Failing to Pay a Subcontractor

Recent case illustrates importance of understanding all construction contracts.

Background. An Ohio court ruled that a church could not avoid paying a subcontractor that provided labor and materials for a church construction project on the ground that the subcontractor failed to file a mechanic’s lien.

In 1995, a church entered into a contract with a general contractor for the construction of a new worship facility. The contract provided that the worship facility would be constructed over a period of seven months for a total cost of $852,650. Payments to the general contractor were to be made in installments upon approval by an independent architect. Over the next several months, substantial work on the project was completed. The architect approved four payment requests from the general contractor, totaling $321,365.05, and the church paid these amounts.

The general contractor later accepted a bid for the fabrication and installation of certain steel structures for the worship facility, and the steel subcontractor fabricated and installed the steel structures in accordance with the terms of its agreement with the general contractor. The steel subcontractor sent the general contractor an invoice for $25,500 for the work and materials it supplied. A few weeks later, the general contractor submitted a request for a fifth payment in the amount of $87,531.10. The architect recommended that the church withhold $58,328, but approved $29,203 of the request. The church in turn paid out $20,000 to those subcontractors who held mechanic’s liens on its property. It did not pay the steel subcontractor because it never perfected a mechanic’s lien on the church property.

The steel subcontractor sued the church, demanding payment for the labor and material that it supplied on the basis of the legal theory of “unjust enrichment.” The church insisted that it was not required to pay the steel subcontractor anything since it had failed to protect itself by filing a mechanic’s lien on the church’s property.

What the court said. A trial court ruled in favor of the steel subcontractor. It concluded that “it would, indeed, be unjust to permit [the church] to pick and choose who it decided to pay and for what services to the detriment of [the steel subcontractor] who dealt in good faith with [the church] and did everything required of it.” The trial court further found that its decision was not by barred by the steel subcontractor’s failure to file a mechanic’s lien on the property, and that the subcontractor was entitled to relief on the basis of its unjust enrichment claim. A state appeals court agreed.

The court noted that to recover under the theory of unjust enrichment, the steel subcontractor had to prove that (1) it conferred a benefit upon the church, (2) the church had knowledge of the benefit, and (3) it would be unjust for the church to retain that benefit without payment. The church insisted that the steel subcontractor could not prove the third requirement. It pointed out that it ultimately paid in excess of the contract price for the completion of the project and paid the general contractor all amounts it was entitled to under the terms of the contract.

The court concluded that the steel subcontractor could pursue a claim of unjust enrichment against the church even though it had failed to file a mechanic’s lien. However, it also acknowledged that if the church had paid the general contractor in full for all performance rendered at the construction site, then it had not received a benefit for which it did not pay and it would not be liable to the steel subcontractor on the basis of unjust enrichment. The key question, then, was whether or not the church had fully paid the general contractor. The court concluded that it had not done so. It noted that the architect had approved only $29,203 of the $87,531.87 requested by the general contractor for its fifth payment, and this is the amount the church paid. Since the church had not fully paid the general contractor for all amounts due under the contract, it would be unjustly enriched if it was not required to pay the steel subcontractor.

Relevance to church treasurers. Most churches enter into construction contracts on occasion. In some cases, a church is constructing a new worship facility, as in this case. In others, a church is remodeling its present facility. Under most construction contracts, the church will be responsible for paying the general contractor the contract price. It is then the general contractor’s responsibility to pay its subcontractors. In some cases, a subcontractor that provides labor or material in a construction project is not paid by the general contractor. Subcontractors can protect themselves against nonpayment by filing a mechanic’s lien against the church’s property. Such a lien enables the subcontractor to sell the church’s property in order to obtain payment for any labor or material that it provided. But subcontractors do not always file mechanic’s liens. This case illustrates the following important points:

Subcontractor files a mechanic’s lien

If a subcontractor files a mechanic’s lien, then its right to payment for any labor or materials that it provided will be protected by state law. If the general contractor does not pay the subcontractor, then the church will be required to do so. If it does not, the subcontractor can sell the church’s property in a foreclosure sale to obtain payment for the labor or materials that it provided.

Key point. Churches can protect themselves from having to pay twice for the same services or material in various ways. Here are some common precautions: (1) Only deal with reputable contractors who have been in business in your community for several years and who have an excellent reputation. Many churches use a contractor who is a member of their congregation. (2) Require the contractor to provide you with “lien waivers” from all suppliers and workers before making payments for the job. (3) Hold back a portion of the contract price until you are assured that all suppliers and workers have been paid. (4) Ask the contractor to submit bills from suppliers and workers directly to the church, and inform the contractor that the church will pay these bills directly. (5) If you sign a contract, you may want to address some of these options in the contract. The assistance of an attorney is essential.

Subcontractor does not file a mechanic’s lien

The fact that a subcontractor fails to file a mechanic’s lien does not necessarily prevent the subcontractor from seeking payment from a church. If the general contractor fails to pay the subcontractor, then the subcontractor may sue the church for payment on the basis of the legal doctrine of “unjust enrichment.” This court made the following two conclusions regarding unjust enrichment:

(1) If the church has paid the full contract price to the general contractor, then it has not received a benefit for which it did not pay and it has not been unjustly enriched. According to this court, the church would not be legally required to pay the subcontractor again.

(2) If the church has not paid the full contract price to the general contractor, then it has received a benefit for which it did not pay. Under these circumstances, the court concluded that the church had been unjustly enriched, and as a result it was required to pay the subcontractor’s claim. Wickford Metal Products v. Tri-Village Church of Christ, Inc., 1999 WL 3973 (Ohio App. 1999).

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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