____________________________________________________________________________________ Spring 2020 NEWSLETTER ISSUE NO. 76

CHAIR’S COLUMN

Dear Section Members:

As our Section’s 40th Anniversary bar year draws to a close, I reflect on all of those that have contributed to our Section’s success. I want to extend a very special thank you to our former Board and Section members for paving the way, and our current Board and Section members for volunteering their valuable time and resources, and providing thoughts and suggestions on how to better serve our membership. Your support is greatly appreciated.

Since our last Newsletter was issued in October 2019, our industry has been impacted and our world has been altered significantly by COVID-19. Many of us have learned to practice remotely and to virtually conduct meetings, mediations, depositions, arbitrations, and even trials. Likewise, our clients have been forced to navigate the labyrinth of local and state orders as well as project-specific protocols concerning social-distancing and other efforts to quell the spread of the virus. Many of our clients have faced significant project delays, supply chain and labor shortages, and even outright shut-downs. Through it all, our Section has banded together to adjust and evolve in order to continue to provide the high caliber of educational opportunities needed to practice successfully and to serve our clients through these challenging and unprecedented times.

As you know, due to COVID-19 concerns the Virginia Law Foundation / Virginia CLE will not be conducting any in-person programming through December 31, 2020. Virginia CLE has, however, worked closely with our Board members to reformat a number of our keystone programs, for which we are eternally grateful. This year, the Section’s 5th Annual Federal Government Contracting Seminar will be conducted remotely on Wednesday, September 16, 2020. The seminar will include pre-recorded presentations from a number of dynamic speakers on a variety of timely topics, and it will conclude with a live Q&A segment. Randy Wintory, Joe Guarino, and the seminar’s planning committee are putting together another terrific program that you will not want to miss if you are involved or interested in becoming proficient in the practice of government contracting. Details on the speakers, topics, and how to register will soon be available.

Please save the dates of November 6, 2020 and December 4, 2020 for our 41st Annual Construction and Public Contracts Law Seminar. For the first time in our Section’s history, this seminar will be delivered remotely, but if you attend both days you will receive the same 12 CLE credits as in past years. This year, the CLE will be broken down into two days with six live/interactive CLE credits per day. Our Fall Seminar Committee, led by Jon Straw and Spencer Wiegard, have worked incredibly hard to develop an instructive and thought-provoking program. We are thrilled to be able to include as part of the Fall Seminar a panel discussion entitled Swimming with the Sharks: Litigating a

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Construction Case to a Jury that was developed to be a showcase CLE at the Annual Meeting prior to its cancellation due to COVID-19. The panelists will include the Honorable David W. Lannetti from Virginia’s 4th Judicial District, past chair of our Section Robert K. Cox of Williams Mullen, and seasoned construction litigator Kathleen Olden Barnes of Watt, Tieder, Hoffar & Fitzgerald, LLP. Many thanks to our panelists for their commitment to our Section and to the co-chairs of our Section’s Summer CLE Committee, Arnie Mason, and Lauren McLaughlin, who, along with members of the Litigation Section, conceptualized the topic and put together this accomplished panel. A complete list of program topics and speakers will follow.

Since our Section’s business meeting that usually takes place during the VSB’s Annual Meeting was cancelled, this year the Board of Governors voted remotely to appoint the officers for the 2020-2021 bar year. I am thrilled to announce that next year’s officers will be the following:

POSITION NAME

Chair Scott W. Kowalski Petty Livingston Dawson & Richards, PC Lynchburg, VA

Vice Chair Randall (“Randy”) H. Wintory Virginia Department of Transportation Richmond, VA

Secretary Alison R. Mullins Shannon, Mullins & Wright, LLP Alexandria, VA

Treasurer Jonathan (“Jon”) J. Straw Kraftson Caudle McLean, VA

In addition, you should have received an email inviting you to vote for the following slate of

proposed new and reappointed board and ex officio members for 2020-2021:

POSITION NAME APPOINTMENT

Board of Governors Jonathan R. Wright Watt, Tieder, Hoffar & Fitzgerald, LLP McLean, VA

New

Board of Governors Jesse S. Keene Cozen O’Connor Washington, DC

Reappointment

Board of Governors Daniel (“Dan”) D. Rounds Smith Pachter McWhorter PLC Tysons, VA

Reappointment

Judge – Ex Officio Hon. David W. Lannetti 4th Judicial Circuit of Virginia

New

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Judge – Ex Officio Hon. James F. Watson 24th Judicial Circuit of Virginia

New

If you have not done so already, please submit your vote today. If you did not receive an email from VSB to enable you to vote, please click here or contact our Section’s liaison Paulette Davidson at Davidson@vsb.org. Voting will close on June 30, 2020.

