Owner Liability To Construction Subcontractors In Contract Or Quasi-Contract

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The typical arrangement on most construction projects is that the property owner or developer engages the services of a general contractor or construction manager, which in turn subcontracts the work out to the various trades pursuant to a number of subcontracts.  Under this standard arrangement, subcontractors seeking payment for their work are generally limited to recovering funds from the general contractor or construction manager, as that is the party they contracted with.  Generally, under such an arrangement, there is no basis for an unpaid subcontractor to sue the property owner or developer for nonpayment because there is no contract between them.  (The obvious exception is a mechanic’s lien foreclosure action, where unpaid subcontractors, among others, can directly pursue a claim against the real property at issue, even where they do not have a contract with the owner.)

Can an unpaid subcontractor nevertheless sue an owner or developer on a “quasi-contract” theory of unjust enrichment or quantum meruit, to recover funds due on a construction project?  The answer is also generally “no,” as reaffirmed by a recent decision of Justice Melissa Crane of the New York County Supreme Court in the case of G&Y Maintenance Corp. v. 540 W. 48th St. Corp., 2021 NY Slip Op 31206(U).  New York law in this area holds that a property owner who contracts with a general contractor does not become liable to a subcontractor on a “quasi-contract” theory unless it expressly consents to pay for the subcontractor’s work.  Further, an owner’s acceptance of the subcontractor’s work also does not create a payment obligation.

In G&Y Maintenance Corp., an HVAC subcontractor entered into an oral subcontract with a general contractor, and alleged that it was owed funds due under the contract and on a change order.  The subcontractor filed suit against the owner asserting claims of unjust enrichment and quantum meruit.  Justice Crane dismissed the subcontractor’s claims against the owner, because the subcontractor had not entered into a contract with the owner, and also because the owner had not “assumed an obligation” to pay for the subcontractor’s work.

The subcontractor also argued that, because its contract with the general contractor was only oral, and not written, it should be permitted to pursue payment directly from the owner.  Justice Crane also rejected this argument, concluding that the owner could not be held liable to the subcontractor that had contracted only with the general contractor, simply because the subcontractor did not have an “express” contract with the general contractor.

The decision in G&Y Maintenance Corp. confirms the basic principle that an owner is generally not liable to a subcontractor with which it has not entered into a contract (except in cases seeking foreclosure of a mechanic’s lien).  By the same token, however, the decision is a reminder that an owner may potentially be held responsible for payments to subcontractors if the owner undertakes conduct reflecting an assumption of such payment obligations – such as directing subcontractors and making payments directly to them so that that the subcontractor is “working for” the owner itself, or terminating the general contractor and assuming direct owner oversight of subcontractors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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