DCB Construction Co. v. Central City Development Co.

965 P.2d 115, 1998 Colo. J. C.A.R. 4748, 1998 Colo. LEXIS 608, 1998 WL 643940

• Court: Supreme Court of Colorado
• Decided: September 14, 1998
• Docket: 96SC672
• Status: Published

Opinions

KOURLIS, Justice.

We granted certiorari to review the court of appeals’ ruling in DCB Construction Co., Inc. v. Central City Development Co., 940 P.2d 958 (Colo.App.1996), in order to address the question of whether a landlord is liable, under a theory of unjust enrichment, for tenant finish construction costs when the tenant defaults. In DCB Construction, the court of appeals held that a contractor that constructed improvements to leased premises pursuant to a contract with the tenant of those premises could not recover against the owner of the premises under a theory of unjust enrichment. We agree. We now hold that for the enrichment to the landlord to be unjust and therefore actionable, the contractor must show some improper, deceitful, or misleading conduct by the landlord. This case presents no such facts, and we therefore affirm the judgment of the court of appeals.

I.

Central City Development Company (CCDC) is the owner of an historic commercial building in Central City, Colorado. In January of 1992, CCDC entered into a five-year lease¹ on the building with Santa Barbara Capital, Inc. (Tenant). The lease called for roughly $30,000 per month in rent, for total expected payments of $1,750,000 over the five-year term. The lease permitted Tenant to use the premises only for limited-stakes gambling. The lease further provided that Tenant would not make alterations or additions that would impair the historic character of the site, and that CCDC had the right to approve all plans and specifications for remodeling. CCDC agreed that such approval would not be unreasonably withheld. Tenant originally hired a contractor in January of 1992, but by June of that year Tenant terminated the first contractor and entered into a contract with DCB Construction Co., Inc. (DCB). This contract called for significant work on the interior of the building, and CCDC approved the plans.

The lease between CCDC and Tenant provided that Tenant would pay all costs associated with remodeling regardless of the amount, and would indemnify CCDC against any liens or claims arising out of the work. The Tenant was to post a notice on the premises informing architects, draftsmen, planners, contractors or subcontractors, and suppliers of labor or material and equipment that the property would not be subject to a lien for the improvements. The Tenant did in fact post the notice, which stated in pertinent part:

[CCDC] shall not be liable for any erection, construction, alteration, removal, addition, repair, or other improvement, and the owner’s interest in the above described property shall not be subject to a hen for any erection, construction, alteration, removal, addition, repair, or other improvement to [the leased premises].

(Emphasis in original.) DCB does not dispute that it was aware of the notice, and it made no attempt to place a lien on the premises.²

Under its contract with Tenant, DCB completed significant improvements to the interi- or of the building, including constructing a foundation retaining wall and a steel frame with flooring. DCB installed carpentry framing, roof joists, stairs, a fire sprinkler system, electrical wiring, plumbing, heating, ventilation, and air conditioning. A representative of CCDC was present on the premises fairly regularly during the construction; however, CCDC did not communicate with or direct DCB regarding the work. In November of 1992, DCB stopped work on the building because of Tenant’s failure to pay. In all, DCB submitted bills to Tenant totaling $371,245, of which amount Tenant paid $76,-515.

Tenant also defaulted under its lease agreement, and stopped paying rent in December of 1992. Tenant paid a total of $427,-500 to CCDC during the term of the lease ($50,000 of which was later dispersed to subcontractors). After Tenant vacated the premises, CCDC placed a “For Rent” sign on the building, but, as of the date of the trial, had received no inquiries about purchasing or leasing the building.

In the wake of these defaults, the subcontractors and DCB filed claims against Tenant and CCDC, and CCDC pursued Tenant for eviction. The three cases were consolidated in the trial court. CCDC obtained an eviction order against Tenant dated February 12, 1993. DCB obtained a judgment against Tenant for $332,026.35, but Tenant was insolvent. The various claims of the subcontractors were dismissed after a settlement was reached.