It has been my privilege to serve as this Section’s Chair the past year, and to have had the opportunity to work with so many people across the Commonwealth that have and continue to dedicate their time to ensure our Section’s success. In addition to the seminar committee chairs mentioned above, I would like to acknowledge the incredible work of the Handbook Committee co-chairs, Jonathan Straw and Joshua Johnson, and the Membership & Young Professionals chair, Jesse Keene. Of course, a very special thank you goes to our Section’s Newsletter Committee led by co-chairs Daniel Rounds and Jesse Gordon. The Newsletter is a valuable resource to our membership. If you would like to contribute to the Newsletter, we are always looking for volunteers. Last, but certainly not least, I want to thank our Ex-Officio Judicial member, Judge Stanley P. Klein for his active participation, dedication, and guidance to our Board for the last three years, and the significant assistance provided by the Board’s liaisons to the VSB and VACLE, Paulette Davidson and Richard DiMeglio, respectively.

As a reminder, you can find a wealth of information on the VSB Construction Law Section website: https://www.vsb.org/site/sections/construction. Thanks to the hard work of Randy Wintory and Joshua Johnson, on our Section’s website you will find Board meeting minutes, the Construction Law Handbook, upcoming events, Newsletters and, importantly, the list of our Board members. Please utilize the resources available on the website and reach out to any Board member if you would like to explore opportunities to contribute to our Section. We look forward to hearing from you.

Hanna Lee Blake WATT, TIEDER, HOFFAR & FITZGERALD, LLP 1765 Greensboro Station Place, Suite 1000

McLean, VA 22102 hblake@watttieder.com

………………………………………………………………………………………

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RECENT CASES

Note: The following decisions are available at http://www.vsb.org/site/sections/construction. Our Member Resources section is password protected. The username is constructionmember and the password is CL2019-20member.

A. UNJUST ENRICHMENT James G. Davis Construction Corp. v. FTJ, Inc., 841 S.E.2d 642 (Va. 2020)

This case featured an unjust enrichment claim brought by FTJ, Inc. (“FTJ,” formerly known as Ciesco, Inc.), a material supplier and second-tier subcontractor, against James G. Davis Construction Corporation (“Davis”), the general contractor for a residential condominium project in Arlington, Virginia (the “Project”). Davis had contracted with H&2 Drywall Contractors (“H&2”) to complete the drywall and metal framing for the Project. FTJ contracted with H&2 to supply materials for the Project. Davis, H&2, and FTJ entered into a joint check agreement whereby Davis would pay for materials from FTJ via joint check with H&2 and FTJ. FTJ began shipping materials in July 2016. By January 2017, FTJ had experienced repeated payment delays. FTJ contacted Davis directly about the non-payment, and Davis repeatedly assured FTJ that it would be paid for the materials. FTJ continued to ship materials to the Project until March 22, 2017.

On March 21, 2017, Davis issued a cure notice to H&2 due to H&2’s inability to adequately staff the Project. In response, H&2 notified Davis that it would be unable to complete its subcontract. Davis terminated H&2 for default and then hired a replacement subcontractor to complete H&2’s scope of work.

Davis informed FTJ of H&2’s difficulties and, on March 22, 2017, asked FTJ not to ship any more materials under the joint checking arrangement. Davis assured FTJ that there were ample funds to pay FTJ’s invoices. Davis also asked FTJ to provide a credit application and W-9 form, then added FTJ to its accounting system and requested copies of FTJ’s unpaid January 2017 invoices. On April 10, 2017, FTJ asked Davis about the outstanding unpaid invoices, and Davis responded that a payment to FTJ of $160,670.05 was in process but delayed due to the accounting changes. On April 21, however, Davis notified FTJ that Davis would need to use the funds it had designated for FTJ’s outstanding invoices to instead pay additional Project costs caused by H&2’s default. Davis offered FTJ $58,000 to settle all unpaid invoices. Davis ultimately did not order materials from FTJ after H&2’s termination.

FTJ brought suit against Davis in Arlington County Circuit alleging breach of contract and unjust enrichment and seeking to enforce liens on the Project. After a bench trial, the Circuit Court held that the joint check agreement was not a binding contract between Davis and FTJ and found in favor of FTJ on the unjust enrichment and lien claims. Davis appealed.

