The Subcontractor’s Uphill Dig

Subcontractors face significant challenges when they are confronted with a general contractor which fails or refuses to pay for a contract balance or extra work. For any one of innumerable reasons, general contractors can be undercapitalized such that even a victory at trial can produce a hollow result when the execution of a judgment is returned unsatisfied. A Subcontractor’s right to file a mechanic’s lien is the Subcontractor’s primary protection under these circumstances. However, where a mechanic’s lien foreclosure action is not viable, either because there is no lien fund or there is some defect in the lien, a Subcontractor is left with limited recourse against the project owner.

For example, in the recent case of Palma Realty Assoc., LTD v. BLDG Oceanside, LLC, 59 Misc.3d 1206(A) (Sup. Ct. N.Y. Co. 2018), the Supreme Court, New York County, dismissed a subcontractor’s breach of contract and quantum meruit claims against the project owner. The plaintiff, Palma Realty Associates, sued the project owner, BLDG Oceanside, LLC, and the contractor with whom it was in privity, Master Development, Inc., for breach of contract, quantum meruit, account stated and to foreclose a mechanic’s lien. For reasons undisclosed by the Court’s opinion, Palma discontinued its causes of action to foreclose upon its Mechanic’s Lien and for an account stated. The Court granted Palma’s motion to dismiss the remaining causes of action for breach of contract and quantum meruit insofar as asserted against it, and severed and continued the breach of contract and quantum meruit claims as asserted against Master.

The Palma Court dismissed the breach of contract cause of action under the well-settled and well-known rule that a  subcontractor generally cannot maintain a breach of contract action against the project owner because there is no privity of contract between them, citing such authorities as Eastern States Electrical Contractors v. William L. Crow Construction Co.,  53 A.D.2d 522 (1 st Dept. 1989) and Braun Equip. v. Meli Borelli Assoc., 220 A.D.2d 312 (1 st Dept. 1995). See also Perma Pave Contracting Corp. v. Paerdegat Boat and Racquet Club, Inc., 156 A.D.2d 550 (2d Dept. 1989).

The Court also dismissed the subcontractor’s final cause of action against the owner sounding in quasi contract. The theory of quasi contract can impose liability without a contract where the defendant-owner has been “enriched” at the expense of the plaintiff-subcontractor, and where the circumstances are such that it is “against equity and good conscience to permit the
other party to retain what is sought to be recovered.” Georgia Malone & Co., Inc. v. Rieder, 19 N.Y.3d 511 (2012).

However, a quasi-contract theory of recovery cannot be maintained where it is undisputed that an express contract governs the subject matter of the dispute. Clark-Fitzpatrik, Inc. v. LIRR, 70 N.Y.2d 382 (1987). Although not cited by the Palma Court, this rule has been specifically held to bar-quasi contract claims even against those who are not parties to the contract. A&V 425 LLC Contracting Co. v. RFD 55 th Street, LLC, 15 Misc.3d 196 (Sup. Ct. N.Y. Co. 2007).

Counsel for the subcontractor argued that the bar to its unjust enrichment claim should not apply because the agreement it had with Master was an oral agreement. The Palma Court rejected this exception because the bar to unjust enrichment claims applies equally well to all express agreements, whether written or oral, citing to Morales v. Grand Cru Assoc., 305 A.D.2d
647 (2d Dept. 2003).

The Palma Court thus dismissed both the breach of contract and quasi contract claims against the owner.

There are, however, exceptions which were not before the Palma Court. Although mere acceptance of a subcontractor’s labor  and materials is usually insufficient to establish a direct claim against an owner, it is well-settled that an owner will be liable to the subcontractor where the owner expressly consents to pay the subcontractor directly. A&V 425 LLC Contracting Co. v. RFD 55 th Street, LLC, 15 Misc.3d 196 (Sup. Ct. N.Y. Co. 2007), citing Perma Pave Contr. Corp. v. Paerdegat Boat &  Racquet Club, Inc., 156 A.D.2d 550 (2d Dept. 1989) and Contelmo’s Sand & Gravel, Inc. v. J&J Milano, Inc., 96 A.D.2d 1090 (2d Dept. 1983).

More recent holdings have used more liberal language to describe the minimum relationship necessary for a subcontractor to state a viable quasi contract claim against an owner. In Heller v. Kurz, 228 A.D.2d 263 (1 st Dept. 1996), in a non-construction context, the Court held that the plaintiff’s services must have been performed for the defendant, not merely to the defendant’s benefit, but at his “behest”. And in Vertical Progression, Inc. v. Canyon-Johnson Urban Funds, 126 A.D.3d 784 (2d Dept. 2015), the Court held that a “subcontractor can sometimes state a cause of action alleging breach of contract or unjust enrichment against the owner where direct dealing between the owner and the subcontractor justify imposing an obligation upon the despite the initial lack of privity between them (emphasis added).” Id. at. 786-87.

In Georgia Malone & Company, Inc. v. Reider, 19 N.Y.3d 511 (2012), the Court of Appeals appears to have opened the door a bit wider for quasi-contract claimants. Reciting several precedents, the Court of Appels reiterated the settled rule stating that a plaintiff asserting a quasi-contract claim, “need not been privity with the defendant”, but that there must “exist a relationship or connection between the parties that is not too attenuated,” which includes direct conduct which produces “reliance or inducement.” Id. at 517. The Court of Appeals dismissed the quasi contract claim at issue because, inter alia, there were “no dealings” between the parties and, although the defendant “knew at all times” that it had received the benefit of the plaintiff’s work through another party, the defendant paid the third party for the work and did not know that the other party had not paid the plaintiff (id. at 518).

A subcontractor or material supplier faced with a defaulting contractor may consider reaching out directly to an owner to discuss a contractor’s payment issues. Depending on their significance, in the event a project ends in litigation, these direct contacts may determine whether or not the subcontractor or supplier gets paid.