What does a subcontractor do when the hiring party runs out of money? Subcontractors often pursue lien or bond claims; however, absent viable lien or bond claims, a subcontractor may attempt to pursue direct claims against parties higher in the contractual chain who have received benefit from the subcontractor’s work. Since the recession that began in 2009, many subcontractors, unfortunately, have been involved on projects where one party to the subcontract becomes insolvent. Insolvency of a party to the subcontract inevitably shifts the focus to possible claims against solvent parties not in privity of contract.
Recently, the United States District Court for the District of Massachusetts issued a decision addressing the merits of a sub-subcontractor’s various direct claims against a general contractor where no written agreement existed between sub-subcontractor and general contractor.1 The decision, though not addressing any issue of first impression, and not changing existing law, is consistent with the law in most states, and is an excellent primer on the various hurdles a subcontractor or supplier must overcome to successfully make a direct claim against a party not in privity of contract.
Factual and Procedural Background
In 2006, prior to the recession, the U.S. General Services Administration retained Suffolk Construction Company, Inc. (“Contractor”) for a project to renovate and restore the John W. McCormack Post Office and Courthouse in Boston.2 Contractor engaged Northeast Interior Supply, Inc. (“Subcontractor”) as a subcontractor to supply and install doors and door hardware for the project. Subcontractor, in turn, hired Auburn Door & Hardware, LLC (“Sub-subcontractor”) to provide the labor for the doors and hardware supplied by Subcontractor.3 Contractor generally had no complaints regarding Sub-subcontractor’s work.4 Notwithstanding, Subcontractor, at various times refused to pay Sub-subcontractor amounts claimed under their agreement. Subcontractor’s non-payment of Sub-subcontractor caused Contractor to issue a series of joint payments to Subcontractor and Sub-subcontractor.5 Sub-subcontractor finished its work in September of 2009 and sent Subcontractor a final invoice for $664,466.92.6 When Sub-subcontractor was not paid, it filed suit against Subcontractor, Contractor, and Contractor’s sureties in federal court. Eventually, Subcontractor filed for bankruptcy,7 shifting the focus of the litigation to the claims Sub-subcontractor was asserting against Contractor and the surety defendants.
Sub-subcontractor asserted various direct claims against Contractor and its sureties, including (1) a payment bond claim, (2) claims for breach of express and implied contract and promissory estoppel, (3) claims for unjust enrichment and quantum meruit, and (4) claims for unfair and deceptive business practices under Mass. Gen. Laws ch. 93A, § 11.8 Contractor and the surety defendants filed motions for summary judgment on all of Sub-subcontractor’s direct claims.
Bond Claim as Means of Payment
Many times when subcontractors and suppliers have not been paid on a project, they assert claims under the contractor’s payment bond. Payment bonds are required for many federal and state projects. Payment bonds obligate the bond principal and surety to pay subcontractors and suppliers if they are within the scope of the persons protected by the bond, and if the subcontractors and suppliers comply with the terms of the bond. In the Auburn Door case, there was little discussion regarding the Sub-subcontractor’s bond claim because Sub-subcontractor conceded that summary judgment was proper on the bond claim. Under the Federal Miller Act, a subcontractor or supplier who does not have a contract with the bond principal must provide written notice of a bond claim within 90 days of subcontractor’s or supplier’s last work.9 Sub-subcontractor conceded it failed to provide the required 90 day notice.