The Virginia Supreme Court affirmed the Circuit Court’s ruling in a split decision. As an initial matter, the Court’s majority agreed with the Circuit Court’s determination that the joint check agreement was not a contract between Davis and FTJ, highlighting language in the agreement stating “[n]othing contained in this Agreement is intended by the parties to create any contractual relationship or equitable obligation between DAVIS and [FTJ].” Therefore, the joint checking agreement did not serve as a bar to quasi-contractual relief.

The majority also rejected Davis’ argument that FTJ’s unjust enrichment theory would result in Davis paying twice for the same material. According to the majority, “[t]he evidence from Davis’ own

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project manager established that Davis did not pay anyone for the supplies [FTJ] delivered to the job site and that it used those supplies. The evidence further established that, absent those materials, Davis would have had to obtain them elsewhere and pay for them.” That Davis had paid more to complete the Project than expected was not persuasive to the majority, as it found that Davis would have incurred even more additional costs if it would have been forced to procure the material from another source.

Ultimately, the majority was not persuaded to overturn the trial court’s determination that FTJ had proven all three elements of unjust enrichment. FTJ, by providing materials to the Project, had benefitted Davis; Davis knew of the benefit and should reasonably have expected to pay FTJ for it; and Davis accepted the benefit without paying. The majority determined that Davis’ repeated responses and assurances to FTJ regarding payment, Davis’ awareness of H&2’s late and non-payment to FTJ, and Davis’ internal actions and discussions regarding payment to FTJ were sufficient so that a “factfinder could plausibly conclude that Davis expected to pay for the materials based on Davis’ course of conduct with [FTJ], and that [FTJ] expected to be paid for materials it was encouraged to ship.”

The majority emphasized the limited scope of this decision and stressed that it does not abrogate the general privity requirements for construction contract claims. Rather, it found that in this case Davis had “willingly climbed down the chain of privity to deal directly with a supplier in order to keep supplies flowing” 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 for those supplies would be forthcoming. These distinct circumstances permit [FTJ] to obtain relief for Davis’ unjust enrichment.” Despite this, the majority noted that FTJ had not plead fraud and that the majority’s decision was not based on a theory of fraud.

The dissent argued that Davis’ complete payment of the subcontract amount meant that it had already paid for FTJ’s materials, as those material costs were covered by the fixed-price subcontract between Davis and H&2. Having already paid for the materials, Davis had a bona fide right to them under Virginia precedent and was not unjustly enriched by using them. Further, the dissent noted that the joint check agreement did not represent a promise on Davis’ part to pay FTJ outside of Davis’ contractual obligations to H&2, nor was there any other contract or agreement that Davis would pay FTJ in the event H&2 did not. The dissent also challenged the accuracy and factual basis for the majority’s conclusion that Davis had induced FTJ’s continued performance through assurances of payment.

B. SOURCE-OF-DUTY RULE / ECONOMIC LOSS DOCTRINE

Tingler v. Graystone Homes, Inc., 834 S.E.2d 244 (Va. 2019) This case involved tort and breach of contract claims brought against homebuilder Graystone

Homes, Inc. (“Graystone”) by a family-run farming company, Belle Meade Farm, LLC (“Belle Meade”) and the Tingler family, residents of a house Graystone constructed on Belle Meade’s property (the “Tinglers”). George and Crystal Tingler contracted with Graystone to build a house on Belle Meade property. In 2010, at the post-construction 30-day inspection permitted by the contract, the Tinglers discovered leaks around the dining room exterior doors and reported them to Graystone. Graystone attempted repair, but, in 2011, the Tinglers discovered and reported another leak in the dining room. Graystone again attempted repair. Graystone allegedly did not inspect for mold on either occasion.

In 2014, after allegedly experiencing medical symptoms, the Tinglers hired a mold inspector, who found mold in the basement under the dining room where the leaks had occurred and noted elevated levels

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of mold spores throughout the home and elevated moisture levels in the dining room. The Tinglers reported this to Graystone, which performed another attempted repair around the dining room doors. A Graystone employee later accompanied the mold inspector during a reinspection of the house. During this reinspection, the Graystone employee allegedly cut a hole in the dining room drywall and removed a large section of wet, moldy insulation. The employee then allegedly dropped the moldy insulation on the floor and cleaned the mess with the Tinglers’ vacuum cleaner. The employee also allegedly covered the hole in the drywall with a garbage bag, which Graystone later replaced with containment sheeting. A few weeks after this occurred, the Tinglers vacated the home due to continued physical symptoms they attributed to mold exposure. After the Tinglers vacated, a remediation contractor concluded that Graystone improperly placed the containment sheeting, and a mold inspector found elevated levels of mold spores and moisture.

