the contract, he or she may be estopped later from raising a contractual defense of lack of written notice or may be deemed to have waived that defense.

Quite frankly, the case law often reflects a lack of clarity by the courts in distinguishing between waiver, estoppel, contract in fact, implied contract, apparent authority and other equity concepts, but that discussion is for a legal seminar.

The basis of the doctrine of unjust enrichment

One of the more interesting alternative theories is "unjust enrichment." Unjust enrichment varies to a degree from state to state, but generally arises from four criteria where there is no contract:

Criterion 1. The owner expressly or by implication requested another to perform work.

Criterion 2. The other party had a reasonable expectation of being paid.

Criterion 3. The owner was guilty of wrongdoing.

Criterion 4. The owner's involvement was active.

Well, that's a handful. An example may help.

How the doctrine is applied

A recurring contractual mess arises when the general contractor disappears (through default termination, bankruptcy, etc.) and the owner asks the subcontractors to continue work. Too often, under these circumstances, the subcontractors do continue, but without the benefit of the owner's written promise.

Here are the facts of a recent case in Indiana. Toward the end of the construction of a hotel, the owner default terminated the general contractor. Among the work remaining was the delivery and installation of marble tile. The owner's field representative orally requested the marble subcontractors to finish the work and told them that the owner had "taken over" the project. There was no discussion of who would pay. When the marble work was done, the owner refused to pay.

The appeals court ruled against the owner on the basis of unjust enrichment. There had been a request for the work to go forward (Criterion 1), and the owner's involvement became so active that he was deemed to have "stepped into the shoes" of the general contractor. (Criterion 4) Although no express promises were made, the subcontractors testified that they certainly expected the owner to pay them directly. (Criterion 2)

But, where was the "wrongdoing?" (Criterion 3) There was no evidence that the owner was guilty of misrepresentation or that there was some evil intent in its actions. So, in a stretch, the court found that the failure to pay was the "wrong." The term of art for what the court did is "bootstrapping." Equity was done, but look what it took to get there.

The court did not address whether the owner would have been liable for past due amounts owed to the subs before the termination by the defaulted general contractor.

In another case, the unjust enrichment doctrine was applied to extra work. An owner "induced" (the court's language) subcontractors to perform extras. The owner had an on-site representative who saw the extras being performed, and that was enough for the court, along with some vague statements regarding payment, to justify the application of unjust enrichment.

The assignment clause

Many contracts allow the owner to essentially take over the subcontracts if the general is terminated. An example:

In the event of termination of the Prime Contract by the Owner, the Contractor may assign this Subcontract to the Owner, with the Owner's agreement.

As with all contract clauses, the exact language is significant. In this clause, the owner appears to be substituted fully for the prime contractor. If that happens, the owner would be treated legally as if he or she had stepped into the shoes of the general contractor, and as a result, would be liable for unpaid work completed prior to the termination. Note though, that under that clause the owner does not have a right to reassign the subcontracts to a replacement general contractor.

Caution is still necessary, even if there is an assignment clause. In a Connecticut case, the terminated prime contractor sent letters to subcontractors stating that their agreements had been assigned to the owner. The subcontractors then continued their work but were not paid. The owner's principal defense was that he did not sign a consent-to assignment.

Although the owner's actions after the termination induced a court to find that the owner had become a party to the subcontracts, it still took litigation to reach that point.

How these issues could have been avoided

Think of the time and litigation costs it took the subcontractors in these examples to get paid. Think of the legal hurdles. Any slip along the way may have doomed recovery. So what do you do?

¥ If anyone asks you to do extra work, get the request in writing, or write it up yourself and be sure to get it signed.

¥ If an owner asks you for extra work, politely suggest that he or she go through the general contractor.

¥ If an owner asks you to continue after the general is defaulted, get at least a simple, written agreement signed by the owner describing the work and the payment terms.

¥ At an absolute minimum, document your conversations with the owner and confirm them by letter to the owner.

¥ Do not rely on good faith and fair dealing. There have been too many instances of the owner and subcontractor having different recollections of who ordered the work and at what price.

¥ If you have questions concerning your legal rights, contact a contracts attorney.

Conclusion

When all parties to a project are getting along or are on a tight schedule, there is a tendency just to do the work and ignore recordkeeping. When part or all of the work is done on a handshake, even well-intentioned and honest people can differ about their agreement. If all the documentation is not in place, the doctrine of unjust enrichment may be used to obtain a fair result. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, e-mail: [email protected], or his Web site, www.ittig-ittig.com.