This article is posted in Zlien’s “Lien Law Alerts” category because it discusses a July 2012 Arizona Court of Appeals decision that addresses whether mechanics lien claimants could rely on an unjust enrichment claim against a property owner as a backup to their lien rights when construction was part of tenant improvements.
On a standard construction project, the property owner contracts with the prime contractor, and the prime contractor contracts with subcontractors, and those subcontractors contract with subcontractors and suppliers. If unpaid, each of these parties have contractual claims against the party who it directly contracted with, but they are without contract claims against the parties above them in the chain.
Is there any way to make a claim against these other parties?
As any loyal reader of this blog knows, one such way is a mechanics lien claim. Filing a mechanics lien claim opens the door for you to demand payment against the property owner and others above you in the contracting chain without privity of contract. But what if you don’t have a lien claim, or your lien claim is found invalid? Do you have any way to demand payment from these other parties?
Many folks have heard of “unjust enrichment claims,” and as an attorney I’ve heard the term uttered by clients on a large number of occasions when they were desperate to find someone to pay them. Let me introduce you to the theory and explain why the remedy may or may not be available to you as an alternative to the mechanics lien.
What Is Unjust Enrichment?
Wikipedia defines unjust enrichment as follows:
Unjust enrichment is a legal term denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing…A general equitable principle that a person should not profit at another’s expense and therefore should make restitution for the reasonable value of any property, services, or other benefits that have been unfairly received and retained.
On a construction project, the theory is frequently claimed by subcontractors or suppliers who believe the property owner has benefitted from their work or furnishing, and if they aren’t paid for the same, the benefit was unjust and to their detriment.
Each state has different elements to what must be proved to qualify for an unjust enrichment claim. Take the state of Arizona’s case law on the remedy, which sets forth five elements:
- an enrichment
- an impoverishment
- a connection between the enrichment and impoverishment
- the absence of justification for the enrichment and impoverishment
- the absence of a remedy provided by law
Problem For Construction Claimants: Remedy Is Provided By Law
In most states, the unjust enrichment theory is not available because of this pesky fifth element: that there is no other remedy provided by law. In many states, the “remedy provided by law” need not have great odds at success. It just simply needs to be there.
Let’s think about a material supplier to a subcontractor as an example, and assume the subcontractor that hired the supplier has gone bankrupt and refused to pay the supplier. The supplier would look to the prime contractor or the property owner for payment under unjust enrichment theory and likely fail because the supplier does have a remedy provided by law: A claim against the subcontractor.
It doesn’t matter that the claim against the subcontractor is unlikely to have a positive result because of the bankruptcy. The legal remedy is there, so it is not absent, and that’s that.
There are some state-by-state exceptions. One exception was referred to by the Arizona Court of Appeals in a recent mechanics lien decision Wang Elec., Inc. v. Smoke Tree Resort, LLC:
…[P]ayment is sought from the owner under a theory of unjust enrichment. These cases fall into two categories: ones in which the owner has fully paid the general contractor and ones in which the owner has not fully paid the general contractor. Our courts have held that recovery under a theory of unjust enrichment is not available in the former category, because the owner is not unjustly enriched if it fully paid its obligation. But when the owner has failed to fully pay its obligation, our courts have held that recovery for unjust enrichment is available because permitting the owner to retain the benefit without fully paying for it would be unjust.
While I think this rule ignores the 5th element of an unjust enrichment claim, as an advocate for supplier and subcontractor remedies, I’m not going to argue. It’s worth noting, however, that the Arizona Court of Appeals did note in this Wang Electric decision (released last week) that there are some limits to the unjust enrichment theory in Arizona beyond this rule, announcing a new rule that “a contractor hired by a tenant to make improvements to leasehold premises, or subcontractors retained by that contractor, can recover unpaid monies for making tenant improvements from the property owner [under an unjust enrichment theory] only when that owner has engaged in improper conduct.”
The Lesson: File Your Mechanics Lien
As a last resort, looking to the unjust enrichment jurisprudence in a project’s state may be worthwhile if you’re left with a claim and no mechanics lien rights. However, it should only be relied upon as a last resort.
In general, it’s very difficult to use unjust enrichment theories to recover against a party you did not contract with on a construction project. Preserving and enforcing your mechanics lien rights would clearly give you this remedy, and therefore, if you can file a mechanics lien it is a much better course of action.