In Superior Steel, Inc. v. Ascent at Roebling's Bridge, LLC, No. 2015-SC-000204-DG, 2017 WL 6380218 (Ky. Dec. 14, 2017), a subcontractor and a sub-subcontractor sued the general contractor and owner for the failure to pay for extra work. The general contractor and owner cross-claimed against the other for, inter alia, indemnification. At the jury trial, the subcontractors recovered under theories of implied contract and unjust enrichment. All parties appealed, in particular, as to the pay-if-paid jury instruction. The Court of Appeals vacated the judgment and remanded. In turn, all parties petitioned to the Supreme Court of Kentucky.
The key questions in the petition were whether the pay-if-paid provision was enforceable as between the general contractor and subcontractors and, if so, whether the subcontractors could pursue the owner directly for payment notwithstanding the lack of privity between owner and subcontractors.
The Supreme Court concluded that, as a result of the pay-if-paid clause, the general contractor had not breached subcontract for the failure to pay for the subcontractor's extra work. The relevant subcontract provisions stated:
- "no compensation . . . for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved"
- And more directly - "payment [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 relied on the credit of the Owner, not the Contractor for payment of the Subcontract Work."
Reading these together, the Supreme Court agreed that the general contractor's receipt of payment from owner was a condition precedent to its obligation to pay the subcontractors. Because the general contractor did not receive payment from the owner, there could be no breach. The Court did note that "pay-if-paid clauses have fallen out of favor in some states, [but] the prohibition against their use has come from the legislature rather than the courts." In Kentucky, no such statutory prohibition existed.
However, because the subcontractors were left with no useful contract remedy against general contractor, the Court held that the subcontractors were not barred from bringing unjust enrichment claims against the owner. The Court acknowledged that typically “unjust enrichment is unavailable when the terms of an express contract control.” But noted that, here, the "adequacy" of a "legal remedy" (or the "actual realization of that contractual remedy") was absent due to the "contractual gridlock" caused by the owner. Indeed, if the contract was the only avenue for the subcontractors to obtain relief, that result would allow the owner to take advantage of its own failure to pay after receiving "a substantial benefit" from the subcontractors' work.
The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver. She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.