The only remaining claims were DCB’s claim against CCDC for unjust enrichment, and CCDC’s counterclaims against DCB for negligent misrepresentation and fraudulent misrepresentation. DCB claimed that principles of unjust enrichment required CCDC to compensate DCB, because CCDC had received the benefit of the property improvement. CCDC, in turn, claimed that DCB had either negligently or fraudulently misrepresented the estimated amount necessary to complete its work on the premises.

After a bench trial, the trial court ruled against CCDC on its misrepresentation claims, finding a “total failure of proof of fraudulent conduct or negligent misrepresentation” by DCB. The court then ruled in favor of DCB on its claim of unjust enrichment. The court entered judgment against CCDC in the amount Tenant owed DCB plus interest and costs for a total of $333,191.³

CCDC appealed both of the trial court’s rulings. The court of appeals affirmed the trial court’s ruling that DCB had not made a negligent or fraudulent misrepresentation to CCDC, but reversed the judgment for unjust enrichment. The court of appeals held that under the facts of this case, where there was no mistake, fraud, duress, or other improper conduct by CCDC, any enrichment of CCDC by DCB was not unjust.⁴ We affirm.

II.

DCB’s claim of unjust enrichment is a legal claim in quasi-contract for money damages based upon principles of restitution. See 1 George E. Palmer, The Law of Restitution §§ 1.1, 1.2 (1978). The Restatement of Restitution § 1 states “[a] person who has been unjustly enriched at the expense of another is required to make restitution to the other.” Restatement of Restitution § 1 (1937). The comment to this section explains that “[a] person is enriched if he has received a benefit. A person is unjustly enriched if the retention of the benefit would be unjust.” Restatement of Restitution § 1 cmt. a (1937).

When restitution is the primary basis of a claim, as opposed to a remedy for bargains gone awry, it invokes what has been called a “contract implied in law.” See Joseph M. Perillo, Restitution in a Contractual Context, 73 Colum. L.Rev. 1208, 1212-13 (1973) (noting the fundamental dichotomy between “quasi-contract as a source of primary rights versus quasi-contract as a remedy”); see also Ninth Dist. Prod. Credit Ass’n v. Ed Duggan, Inc., 821 P.2d 788, 794-95 (Colo.1991) (characterizing an unjust enrichment claim as a contract implied in law).

The unjust enrichment claim in the context of a contract implied in law does not depend in any way upon a promise or privity between the parties. See Wistrand v. Leach Realty Co., 147 Colo. 573, 576, 364 P.2d 396, 397 (1961). As the court of appeals noted in the instant case, “the claim arises, ‘not from consent of the parties, as in the case of contracts, express or implied in fact, but from the law of natural immutable justice and equity.’ ” DCB Constr., 940 P.2d at 962 (citing Valley Realty & Inv. Co. v. McMillan, 160 Colo. 109, 112, 414 P.2d 486, 488 (1966)). Thus a “contract implied in law” is not really a contract at all, and may even be imposed in the face of a clearly expressed contrary intent if justice requires. See, e.g., Sears Roebuck & Co. v. Ragucci, 203 N.J.Super. 82, 495 A.2d 923, 926 (N.J.Super. Ct. Law Div. 1985).

The elements of the claim are based upon the principles stated in the Restatement of Restitution § 1, and we have previously expressed these elements as follows:

(1) that a benefit was conferred on the defendant by the plaintiff, (2) that the benefit was appreciated by the defendant, and

(3) that the benefit was accepted by the defendant under such circumstances that it would be inequitable for it to be retained without payment of its value.

Cablevision of Breckenridge, Inc. v. Tannhauser Condominium Ass’n, 649 P.2d 1093, 1096 (Colo.1982).

