Waiver of Written Change Orders and Unjust Enrichment

By Paul Whitt and Ashton Smith | February 1, 2023
Construction worker pouring concrete

Tennessee Court of Appeals Finds in Favor of Subcontractor in Claim Against Owner

The Tennessee Court of Appeals recently affirmed a trial court’s decision in favor of a subcontractor where the general contractor went under and the subcontractor asserted a lien claim and a claim for unjust enrichment against the owner. The owner argued that the subcontractor did not comply with the written change order provision in the subcontract and that the owner had already paid the general contractor for a portion of the work performed by the subcontractor.

In Los Pumas Concrete v. Harmony Hospitality, LLC et al., 2021 Tenn. App. LEXIS 319 (Tenn. Ct. App. Aug. 11, 2021), the court rejected the arguments by the owner against a payment claim by the subcontractor after the general contractor went out of business and failed to pay the subcontractor. The subcontractor provided concrete services for the construction of a hotel project pursuant to an agreement with contractor. The subcontractor stopped work on the project when the contractor stopped making progress payments despite making initial progress payments. The subcontractor timely recorded and served its mechanic’s and materialmen’s lien on the project in the amount of $144,067, plus interest and attorney’s fees. Shortly thereafter, the subcontractor filed suit against the owner and the contractor.  The claims against the owner were for enforcement of the lien and for unjust enrichment.  The contractor—being apparently defunct—defaulted and a default judgment was entered against the contractor.

The subcontractor proceeded against the owner as to both the enforcement of the lien and the claim for unjust enrichment.  The owner disputed both claims on multiple grounds. Initially, the owner—placed in the position of having to assert arguments/defenses of the contractor since the contractor was not responding—argued that the subcontractor failed to get written change orders for the work comprising the amount sought by the subcontractor. The owner argued that the agreement between the contractor and subcontractor required that any change orders be signed by the appropriate representative of the contractor. The change orders were apparently not signed by the contractor. However, the subcontractor submitted proof, in the form of testimony from the subcontractor’s project manager, that the contractor and subcontractor established a course of dealing where contractor’s superintendent was given authority by contractor’s vice president to approve change orders. The subcontractor’s project manager also testified that the contractor’s superintendent directed the subcontractor to perform the work comprising the change orders in question. The owner—despite offering testimony of the owner’s representative that the owner was unaware of who approved the change orders of the subcontractor—was unable to present testimony of anyone with personal knowledge to dispute the testimony of the subcontractor’s representatives concerning the course of dealing between the contractor and the subcontractor.  As a result, the court affirmed the trial court’s decision that contractor and subcontractor “engaged in a course of dealing such that their failure to adhere to the signatory requirement contained in the Subcontractor Agreement constituted a waiver of that requirement.”

Contractor and subcontractor “engaged in a course of dealing such that their failure to adhere to the signatory requirement contained in the Subcontractor Agreement constituted a waiver of that requirement.”

The owner also disputed the subcontractor’s unjust enrichment claim on the ground that the owner had made some payments to the contractor for subcontractor’s work. The owner relied heavily on the decision in Paschall’s Inc. v. Dozier, 219 Tenn. 45 (Tenn. 1966), for the proposition that where an owner “has given any consideration to any person for the improvements, it would not be unjust for him to retain the benefit without paying the furnisher.” The court disagreed and stated that the owner was “attempting to paint the unjust enrichment landscape with too broad a brush.” The court went on to explain, and hold, that the owner’s argument that it had made a partial payment to the contractor was misplaced because the question is whether the owner had made payment to the contractor for the “value of the improvements that are at issue.”  Because the record was undisputed that the owner had not made any payment to the contractor for the specific work covered by the change orders in question, the court ruled that the trial court correctly found that the owner was liable to the subcontractor for unjust enrichment.

This decision should be a reminder to members of the construction industry to be wary of allowing for a course of dealing that does not adhere to the specific terms of the contract—such as the requirement for written change orders—to persist, or else a party very well may be able to sustain a claim for additional costs and/or work even when there is no written change order approving the work.  Also, while many owners believe that making payment to a contractor eliminates a claim for unjust enrichment by a subcontractor, that general rule is limited to payments made for the specific improvements, services, or materials at issues—and not universally to any work, materials and/or services provided by a subcontractor and/or vendor.

Photo credit: Michael Coghlan licensed under Attribution-ShareAlike (CC BY-SA 2.0)

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