Effect of Oral Assurances of Payment by General Contractor
In addition to its bond claim, Sub-subcontractor also argued it could recover its costs from Contractor because Contractor breached a direct contract with Sub-subcontractor. Sub-subcontractor argued that statements made by Contractor assuring payment created a contract between Contractor and Sub-subcontractor and, under the parties’ express and implied contract, Contractor had an obligation to pay Sub-subcontractor for its work. The alleged statements were statements typical of those uttered by general contractors seeking to continue a project with a subcontractor who is “slow pay” with its sub-subcontractors and material suppliers. As summarized by the Court:
The alleged promises, attested to by Black [Auburn Door’s project manager] are as follows. According to Black, the project executive for Suffolk, Michael Cappellano, requested in early 2009 that Auburn Door increase its personnel on the McCormack project and promised that, if it did, “Suffolk guaranteed it would be paid.” Auburn Door says that, as a result, it increased its manpower and stayed on the job longer than it otherwise would have done. Additionally, Black affirms that when Cardoos became aware that Auburn Door was having payment problems with Northeast, he promised that “if Northeast was unable to complete the job, Suffolk would take over the contract between Northeast and Auburn Door.” On one occasion in which Cardoos contacted Black directly about performing additional work, he told Black that “we’ll work something out obviously” and, after Black assured Cardoos that the work would get done, Cardoos replied “I am sure between the two of us we can work it out”; these representations were recorded by voicemail transcription and email.10
The Court in Auburn Door acknowledged that “the terms of an oral contract may be established entirely through testimony”,11 but ultimately held insufficient evidence existed to create a genuine issue of fact regarding whether the Contractor and Sub-subcontractor had an agreement for Contractor to pay Sub-subcontractor. According to the Court, the general statements by Contractor assuring payment (above) were not sufficiently definite to create an agreement between Sub-subcontractor and Contractor.12 In addition, the Court was persuaded that no direct agreement existed between Sub-subcontractor and Contractor because Sub-subcontractor never sent invoices directly to Contractor.13
Quasi Contractual Claims by a Sub-Subcontractor Against a General Contractor
When a subcontractor has not been paid for its valuable work and materials, it often also argues the owner or general contractor should be liable for the value of the subcontractor’s work under a “quasi-contract” claim (e.g., unjust enrichment or quantum meruit). In Auburn Door, Sub-subcontractor claimed Contractor was liable under such quasi-contractual claims and argued that, under these circumstances (i.e., assurance of payment and retention of benefit by Contractor), it would be unjust if Contractor was not required to pay Sub-subcontractor for the value of Sub-subcontractor’s work. The Court, relying heavily on the Massachusetts Appeals Court’s decision in Mike Glynn & Co. v. Hy-Brasil Restaurants, Inc., 75 Mass. App. Ct. 322, 914 N.E.2d 103 (Mass. App. Ct. 2009), found that Sub-subcontractor could state a quasi-contractual claim against Contractor.14 Mike Glynn & Co. involved similar facts where a subcontractor was prepared to walk off the job because of non-payment but continued working because of vague assurances by the owner that the subcontractor would receive payment.15
The Court also relied on the Restatement (Third) of Restitution & Unjust Enrichment § 25 (2011) which states, in part:
(1) If the claimant renders to a third person a contractual performance for which the claimant does not receive the promised compensation, and the effect of the claimant’s uncompensated performance is to confer a benefit on the defendant, the claimant is entitled to restitution from the defendant as necessary to prevent unjust enrichment.16
On the strength of these authorities, the Court denied Contractor’s motion for summary judgment on Sub-subcontractor’s quasi-contractual claims.
The general rule in most jurisdictions requires that an owner or general contractor will not be liable under a quasi-contract theory to subcontractors not in privity if the owner or general contractor paid the full amount of the owner or general contractor’s contract price. In Auburn Door, the evidence before the Court was insufficient to resolve whether Contractor had already paid amounts it was required to pay under its agreement with Subcontractor. Thus, summary judgment was not proper for the alternative reason that Contractor had satisfied its payment obligations. However, the Court warned in its opinion that “Sub-subcontractor will have no claim in restitution if Contractor ‘has already paid the contract price for the benefits received, even if the contract price is less than the cost or value of the performance in question.’”17 Notably, a month after the Court’s opinion was filed on September 19, 2013, Contractor filed another motion for summary judgment as to Sub-subcontractor’s quasi-contract claims. In that motion, Contractor argues that it actually overpaid on Subcontractor’s subcontract by $366,680.12 and, therefore, cannot be liable in quasi-contract to Sub-subcontractor.18
Lessons Learned from Auburn Door v. Suffolk Construction
This case has not been fully adjudicated or resolved. Thus, it would be improper to assume that Sub-subcontractor will not receive some or all of the costs it incurred for this project. That being said, a safe assumption is that Sub-subcontractor, because it did not have a valid bond claim, and because it did not have sufficient evidence of any payment agreement with Contractor, has now been involved in litigation regarding the McCormack renovation project for nearly four years -- with no guaranty of payment. No subcontractor or supplier relishes being in such a position.
