In latest edition of The Wright Toolbox:

• Virginia Supreme Court Says General Contractor Can Be Liable to Subcontractor’s Supplier for Unjust Enrichment – read now
• New Laws for Virginia Employers – read now

Virginia Supreme Court Says General Contractor Can Be Liable to Subcontractor’s Supplier for Unjust Enrichment

In May, the Supreme Court of Virginia decided the case of Davis Construction Corp. v. FTJ, Inc., a decision that opens up general contractors to liability to suppliers of their subcontractors. Perhaps not surprisingly, the decision split the Court on the final outcome.

The relationship between the key parties is a common one.  Davis Construction Corp. (“Davis”) was the general contractor on a condominium project in Arlington County, Virginia. It contracted with H&2 Drywall to complete the drywall and metal framing for the project. H&2 Drywall purchased its materials from Ciesco (now FTJ, Inc., hence the named appellee). The parties agreed to a Joint Check Agreement, another common tool in the construction industry, whereby Davis would issue checks payable to both H&2 and Ciesco. Davis would deliver the check to H&2 who would endorse the check and send it to Ciesco to apply to outstanding invoices.

From here the story gets a bit factually intensive. Ciesco’s invoices were not being paid timely, and it raised this issue with Davis. Davis confirmed that joint checks either had been written or would be written for the invoices in question. Over time, Davis learned that H&2 was having problems, namely payroll issues where it could not pay its employees. As a result, H&2 was struggling to find sufficient staffing to perform contract work. Eventually, Davis concluded that H&2 would ultimately not be able to pay its suppliers either.

Relevant for this analysis, from January 2017 through March 2017, Ciesco delivered supplies to the project. Those supplies were not paid for by H&2 or Davis. In March 2017, after sending a notice to cure to H&2, Davis reached out to Ciesco regarding problems it was having with H&2 and advised them not to ship any more materials to the project. After this discussion, Ciesco elected to not take any action to collect outstanding amounts owed to it by H&2.

Records indicate that Davis was processing a payment to Ciesco directly. Before being finalized, Davis terminated H&2 after it told Davis it could not complete the work. Davis paid H&2 for the work it had completed and found another contractor to complete the scope of work. Materials that Ciesco delivered were used to complete the scope of work but were not paid for by Davis.

The Court found that Davis was liable to pay Ciesco under a theory of unjust enrichment. The Court seemed persuaded by the fact that Davis added Ciesco to its accounting system and made representations that it would pay Ciesco for materials that were ultimately used to complete the project. Davis contended that by paying H&2 and then paying the replacement contractor to complete the work that it was paying twice for the materials. The majority was not moved by this and found that, because Davis got the benefit of the materials, the party that used the materials did not matter.

In sum, the Court said such a result would not be the norm for a lower tier supplier. It said Davis was liable because “Davis knew of the subcontractor’s difficulties and past due invoices, and, to ensure a continued flow of supplies, interacted directly with the supplier and led the supplier to believe that payment for those supplies would be forthcoming. These distinct circumstances permit Ciesco to obtain relief for Davis’ unjust enrichment.”

Three justices wrote a strong dissent criticizing the majority’s decision. First, they criticized the majority for using a “quasi-contract” theory to impose liability on the general contractor when all of the parties’ relationships were governed by express contracts. The dissent corrected what it believed to be a misunderstanding of the Joint Check Agreement by the majority. It also believed the majority misstated or misapplied the facts to reach its conclusion. Namely, the dissent pointed out that Ciesco shipped no more supplies after Davis made assurances that it would be paid, so it could not have relied on those representations to its detriment.

The dissent hits the nail on the head (no pun intended) regarding the question at issue: “This case is not about whether the general contractor paid for each sheet of drywall delivered to the job site. The legally relevant question is whether the general contractor paid the subcontractor what the subcontractor was owed for anything (services, materials, etc.) it was supposed to provide under its fixed-price contract.” The majority’s ruling makes the general contractor liable for what the subcontractor said it would provide, even after it paid the subcontractor what it did provide. The fixed prices that the subcontractors proposed included materials, and there is no question that Davis paid both subs what they were owed for work completed.

