A general contractor may now be liable to a supplier and subcontractor even if the supplier and subcontractor fails to perfect its claim against the payment bond on a public project.
Consider the following scenario: a supplier furnishes equipment or materials to a subcontractor for a public project. The subcontractor goes out of business and is replaced by the general contractor. The suppliers equipment is then installed by the replacement subcontractor. The supplier is never paid. The supplier fails to perfect its claim against the general contractors payment bond for the project.
The supplier files a lawsuit against the general contractor contending that it was unjustly enriched because it never paid for the suppliers materials. The general contractor makes the following arguments against the suppliers claim:
1. The supplier had no contract with the general contractor but did have an express contract with the subcontractor. The court should not create a new contract with the general contractor simply because the subcontractor went out of business. The Michigan Court of Appeals rejected this argument saying that even if there was no contract between the supplier and general contractor, the court can create or imply a contract between these parties to prevent unjust enrichment by one party.
2. The general contractor was not unjustly or inequitably enriched simply because it retained and used the materials. Not all enrichment is unjust. The Court disagreed again finding that no one paid the supplier for the materials that were used. The general contractors retention of the materials was not innocent because it knew the subcontractor had gone out of business and had not paid the supplier.
3. The general contractor paid more than the full price under the original subcontract to the replacement subcontractor; and therefore, was not unjustly enriched. Again, the Court said no. The mere fact that the general contractor may have paid more than the full contract price originally contemplated does not eliminate its obligation to pay the supplier for the materials used in the project. The original subcontractors breach of contract had nothing to do with the supplier.
4. The suppliers failure to avail itself of a claim against the payment bond bars an unjust enrichment claim. The Court also rejected this argument finding that the remedy under the payment bond was not the suppliers exclusive remedy against the general contractor.
Whats the lesson here? A general contractor must now be more diligent than ever before in its review of subcontractor sworn statements to verify that suppliers and subcontractors have been paid; otherwise, it may be liable to an unpaid subcontractor or supplier.