The Tinglers and Belle Meade (collectively the “Plaintiffs”) brought negligence and breach of contract claims against Graystone for its allegedly negligent construction and repair work. The Plaintiffs sought millions of dollars for personal injury suffered because of the mold as well as for property damage to the home and its contents. The Circuit Court of Culpeper County sustained demurrers against all of the Plaintiff’s claims and dismissed them with prejudice, holding that the Tinglers’ tort claims arose from contract and were therefore barred by the source-of-duty rule, that the Tinglers had no standing to bring the contractual claims because the house was a fixture on Belle Meade’s land, and that Belle Meade had no standing because it was not a party to the contract. The Plaintiffs appealed.

The Virginia Supreme Court, noting the “complicated fact pattern and anfractuous legal precedent on a host of issues,” affirmed in part and reversed in part. The Supreme Court’s opinion contained an examination of the history and intent of the source-of-duty rule, a rule requiring analysis of the “source of the duty violated” in order to ascertain whether a cause of action sounds in tort, in contract, or both. The Court explained that “[w]hether viable tort claims arose under the facts pleaded in this case depends both upon the nature of the alleged torts and the types of the alleged damages.”

The Court affirmed the dismissal of the personal injury tort claims relating to the allegedly

negligent original construction. The Court concluded those claims amounted to allegations that Graystone merely failed to do what it was contractually obligated to do, not that Graystone committed misfeasance or malfeasance during initial construction, so were therefore in essence contract claims.

The Court reversed the dismissal of the personal injury tort claims based on Graystone’s allegedly negligent repair, however. Drawing an analogy between this case and landlord-tenant cases, the Court held that Graystone had a duty to not create or aggravate a dangerous condition when it performed its repairs. The Court held that the Plaintiff’s allegations about Graystone’s unsafe repair work were sufficient to withstand demurrer, and therefore the Circuit Court erred in dismissing them. Graystone’s potential tort liability was to be limited to only those damages caused by the allegedly negligent repairs, however, and not to damage attributable to the original construction work.

The Court further explained that the economic loss doctrine, which it described as a “remedy-specific application of the source-of-duty rule” that “precludes recovery in tort for any economic loss attributable to the alleged breach of contract,” would likewise not bar the Plaintiffs’ recovery in tort for personal property damage if the damage was caused by the repair work. Recovery in tort for damage to the house itself was barred by the economic loss doctrine, however, because the house was the object of the contract. The doctrine would also bar recovery in tort for personal property damage caused by the original construction work, as that damage would have been the result of the breach of the construction contract and not misfeasance or malfeasance.

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The Court also reversed the Circuit Court’s dismissal of the Plaintiffs’ contract claims. The Plaintiffs alleged that the Tinglers were agents of Belle Meade for the purposes of the contract with Graystone or, in the alternate, Belle Meade was a third-party beneficiary of the contract between the Tinglers and Graystone. The Court found that the facts alleged were sufficient to state a contract claim based on either theory. C. WAIVER OF STATUTE OF LIMITATIONS Radiance Capital Receivable Fourteen, LLC v. Foster, 833 S.E.2d 867 (2019).

This case involved Foster and Wilson Building, LLC (the “Company”), which in February 2006 executed a promissory note in favor of New South Federal Savings Bank (“New South”) based on a construction loan. Soon thereafter, Robert D. Foster and James M. Wilson executed a guaranty agreement with New South in which they personally agreed to pay the Company’s debt. The guaranty agreement contained a statement that Messrs. Foster and Wilson agreed to “waive[] the benefit of any statute of limitations or other defenses affecting the … Guarantor’s liability.”

The Company defaulted on the promissory note, and demands for payment were sent to Messrs.