Overall, it is an interesting read that is worth the read, even for a layman, in the construction industry. Regardless of the viewpoint, this decision is now law in the Commonwealth of Virginia, and general contractors should be educated on the factors the Court found persuasive in holding a general contractor liable to a lower-tier supplier. Hopefully, the Court follows its own words when it said its decision was very narrow and limited to facts before it.

New Laws for Virginia Employers

As Virginia employers emerge from a COVID shelter, they are met with a long list of new and updated employment laws which are more in line with neighboring jurisdictions protections.  Here is a list of some of the more noteworthy laws taking effect on July 1.

• Adopting protections similar to Maryland, Virginia amended its wage payment law to permit employees to sue their employer directly for failure to pay wages (including through a collective action with similarly situated co-workers) for any owed wages, liquidated damages, prejudgment interest, and attorneys’ fees and costs. For employers found to knowingly failing to pay owed wages, the employee can recover “triple the amount of wages due and reasonable attorney fees and costs.” Consistent with the enforcement of other employment protections, retaliation against employees for exercising such rights is prohibited although it cannot be enforced in a private cause of action.
• To avoid problems with misclassification of employees as independent contractors, Virginia has adopted protections similar to those recently adopted in California and created a “presumption” of employee status and a new private right of action. Any individual who performs services for remuneration is presumed to be an employee unless the company can prove the individual is an independent contractor pursuant to IRS guidelines.  In addition to protection against retaliation, misclassified individuals will have a private cause of action, can recover wages, benefits and attorneys’ fees.
• Non-compete agreements entered into after July 1 are now unenforceable against “low-wage employees” (making less than $59,124/year) and exposure to substantial monetary liability. This law does not impact nondisclosure agreements and confidentiality protections imposed by employers.  Employers will need to post this requirement where other required workplace posters are posted.
• The Virginia Human Rights Act (VHRA) now provides greater jurisdiction over more employers and greater protection for more workers.
• Adopting new standards which make the Virginia State law protections more consistent with federal protections under Title VII, the VHRA now applies to all private employers with 15 or more employees. Smaller employers with at least 6 employees remain responsible for claims of discriminatory discharge.
• In addition to traditionally protected classes of race; color; religion; national origin; sex; and pregnancy, childbirth, and related medical conditions, the amendments to Virginia law now protect sexual orientation, gender identity, and veteran status. Important to note, race discrimination is now defined to also include traits historically associated with race such as “hair texture, hair type, and protective hairstyles such as braids, locks, and twists.”
• Before pressing their claims in state court, employees must exhaust their administrative remedies by first filing an administrative charge either with the Virginia Division of Human Rights (VDHR), or the U.S. Equal Employment Opportunity Commission (EEOC).
• Pursuant to the amendments, the Act also provides unlimited compensatory damages, punitive damages, attorneys’ fees, costs, and injunctive relief.
• Employers with 5 or more employees must provide reasonable accommodations (absent undue hardship) due to pregnancy, childbirth, and related medical conditions, including lactation. These accommodations include frequent or longer breaks. Employers must post information regarding these rights in a conspicuous location in the workplace, include the information in handbooks, and, importantly, provide the information to new employees and existing employees 10 days after she informs her employer she is pregnant.
• Virginia also adopted a new whistleblower law protecting a broad range of activities and generally prohibiting employers from retaliating against an employee who engages in activities which are intended in good faith to stop or prevent and unlawful employment practice occurring or being investigated. As is usually the case, employees cannot claim protection if the employee’s disclosure or activities is false or in reckless disregard of the truth, the employee discloses privileged information, or the disclosure by the employee is illegal.
• Consistent with protections under the National Labor Relations Act, employers are also now prohibited from retaliating against employees who inquire about, discuss, or disclose wages or other compensation information.
• Employers may no longer ask employees or applicants to disclose information concerning any arrest, criminal charge, or conviction relating to simple marijuana possession.

For more information on the impact of these new laws to your employment practices, feel free to reach out to our Employment & Labor Law Team.