To avoid Sub-subcontractor’s position, subcontractors and suppliers need to be particularly mindful of lien deadlines and state and federal bond deadlines, and mindful of any deadlines or limitations placed in the project’s payment bond (to the extent not preempted by state or federal law). A very common requirement for a valid bond claim under state and federal law or under the terms of various payment bonds is the provision of notice of the claim by a subcontractor or supplier not in privity with the bond principal, which notice must be made within 90 days of claimant’s last day of work or provision of materials.19
Further, subcontractors and suppliers need to provide the correct form of notice under the bond or state or federal law, and timely file suit to enforce their bond rights. The federal Miller Act, for example, requires a subcontractor to file suit within one year of its last work or provision of materials.20
In addition (not as an alternative), subcontractors and suppliers, when facing potential termination or suspension for non-payment or slow payment should not rely merely on the common vague assurances of payment general contractors and owners freely given when trying to maintain a project schedule. Instead, such a subcontractor or supplier expressly should request and negotiate a more formal agreement, like a joint check agreement or a payment guaranty. The importance of proceeding with an express agreement (as opposed to possible quasi-contractual claims) cannot be understated. First, payment by an owner or general contractor to its immediate contractor or subcontractor is not a defense to a claim under an express payment agreement. Second, if a subcontractor enters into a direct agreement with parties higher in the contractual chain (e.g., an owner or general contractor), the subcontractor, in the event of breach, may be able to assert a claim not only for its contract price, but for contractual damages like impact and delay damages. In Auburn Door, the Court entered summary judgment on the Sub-subcontractor’s request for “labor impact damages” because Sub-subcontractor did not have a direct agreement with Contractor. The Court held that Sub-subcontractor was limited to seeking restitution from Contractor under a quasi-contract claim, and “[w]hile damages are measured by a plaintiff’s loss or injury, restitution is measured by a defendant’s gain or benefit. . . . Auburn Door’s [Sub-subcontractor’s] alleged inefficiency losses are not a measure of Suffolk’s [Contractor’s] gain . . . .”21
Some owners or general contractors may hesitate to execute a direct payment agreement with a subcontractor with whom they have no pre-existing agreement. If the owner or general contractor is not willing to provide an express guaranty of payment, a subcontractor or supplier’s best business decision may be suspension or termination.
1. See Auburn Door & Hardware, LLC v. Suffolk Constr. Co., Inc., No. 10-11074-DPW, 2013 U.S. Dist. LEXIS 134118 (D. Mass. Sept. 19, 2013).
2. Id. at *2.
4. Id. at *3.
6. Id. at *3-4.
7. Id. at *4-5.
8. Id. at *4. Auburn Door conceded summary judgment was proper on the unfair and deceptive business practices claim since “a good faith dispute as to whether money is owed, or performance of some kind is due, is not the stuff of which a c. 93A claim is made.” Id. at *18-19 (quoting Duslersaint v. Fed. Nat. Mortg. Ass’n, 696 N.E.2d 536, 540, 427 Mass. 809 (Mass. 1998)). Since the Court, in its Opinion, did not provide significant discussion regarding this claim, further discussion will be omitted from this Article.
9. Id. at *6 (quoting 40 U.S.C. § 3133(b)(2)). Because summary judgment was granted regarding the bond claim (which provided federal question jurisdiction), and because the parties did not have diversity of citizenship (both Northeast and Auburn Door are New Hampshire citizens), the Court next addressed, sua sponte, whether it was proper for the Court to exercise supplemental jurisdiction over the remaining state law claims. Ultimately, the Court concluded it was proper for it to proceed because remanding to state court would cause unnecessary delay. Id. at *8 (citing Roche v. John Hancock Mut. Life Ins. Co., 81 F.3d 249, 257 (1st Cir. 1996).
13. Id. at *11. Regarding the estoppel claim, without discussion, the Court found that Auburn Door did not reasonably rely on Suffolk’s assurances with payment, presumably because Suffolk’s statements were too “vague and noncommittal.” See id. at **11-12.
15. Mike Glynn & Co., 914 N.E.2d at 108. Importantly, for Massachusetts practitioners, the holding of Mike Glynn & Co. has been limited by at least one Massachusetts Appeals Court panel and stated to apply only in those cases like Mike Glynn & Co., and like Auburn Door, where the defendant encouraged the plaintiff to continue providing work or materials. See Michael Shea Co., Inc. v. Chellis, 81 Mass. App. Ct. 1105, 958 N.E.2d 537, 2011 Mass. App. Unpub. LEXIS 1322, *8 fn. 4 (Mass. App. Ct. Dec. 20, 2011) (unpublished opinion).
18. See Auburn Door & Hardware, LLC v. Suffolk Construction Co., Inc., et al., Case No. 10-11074-DPW (D. Mass.) (Doc. Nos. 80-83). Auburn Door has responded to Suffolk’s motion, advancing various arguments, including that Suffolk did not provide sufficient evidence that Suffolk has fully paid Northeast, and that Auburn Door and Northeast dispute various backcharges used by Suffolk to calculate Northeast’s contract balance (and thus whether Suffolk has paid Northeast in full). See id. at Doc. Nos. 93-97. The case has been referred to an ADR conference.