Foster and Wilson in August 2010. In November 2015, Radiance Capital Receivables Fourteen, LLC (“Radiance”), the assignee of the promissory note and guaranty from New South, filed suit against Messrs. Foster and Wilson in Gloucester County Circuit Court to collect on the note. In response, Messrs. Foster and Wilson filed a plea in bar asserting that Radiance’s suit was barred by the five year statute of limitations. Radiance asserted that Messrs. Foster and Wilson had waived the statute by the terms of the guaranty; Messrs. Foster and Wilson argued that the waiver was void under Virginia Code § 8.01-232, which states in pertinent part:

[w]henever the failure to enforce a promise, written or unwritten, not to plead the statute of limitations would operate as a fraud on the promisee, the promisor shall be estopped to plead the statute. In all other cases, an unwritten promise not to plead the statute shall be void, and a written promise not to plead such statute shall be valid when (i) it is made to avoid or defer litigation pending settlement of any case, (ii) it is not made contemporaneously with any other contract, and (iii) it is made for an additional term not longer than the applicable limitations period.

Radiance argued that the statute did not apply to the terms of the guaranty because the guaranty

provided a waiver of the statute of limitations rather than a promise not to plead the statute. In the alternate, Radiance argued that the terms of the guaranty should be enforced per the statute, as not doing do would operate as a fraud on Radiance. The Circuit Court sustained Messrs. Foster and Wilson’s plea in bar based on the statute of limitations and dismissed Radiance’s complaint with prejudice. Radiance appealed. The Virginia Supreme Court affirmed the Circuit Court’s dismissal. First, the Court held that the waiver in the statute of limitations did not fall within the express circumstances where the statute enforces waivers of the statute of limitations because the waiver in question was part of the original contractual obligation in the promissory note and was not made to defer litigation. Second, the Court rejected Radiance’s attempt to distinguish between a “waiver” of the statute of limitations as contained in the guaranty and the “promise” not to plead the statute of limitations described in § 8.01-232. The Court reasoned that promises and waivers had the same practical effect and parties could too easily contact

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around the statute if the Court allowed there to be distinction between the two terms. Lastly, the Court rejected that signing the promissory note with the waiver of the statute of limitations was a fraud. The Court cited to Soble v. Herman, 175 Va. 489, 500, 9 S.E. 2d 459 (1940) for the proposition that a promise in a contract to do a future act is not a fraud because it is not a misrepresentation of a present or pre-existing fact and is instead an unfulfilled statement of a future act or event. To establish fraud, Radiance would have been required to establish that Messrs. Foster and Wilson executed the guaranty in 2006 with the fraudulent intent to refuse to be bound by the statute of limitations waiver. Radiance did not provide evidence establishing that fraudulent intent. D. ATTORNEY FEES Ebadom VA, LLC, et al. v. Steve S. Lee, et al., Case No. CL-2018-1535 (Consolidated with CL-2018-2399 and CL-2018-3455) (Cir. Ct. Fairfax County, Apr. 6, 2020)

This case involved a dispute over a commercial lease agreement between 1004 Palace Plaza LLC (“Landlord”) and Ebadom VA LLC (“Tenant”). Both sides accused the other of breaching the lease. The Landlord asserted the Tenant failed to perform an interior build-out of the property to open a Korean barbeque restaurant and left the space saddled with a stop work order by the County for unpermitted construction. Tenant asserted claims of fraud and conspiracy to commit fraud against the Landlord, its management company, and one of its owners.

After a two-week jury trial, the Circuit Court found in favor of Landlord on all counts and awarded Landlord over $2 million in damages. Landlord then moved to recover its attorneys’ fees under a provision in the Lease stating that Landlord may recover its reasonable attorneys’ fees if it files suit against Tenant for any reason, including to enforce the terms of the Lease.

Tenant argued that the fee provision was unconscionable and against public policy, citing a recent, unpublished opinion by the Virginia Supreme Court in which the Court invalidated a fee provision in an enrollment contract between a private school and the parents of a student that required the parents to pay all fees incurred by the school in any action arising out of the contract. See Flint Hill Sch. v. McIntosh, No. 181678, 2020 WL 33258 (Va. Jan. 2, 2020).

The circuit court rejected Tenant’s argument and awarded the Landlord an additional $1.2 million in attorneys’ fees. The court distinguished the Flint Hill School case in several ways. Unlike the enrollment contract at issue in the Flint Hill School case, the lease was not a contract of adhesion, nor was it a product of unequal bargaining power. Furthermore, unlike the enrollment contract in Flint Hill School, which required the parents to pay all fees incurred by the school, even if the parents sued and won, the lease only required Tenant to compensate Landlord for its “reasonable” fees, which implicitly limited Landlord to recovering fees related to claims on which it actually prevailed.