This articulation of the test has spawned some confusion. For example, the second prong of this test calls for the defendant to “appreciate” the benefit. Courts using tests with similar language frequently analyze “appreciation” as knowledge or acquiescence. See e.g., Thompson v. Welles, 243 Kan. 503, 758 P.2d 738, 745 (Kan.1988) (using the terms appreciation and knowledge interchangeably); Mass Transit Admin. v. Granite Constr. Co., 57 Md.App. 766, 471 A.2d 1121, 1125 (Md.Ct.Spec.App.1984) (setting forth the second prong of the test as “appreciation or knowledge by the defendant of the benefit”); S & M Rotogravure Serv., Inc. v. Baer, 77 Wis.2d 454, 252 N.W.2d 913, 915-16 (Wis.1977) (equating appreciation with knowledge and finding appreciation where defendant knew of the remodeling work). However, the second prong really speaks only to the question of whether the materials and/or services received are of value to the defendant. See Restatement of Restitution § 1 & cmt. a (1937).

The third prong of this test requires defendant to “accept” the benefit. This requirement is rarely meaningful because in many cases the defendant is unable to stop plaintiff from conferring the benefit at issue and/or cannot return it. Compare, Jordan v. Lone Pines, Ltd., 41 Colo.App. 152, 580 P.2d 1273 (1978) (denying recovery where defendant could not have stopped benefit and could not reasonably return it), with Cablevision of Breckenridge, 649 P.2d at 1093 (allowing recovery where defendant could not have returned benefit). Hence “acceptance” should be weighed with other factors only in situations where a defendant was in a position, and should reasonably have been expected, to prevent the benefit from being conferred.

Because experience has demonstrated some flaws in the old test, we now clarify and restate the test for recovery under a theory of unjust enrichment as: (1) at plaintiffs expense (2) defendant received a benefit (3) under circumstances that would make it unjust for defendant to retain the benefit without paying.⁵ We next proceed to apply this general test to this case in the context of tenant finish construction.

III.

Considering the first prong of the test, in this case there is no question that any benefit CCDC received came at DCB’s expense. DCB performed construction work • on CCDC’s building over a period of approximately six months, and Tenant paid DCB for only a fraction of the work.

The second prong examines whether defendant was benefited or enriched. The trial court specifically found, based on the expert evidence submitted, that the building is now worth more than it was before DCB’s work. In its order, the trial court rejected the argument that under Frank M. Hall & Co. v. Southwest Properties Venture, 747 P.2d 688 (Colo.App.1987), the defendant must have re-leased or sold the premises in order to have “appreciated” the benefit. The trial court stated:

The Hall case does not contain a definition of the word “appreciated.” The Court can assume that one of the meanings of appreciated must be that the owner received a benefit, however, since this building has not yet been leased, CCDC argues that the test set forth in the Hall case has not been met. The Court specifically finds that the word “appreciated” cannot mean that the property has to have been leased or sold before a judgment based on unjust enrichment can enter.... I find that CCDC has appreciated the benefit because the building is now more valuable than it would be without [the improvements made by DCB].

As we noted above, the term “appreciation” requires the court to determine whether defendant received a benefit. Evidence that the building has been sold or released, depending upon the terms and circumstances, might support the conclusion that defendant indeed received a benefit. However, the absence of a sale or re-lease does not definitively prove the converse.

The trial court’s finding that the building is now worth more after the remodeling than before is sufficient to show that CCDC benefited.⁶ Accordingly, the first two elements of the test, benefit to CCDC at DCB’s expense, have been established.

IV.

