Suppose you act as a subcontractor on a job. Assume in the middle of that project, the general contractor goes out of business, leaving you with unpaid invoices. You want to look for compensation for your labor and materials, and often, the only other entity to look to is the project owner.
Suppose you act as a subcontractor on a job. Assume in the middle of that project, the general contractor goes out of business, leaving you with unpaid invoices. You want to look for compensation for your labor and materials, and often, the only other entity to look to is the project owner. Normally, as a subcontractor, you do not have a contract with the project owner, so you cannot initiate a legal action and allege breach of contract. Traditionally, in these scenarios, unjust enrichment has been a broad remedy the subcontractor could use to collect money from an owner.
Unjust enrichmentprovides a remedy when one party has benefitted from another and, in good conscience, the benefitted party should compensate the other. It does not apply to cases in which owners have paid general contractors for the subcontractor’s work. It does apply when the owner has not paid the subcontractors. In that case, a court would order the owner to pay the subcontractor. These two broad principles are unchanged.
In August, the Arizona Court of Appealshanded down a court opinion called Wang Electric v. Smoke Tree Resortthat limits the remedy of unjust enrichment when a lease is involved. In that case, the court ruled that subcontractors who contracted with a tenant to improve a building, and who do not get paid by the tenant, cannot sue the owner of the building for unjust enrichment unless the subcontractor shows the owner acted with improper, deceitful or misleading conduct. According to the court, the reason for this is that the owner/landlord should not have to act as an insurer for the tenant’s acts and as a guarantor for the tenant’s payments to subcontractors.
In the end, the court rules the owner could benefit from the improvements and not pay for them because the owner’s retaining the improvements without paying the contractor was not unjust. The court rules that the owner’s actively taking a role in the construction of the project did not make the owner’s retaining the benefits of the improvements, without paying for them, unjust. So, in this case, the owner received an almost-finished commercial restaurant without having to pay for much of it.Many have pointed out that the delineation that the court made is nonsensical and that the results is far from just. Nevertheless, subcontractors should beware when contracting with tenants of buildings. If the tenant files for bankruptcy or simply goes out of business, you may not have an unjust enrichment claim against the owner
You work hard, and when you do not get paid for your labor or materials, it is financially and emotionally devastating. To increase your chances of getting paid, consider using Stop Notices.
A Stop Notice is a demand upon a lender or owner to immediately stop paying a general contractor
Stop Notices are a remedy the Arizona Legislature added to assist contractors and material suppliers in getting paid. A Stop Notice is a demand upon a lender or owner to immediately stop paying a general contractor. A Stop Notice creates a lien on undisbursed construction funds held by the owner or construction lender.
Contractors and suppliers who can record a mechanic’s liencan serve a Stop Notice. Thus, to serve a valid Stop Notice, a contractor or supplier must have served a 20-Day Notice. The project must be a private project, not a public project. If the project is “owner occupied”, the contractor/supplier cannot serve a valid Stop Notice unless the Claimant has a written contract with the owner occupant.
A lender that receives a bonded Stop Notice must withhold the amount of the claim until the claim is resolved
A Stop Notice is served on the lender, if there is one, and the project owner. There are two types of Stop Notices: bonded and unbonded. A bonded Stop Notice is a Stop Notice that is served with a bond, issued by a surety company, for 125% of the amount owed. A lender that receives a bonded Stop Notice must withhold the amount of the claim until the claim is resolved. This is the strength of the Stop Notice remedy: serving a Stop Notice can shut down or significantly curtail a project. However, a surety normally requires a bond to be backed by cash collateral. The requirement of cash collateral can preclude contractors and suppliers from being able to use the bonded Stop Notice remedy.
An unbonded Stop Notice is a Stop Notice without the bond
An unbonded Stop Notice is a Stop Notice without the bond. An owner served with an unbonded Stop Notice from a subcontractor or supplier must withhold funds to satisfy the subcontractor or supplier’s claims. While the lender does not have to honor an unbonded Stop Notice, often times the lender will choose to honor it, which will either get you paid or cause the project to be shut down. You can prepare an unbonded Stop Notice in house, or a preliminary notice company can prepare unbonded Stop Notices for you for a reasonable fee.
Most contractors in Arizona do not use Stop Notices. If you are not getting paid on a project, consider, at a minimum, an unbonded Stop Notice. A project owner must withhold money and a lender may withhold money. An unbonded Stop Notice is inexpensive, and it may be the tool that gets you paid.