Next, Tenant argued that Landlord should only be permitted to recover the fees it incurred pursuing its affirmative breach of contract claims, as opposed to defending against Tenant’s claims. The Circuit Court rejected this argument as well, finding that Landlord’s successful defense of Tenant’s claims constituted “enforcement” of the lease. Notably, the court held that Landlord’s enforcement efforts included not only its defense of Tenant’s breach of contract claims, but also its defense of Tenant’s fraud and conspiracy claims, since Landlord could not have sought to enforce the terms of the lease without first defending against Tenant’s allegation that Landlord had procured the lease through fraud.

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E. ARBITRATION VENUE Comfort Systems of Virginia, Inc. Et al. v. P.J. Potter Enterprises, Inc. et al., 104 Va. Cir. 239 (Cir. Ct. Chesapeake, Feb. 11, 2020).

This case involved the proper venue for a Petition to Vacate an Arbitration. Comfort Systems of Virginia, Inc. and the other petitioners were challenging an arbitration ruling in favor of P.J. Potter Enterprises, Inc. and the other respondents. The Court had previously ruled that because there was no evidence taken at the alleged arbitration hearing, there had been no hearing and therefore the venue for the petition to vacate could not have been the location of the hearing per Virginia Code § 8.01-581.015. Further, the arbitration provision from the parties’ contact had not selected a place for the hearing which would have been the proper venue for the petition.

Instead, to determine the proper venue for the petition to vacate the arbitration, the Court referred to the last provision of Virginia Code § 8.01-581.015, which directs the Court to consider the standard statutory venue provisions in the Virginia Code found at § 8.01-261 et seq. The Court heard evidence concerning the appropriate venue and held that it was not in Chesapeake because the respondent did not regularly conduct business in Chesapeake. Instead, the Court transferred venue to Suffolk, Virginia, the location of the respondent’s principal office.

LEGISLATION

HB 358 Project Labor Agreements; Public Procurement: This bill amends Virginia Code § 2.2-4321.2 to permit the use of project labor agreements for public works projects in Virginia. A “project labor agreement” is defined as a “pre-hire collective bargaining agreement with one or more labor organizations that establishes the terms and conditions of employment for a specific public works project.” Under the amended statute, a Virginia public body may require bidders, offerors, contractors, or subcontractors to enter into, remain signatories to, or otherwise adhere to project labor agreements with one or more labor organizations on the same or related public works projects. The requirements of this bill become effective on May 1, 2021. This bill incorporates HB 122, HB 1202, and HB 1311, and it is identical to SB 182. HB 452 Virginia Public Procurement Act – Small Purchases: This bill amends Virginia Code § 2.2-4303 to increase the threshold for the small purchase exception to competitive procurements from $100,000 to $200,000 for goods and services other than professional services and non-transportation-related construction. The bill also clarifies that informal solicitations conducted under the small purchase exception shall be posted to the Department of General Services’ central procurement website. This bill is identical to SB 650.

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HB 544 Department of General Services; Public Posting of Contract Information on Central Electronic Procurement System: This bill amends Virginia Code § 2.2-1110 to require that the Department of General Services and using agencies publicly post awarded contracts and amendments to them on the Department of General Services’ central electronic procurement system website. This requirement applies to any using agency contract awarded on or after July 1, 2021 and any modification thereto. Modifications issued after July 1, 2021 to contracts which were awarded before July 1, 2021 but which have two or more years remaining shall also be posted, along with the original contract and any previous modifications. This bill is identical to SB 563. HB 833 Virginia Public Procurement Act – Public Works Contracts, Prevailing Wage Rate: This bill amends adds Virginia Code § 2.2-4321.3 and amends Virginia Code § 40.1-6 to add prevailing wage rate requirements to Virginia public works contracts. The newly added § 2.2-4321.3 contains most of new requirements. It defines the “Prevailing Wage Rate” as the rate “prevailing for the corresponding classes of mechanics, laborers, or workers employed for the same work in the same trade or occupation in the locality in which the public facility or immovable property that is the subject of public works is located.” The rate is to be determined by the Virginia Commissioner of Labor and Industry based on the applicable prevailing wage rate determinations made by the U.S. Secretary of Labor under the federal Davis-Bacon Act. “Public Works” are defined as “the operation, erection, construction, alteration, improvement, maintenance, or repair of any public facility or immovable property owned, used, or leased by a state agency or locality.” The new statute requires public works contracts over $250,000 issued by state agencies to include clauses requiring the payment of the prevailing wage to any individual performing the work of a mechanic, laborer, or worker under the contract. State agencies are required to ensure that the prevailing wage requirements are contained in prime contracts and subcontracts. The statute further requires that contractors certify the pay scale “for each craft or trade employed on the project to be used by such contractor and any of the contractor's subcontractors for work to be performed under such public contract.” This requires the contractor to “specify the total hourly amount to be paid to employees, including wages and applicable fringe benefits, provide an itemization of the amount paid in wages and each applicable benefit, and list the names and addresses of any third party fund, plan or program to which benefit payments will be made on behalf of employees.” Contractors and subcontractors will be required to preserve records establishing their payment of the prevailing wage for a minimum of six years, to provide those records to the Virginia Department of Labor within 10 days of a request, and to certify the veracity of the records. The new statute contains penalties for contractors and subcontractors that fail to pay the prevailing wage rate. These penalties include the requirement that the contractor pay the underpaid worker the difference in pay plus interest on the difference, disqualification from bidding on public contracts until the contractor or subcontractor makes full restitution, and, if the violation was willful, a finding of a class 1 misdemeanor and the associated penalties. The new statute also expressly allows any interested part to seek an injunction against any public work contract that violates its requirements. It also sets the procedure for how the state agency obtains the prevailing wage rate from the Commissioner.