The third prong of the test requires consideration of whether it would be unjust to allow CCDC to retain the benefit conferred without paying its value. The notion of what is or is not “unjust” is an inherently malleable and unpredictable standard. Because tenants frequently contract for improvements to leased property, the law must be sufficiently predictable so that the appropriate parties can adequately calculate and make adjustments for the risks they face. Landlords need to know, with some degree of certainty, what behavior and circumstances will subject them to these claims; and contractors likewise should be able to make risk-adjusted pricing decisions and implement appropriate payment-protection provisions. Thus, we think it is important to articulate a general rule, applicable in this context, that provides more stability and predictability than an ad hoc review. Compare S & M Rotogravure Serv., Inc. v. Baer, 77 Wis.2d 454, 252 N.W.2d 913, 918 (Wis.1977) (allowing an unjust enrichment claim against a landlord and distinguishing it from cases denying claims because in this case there was no evidence the landlord had paid another for the work) with Puttkammer v. Minth, 83 , 266 N.W.2d 361, 364 (Wis.1978) (disallowing an unjust enrichment claim based on eases denying claims where owner had paid another and distinguishing Baer because of an allegation in Baer that work was performed at the special instance and request of landlord).

With this principle in mind, we begin our analysis with two basic propositions. First, there is the general rule that when an individual who is not the owner orders improvements on the owner’s land and then fails to pay the contractor or supplier, “the owner is not liable to the contractor or supplier unless he agreed to pay them.” 3 Dan B. Dobbs, The Law of Remedies § 12.20(3) at 473 (2d ed.1993); see also Brannan Sand & Gravel Co. v. Santa Fe Land & Improvement Co., 138 Colo. 314, 332 P.2d 892 (1958) (noting that an owner cannot be personally liable for improvements when there is no privity of contract between contractor and owner).

The rule seeks to protect personal autonomy and rights of choice. See generally Dobbs, supra § 12.20(3) at 472. Ordinarily, an owner should not be forced into “legal relations with someone other than the contract partner he ha[s] chosen.”⁷

Second, the Restatement of Restitution § 110 provides that “[a] person who has conferred a benefit upon another as the performance of a contract with a third person is not entitled to restitution from the other merely because of the failure of performance by the third person.” Restatement of Restitution § 110 (1937) (emphasis added).

Application of these principles to this case suggests that CCDC should not be held liable for the improvements ordered by Tenant. CCDC did not agree to pay for the improvements, and should not be forced into a quasi-eontractual relationship with DCB. It is not enough that CCDC owns the improved building and that Tenant breached its contract to pay for those improvements. There must be more. It is unjust for a contractor to bear the loss of a debt unpaid. However, it is not necessarily just or right to impose that debt upon the owner of the property merely to rectify the first injustice. If that were so, anyone benefiting from another’s services could be hable for those services. We all enjoy the protection that we are generally not hable for services or goods for which we did not contract. The courts should be slow to impose obligations in the absence of a contract; slow to impose the debts of one party upon another.

Hence an injustice that warrants the court’s imposition of the remedy of restitution must rest not only in the loss to the contractor, but also in the conduct of the owner. The Restatement of Restitution sets forth several general doctrines, such as fraud, mistake, coercion, and request, that are instructive in defining the notion of injustice. Although this list does not exhaust the potential sources of injustice, it provides a framework with which to begin analysis of unjust enrichment claims.

Some of these doctrines lend themselves to application within the context of nonbar-gained benefits.⁸ If, for example, a landlord has actually engaged in fraud to induce a contractor either to enter into the contract with a tenant, or to continue performance when the contractor might otherwise have ceased, this situation will likely sustain a claim of unjust enrichment. See Restatement of Restitution, ch. 2 (1937). Likewise, principles of coercion or duress might provide a foundation for unjust enrichment as a primary source of right. See Restatement of Restitution, ch. 3 (1937).

In the instant case, we do not have allegations that fit neatly into the applicable “injustice” categories suggested by the Restatement. However, the general theme of these doctrines sheds light on the concept of unjust enrichment in the landlord/tenant/contractor context. The principle that defines and connects these examples is that “injustice” involves some form of improper conduct by the party to be charged.

DCB cites Hall and contends that the nature of CCDC’s involvement in the enterprise is sufficient to render its retention of the benefit unjust. In Hall, the court of appeals held that a contractor could recover in unjust enrichment from a landlord where:

[t]he landlord not only gave its permission for the work but took an active role in its completion. Indeed, the lease required that the improvements be made, and provided that they would revert to the landlord upon termination of the lease. They were made according to the landlord’s specifications, and were inspected and approved by it.

