Beyond Contract Liability: When a General Contractor Has to Pay a Subcontractor He Never Hired

March 12, 2015

The general rule concerning contracts holds that the only parties that can be held liable are those that signed the contract. In other words, you or your business generally can’t be held liable for a contract you did not sign. This simple rule is fundamental to contracts in the construction business. A general contractor hires subcontractors, who, in turn, may hire sub-subcontractors. While the entire chain is set in motion by the general contractor, the general contractor is only liable for the first tier of contracts it signs and not for the contracts between subcontractors and sub-subcontractors.

However, Illinois recognizes contracts “implied in law,” also known as quasi-contracts. In these cases, there is no actual agreement between the parties, but a court imposes a duty as if there were a contract to prevent unjust enrichment. This principle requires the plaintiff to show that he furnished valuable materials or services, which the defendant received. The courts permit recovery only where the relationship violates the fundamental principles of justice, equity, and good conscience. Furthermore, Illinois courts do not permit implied in law contracts when there is a written contract between the parties.

Yet, just this year, the Illinois Appellate Court opened the door for non-contracted parties to be liable to each other. In C. Szabo Contracting, Inc. v. Lorig Const. Co.[1], the chain of contractors began when Lorig Construction was hired by the Illinois State Toll Highway Authority to serve as the general contractor on a project on Interstate 355. Lorig then hired JLA Construction as a subcontractor to install storm sewers via a process called “pipe-jacking.” The contracted price was $266,274. Subsequently, JLA sub-subcontracted the project to Szabo Contracting. Throughout the chain of contracts, no agreement was ever made between Lorig and Szabo. The only instructions and interactions given by Lorig were to JLA.

Due to an error on the part of JLA, it was prevented as a subcontractor to collect from Lorig, and as a result, Lorig was not responsible for payment to JLA pursuant to the terms of their written contract.  This error resulted in JLA being unable to pay Szabo for the work it did pursuant to their sub-contractor agreement.  Left with few choices, Szabo made a claim that there was a quasi-contractual relationship between itself and Lorig, in an attempt to collect on its contract with JLA.

Normally, such a claim would be defeated by the existence of express contracts as courts rely on express agreements to avoid a double recovery or double liability to a party. Courts note that once a party contracts with only one other party (in this case, Szabo and JLA), they assume the risk that the party may not pay.  Despite the arguments and case law against Szabo, the court found two differences that allow recovery.  First, the work done by Szabo was the exact work Lorig requested and agreed to pay for with JLA. Second, Lorig never disputed that it was paid by the State while not paying any subcontractor for the work.

These two facts painted a clear picture of unjust enrichment. Since Szabo did the exact work that Lorig wanted, it was effectively taking the place of JLA in the subcontractor agreement. For Lorig to retain the money it received from the State for the project and to not pay anyone for the work actually done, the Appellate Court found that Lorig would be unjustly enriched. Having Lorig pay Szabo eliminated the risk of double payment by Lorig or impose any obligation beyond what Lorig’s original agreement with JLA.

However, while this case expands quasi-contractual relief in Illinois, it is not as apocalyptic as some contractors might believe. The specific facts and opinion of the court restrict the application of the arguments in this case. In the end, businesses should carefully scrutinize their contractual and sub-contractual relationships to avoid potential liability.

[1] C. Szabo Contracting, Inc. v. Lorig Construction Co., 2014 IL App (2d) 131328.