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While the statue is mandatory for state agencies, it is permissive for local governments. Localities that adopt the provisions may avail themselves of the Commissioner to determine prevailing wage rates. The bill’s amendments to § 40.1-6 expressly provide the Commissioner with authority to determine the prevailing wage rate for public works contracts. The requirements of this bill become effective May 1, 2021. This bill is identical to SB 8.  

HB 890 Construction Management or Design-Build Contracts; Use by Local Public Bodies: This bill amends Virginia Code § 2.2-4382 to eliminate the default $10 million threshold for local public bodies to use construction management contracts. The bill further amends the statute to clarify that construction management contracts may be used by public bodies for projects that are below the cost threshold set by the Secretary of Administration for such contracts, provided that the project is complex and the local governing body approves of the use of a construction manager. This bill is identical to SB 341 HB 1078 Virginia Public Procurement Act – Including Employment of Persons With a Disability as a Factor in Evaluating Proposals: This bill amends Virginia Code § 2.2-4302.2 to allow municipalities to include as a factor in evaluating proposals the proposer’s employment of persons with disabilities to perform the contract. However, this factor may not be applied in contracts for architectural services, professional engineering, transportation construction, and transportation-related construction services. HB 1300 Virginia Public Procurement Act – Statute of Limitations on Actions on Construction Contracts: This bill amends Virginia Code §§ 2.2-4340, 8.01-232, and 23.1-1017 and adds §§ 2.2-4340.1 and 2.2-4340.2 to change the statutes of limitations for actions on public construction and architectural/engineering contracts. § 2.2-4340 is amended to clarify that, for purposes of the statute of limitations for performance bond actions under the VPPA, “completion of the contract” means final payment to the contractor pursuant to the terms of the contract unless a final certificate of occupancy or written final acceptance is issued to the contractor, in which case the five-year period to bring a performance bond action begins to run no later than 12 months after the date of the certificate of occupancy or written acceptance. New statute § 2.2-4340.1 creates a 15-year statute of limitation for actions on a construction contract brought by a state public body. The 15-year period begins at final payment to the contractor. If the public body issues a certificate of occupancy or written final acceptance before final payment, then the 15-year limitation begins to run no later than 12 months after the date of the certificate of occupancy or written acceptance. The statute contains a further limitation prohibiting the state public body from bringing action against a contractor more than five years after the state issues a written notice of defect or breach to the contractor and prohibits the state body from unreasonably delaying the written notice to the contractor. New statute § 2.2-4340.2 creates a 15-year statute of limitation for actions on an architectural or engineering contract brought by a state public body. The details of this statute are the same as those in § 2.2-4340.1.