Hall, 747 P.2d at 691. DCB asserts that here, as in Hall, CCDC gave permission for the work, took an active role in its completion, required that the improvements be made according to CCDC specifications, and contracted to retain the improvements upon lease termination.

We hold that these facts alone would not render CCDC’s retention of the benefit unjust. A landlord will virtually always retain the right to give or withhold permission for work to be done on its premises. As owner of the premises, the landlord is generally required to apply for and execute building permits or other necessary documents. The landlord has a strong and legitimate interest in pre-approving and monitoring any significant construction. Similarly, the landlord’s participation in creating and/or approving specifications is a natural product of its interest in the property and is a matter of concern solely between the landlord and the tenant.⁹

We do not find it unjust for a landlord to be closely involved in an enterprise for which it has contracted and given consideration to another. We thus disapprove that portion of Hall that would allow an unjust enrichment claim based solely upon the landlord’s involvement. If we were to approve this formula for evaluating injustice, we would adopt a rule that essentially makes the landlord an insurer of the risk assumed by contractors in extending credit to tenants. See Dawson, supra at 1448 (noting policy problems with restitution claims in this context and asking, “[i]f it can be shown that the third party has received an uncompensated gain, is he to be made, to the extent of the gain, an insurer of the return promised by the defaulting promi-sor?”).

Rather, we hold that injustice in this context requires some type of improper, deceitful, or misleading conduct by the landlord. This is in harmony with our decision in Ninth District Production Credit Assoc. v. Ed Duggan, Inc., 821 P.2d 788 (Colo.1991), the Restatement of Restitution, and the weight of authority in other jurisdictions. See, e.g., Insulation Contracting & Supply v. Kravco, Inc., 209 N.J.Super. 367, 507 A.2d 754, 760 (N.J.Super.Ct.App.Div.1986) (referring to a case requiring that defendant engage in misleading behavior); Kemp v. Majestic Amusement Co., 427 Pa. 429, 234 A.2d 846, 848 (Pa.1967) (“[I]n the absence of some misleading by the third party, the mere failure of performance by one of the contracting parties does not give rise to a right of restitution against the third party.”); Frank W. Whitcomb Constr. Corp. v. Cedar Constr. Co., 142 Vt. 541, 459 A.2d 985, 988 (Vt.1983) (“Certainly there is nothing to show the plaintiff to have been misled to its detriment either deliberately or accidentally.”); Farwest Steel Corp. v. Mainline Metal Works, Inc., 48 Wash.App. 719, 741 P.2d 58, 65 (Wash.Ct.App.1987) (identifying a common thread among cases finding unjust enrichment in that they “involved some clear act of bad faith by the defendant” and noting that the defendant there had not misled the plaintiff).

In Duggan, a secured creditor profited from an unsecured creditor’s provision of goods that enhanced the value of the collateral. The court held that the secured creditor’s “active role in creating a perception that the [goods] would be paid for” along with other factors, such as a memo indicating that the secured creditor would approve and pay for purchases from the unsecured creditor, created circumstances that would allow a jury to find unjust enrichment. Duggan, 821 P.2d at 798. Hence, the secured creditor misled the unsecured creditor.

Here, there is no evidence that CCDC improperly created the impression that either CCDC or Tenant would pay for the work being done. In fact, CCDC posted a notice that not only informed DCB that it would not be subject to mechanics’ liens, but also explicitly disclaimed any type of liability for the work. A notice alone might not suffice to absolve a landlord from liability if the landlord had otherwise engaged in improper conduct that negated the effect of a notice. However, here CCDC did not engage in any type of improper, deceitful, or misleading conduct. Absent such conduct, we do not find that CCDC’s retention of any benefit received is unjust.

V.

