In a recent case in Kentucky, a sub-tier subcontractor sued the general contractor and owner for failure to pay for extra work. At the trial, the court held the subcontractor was entitled to recover under the theories of implied contracts and unjust enrichment, even though the subcontract contained a “pay-if-paid” clause. All parties appealed. In particular, the general contractor asserted that the pay-if-paid provision in the subcontract precluded recovery by the subcontractor. The issue was petitioned to the Supreme Court of Kentucky.
The question to be resolved by the Supreme Court of Kentucky was whether a pay-if-paid provision was enforceable as between a general contractor and subcontractor, and if so, whether the subcontractor could nevertheless pursue the owner directly for payment notwithstanding a lack of privity between the owner and subcontractor.
The Supreme Court of Kentucky held that because the owner had not paid the general contractor, as a result of the pay-if-paid clause, the general contractor had not breached the subcontract for failure to pay the subcontractor’s extra work. The relevant subcontract provision was:
[P]ayment [to] the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The Subcontractor hereby acknowledges that it relies on the credit of the Owner, not the Contractor, for the payment of the Subcontract Work.
Another subcontract provision read that:
Unless the Contractor has collected corresponding additional compensation from the Owner or other party involved, no compensation for any claim arising out of the performance of the Subcontract is allowed.
Reading these two clauses together, the Supreme Court concluded that the general contractor’s receipt of payment from the owner was a condition precedent to the obligation to pay the subcontractor. It was established that the general contractor had not received payment from the owner. Therefore, there could be no breach.
The court ruled, however, that because the subcontractor was left with no useful contract remedy against the general contractor, the subcontractor was not barred from bringing unjust enrichment claims against the owner. The court acknowledged that typically “unjust enrichment is unavailable when the terms of the express contract control,” but noted that here the “adequacy” of a “legal remedy” (or the actual realization of that contract remedy) was absent due to the “contractual gridlock” caused by the owner. If the contract was the only avenue for contractors to obtain relief, the result would allow the owner to take advantage of its own failure to pay after receiving “a substantial benefit” from the subcontractor’s work.
Comment: Unjust enrichment and implied contract theories have been used to provide remedies to contractors caught in similar dilemmas in other jurisdictions. See Town Concrete Pipe of Washington, Inc. v. Redford, 43 Wn. App. 493, 717 P.2d 1384 (1986). This is another theory of recovery that a subcontractor should keep in mind if it has failed to recover because of the pay-if-paid provision, when the owner is the cause of the failure of the general contractor to make payment and the subcontractor has not for some reason perfected its lien rights.
Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, 540 S.W.3d 770 (Ky. 2017).