In order for a tenant’s contractor to attach liability upon an owner of property under an unjust enrichment claim, the contractor must be able to show that the landlord has engaged in some form of improper, deceitful, or misleading conduct. CCDC did not mislead DCB in any way, thus CCDC was not unjustly enriched by DCB’s performance of its contract with Tenant. Accordingly^ we affirm the judgment of the court of appeals.

Chief Justice MULLARKEY dissents, and Justice SCOTT joins in the dissent.

1 . The parties actually signed two five-year leases, one covering the first floor and another covering the second floor. The pertinent terms of the two ■ leases are identical, and for simplicity of reference, we refer herein to these leases as one lease.

2 . Although section 38-22-105 allows owners to protect their interest in land from liens by posting proper notice, such notice does not automatically foreclose all liability. By statute and case law, contractors and others may still pursue any other available remedies, such as breach of contract or unjust enrichment. See § 38-22-124, 10 C.R.S. (1998); Frank M. Hall & Co. v. Southwest Properties Venture, 747 P.2d 688, 690 (Colo.App.1987).

3 . Whether this is an appropriate measure of damages is an issue that is not before us, and, particularly in light of our decision to reverse the judgment on substantive grounds, we decline to address damages.

4 .DCB asserts that the court of appeals ruled as a matter of law that no unjust enrichment claim could lie where a landlord has received improvements from a tenant’s contractor. We do not agree with this characterization of the court of appeals’ ruling. The opinion states that “given the undisputed factual circumstances summarized above, a claim for unjust enrichment will not lie, as a matter of law.” DCB Constr., 940 P.2d at 961 (emphasis added).

5 . See Restatement of Restitution § 1 & cmt. a (1937); Candace S. Kovacic, A Proposal to Simplify Quantum Meruit Litigation, 35 Am. U.L.Rev. 547, 554-560 (1986)(tracing the history of the claim and noting that courts have occasionally added extra, often inappropriate, elements).

6 . The court of appeals was skeptical about whether CCDC had been enriched since the construction work was "simply part of the consideration that the lessee agreed to provide to the lessor in return for the creation of a leasehold in the property by the lessor.” DCB Constr., 940 P.2d at 964. Under the second prong however, we consider only whether, in gross, defendant was enriched by plaintiff's work. We do not consider whether defendant had provided compensation for that gain, although in some cases the question of uncompensated gain could be an important factor under the third prong of the test.

7 . John P. Dawson, The Self-Serving Intermeddler, 87 Harv. L.Rev. 1409, 1444 (1974). In the analogous context of mechanics’ liens, Dawson notes that where a lease authorizes but does not require a lessee to make an improvement, most courts deny a lien on the owner’s interest, regardless of whether the improvements were knowingly permitted or specifically approved by the lessor. See id. at 1454.

8 . Other doctrinal approaches defeat the notion of a contract implied in law. For example, the court of appeals in this case referred to the lack of a "request from the party to be charged.” DCB Constr., 940 P.2d at 962. This notion is derived from Chapter 4 of the Restatement, Benefits Conferred at Request, and concerns situations where two parties have actually made some sort of bargain. If, in fact, a landlord had "requested” the services as contemplated in this part of the Restatement, we would be dealing with a contract between the landlord and contractor, either express or implied in fact.

It is also doubtful that the doctrine of mistake would apply in this third-party context since such mistake, whether unilateral or not, is not likely to have been connected in any manner to the landlord.

9 . See Dawson, supra at 1447-48 (noting that because an owner has contracted with a tenant or general contractor for specific improvements, the owner's "knowledge that the work is being done or his constant presence at the building site adds nothing to the grounds for restitution as these elements might in another context”).

DCB also argues that it is important that CCDC knew of and acquiesced in the renovation and "never objected to anything that DCB was doing.” As discussed above, CCDC’s "acceptance” of the work carries no significance in this context where the work was an expected result of its lease with Tenant. CCDC could not be expected to object to or attempt to stop work which was clearly anticipated and bargained for with another.