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§ 8.01-232 is amended to add a new subsection D. This new subsection states that other limitations in the statute do not apply to, limit, or prohibit written promises to waive or not plead the statute of limitations that are made in or contemporaneously with subcontracts relating to construction, construction management, design-build, architecture, or engineering so long as the promise to waive or not plead the statute applies only to demands, claims, or actions asserted by a public body. § 23.1-1017 is amended to subject public institutions of higher education that have entered into management agreements with the Commonwealth to the new statutes of limitations introduced in the bill. HB 1300 incorporates HB 847 and is identical to SB 607. SB 208 Mechanics' Liens; Right to Withhold Payment: This bill amends Virginia Code § 43-13 to add a civil cause of action in contract that can be asserted by a subcontractor or supplier against a general contractor or higher tier subcontractor that had diverted project funds from the subcontract or supplier. The new cause of action does not eliminate the higher tiered contractor’s right to withhold payment for defective work or materials. The bill also adds a provision to the statute rendering void as against public policy any contract provision that allows withholding of funds due under one contract based on performance of another contract. SB 658 Contracts with Design Professionals; Provisions Requiring a Duty to Defend Void: This bill amends Virginia Code § 11-4.4 to render void any provision contained in any contract relating to the planning or design of a building, structure, or appurtenance thereto (including moving, demolition, or excavation connected with it), or any provision contained in any contract relating to the planning or design of construction projects by which any party purports to impose a duty to defend on any other party to the contract. SB 838 Nonpayment of Wages; Private Action; Liability for Payment of Wages Due under Construction Contracts: This bill adds Virginia Code § 11-4.6 and amends Virginia Code § 40.1-29 to establish the joint and several liability of the general contractor and subcontractors at any tier for the wages of the subcontractors’ employees for certain construction projects. Under new statute § 11-4.6, any construction contract entered into on or after July 1, 2020 shall be deemed to include a provision making the general contractor and the subcontractors at any tier jointly and severally liable for paying the wages owed on a project to any subcontractor’s employees. Further, the new statute provides that the general contractor is deemed to be the employer of the subcontractor’s employees at any tier for purposes of § 40.1-29, which governs the manner and timing of wage payments. As a result, if a subcontractor at any tier fails to pay its employees in accordance with prevailing law, both the subcontractor and the general contractor may be liable for civil and criminal penalties. The statute includes a requirement that a subcontractor indemnify the general contractor for any damages, interest, penalties, or attorneys’ fees the general contractor incurred as a result of the subcontractor’s failure to pay its employees, but this indemnification requirement does not apply if the subcontractor’s failure to pay its employees was due to the general contractor’s failure to pay the subcontractor according to the terms of the subcontract.

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Importantly, subsection E of the new statute provides that the statute only applies when (i) it can be demonstrated that the general contractor knew or should have known that the subcontractor was not paying employees all wages due, (ii) the construction contract is related to a project other than a single family residential project, and (iii) the value of the project, or an aggregate of projects under one construction contract, is greater than $500,000. § 40.1-29 is amended to create a private cause of action for Virginia employees to recover unpaid wages from their employer, which can also include up to treble damages if non-payment was knowing. Under the newly created § 11-4.6, this cause of action can also be brought against the general contractor for a qualifying construction project. This cause of action has a three-year limitation period.

………………………………………………………………………………………… The Editors wish to thank all of the contributors to this issue of the Section Newsletter. As always, the Editors welcome the submission of articles, opinions, and other items of interest. Such materials may be sent to either of the newsletter editors:

Daniel D. Rounds Jesse B. Gordon SMITH PACHTER MCWHORTER PLC PENDER & COWARD PC 8000 Towers Crescent Drive, Suite 900 222 Central Park Avenue, Suite 400 Tysons Corner, VA 22182 Virginia Beach, VA 23462 drounds@smithpachter.com jgordon@pendercoward.com

Construction Law and Public Contracts Section 2019–2020 Board of Governors

Hanna Lee Blake, Esq., Chair Watt, Tieder, Hoffar & Fitzgerald, LLP 1765 Greensboro Station Place, Ste. 1000 McLean, VA 22102 703-749-1000 hblake@watttieder.com

Scott Windle Kowalski, Esq., Vice Chair Petty Livingston Dawson & Richards PC P.O. Box 1080 Lynchburg, VA 24505 434-846-2768 skowalski@pldrlaw.com

Randall Hall Wintory, Esq., Secretary Virginia Department of Transportation 1401 East Broad Street Richmond, VA 23219 804-225-3306 Randall.wintory@vdot.virginia.gov

Alison Rachelle Mullins, Esq., Treasurer Shannon, Mullins & Wright LLP 124 S Royal Street Alexandria, VA 22134 571-620-1930 amullins@smw.law

James Barrett Lucy, Esq. Immediate Past Chair Freeman, Dunn, Alexander, Gay, Lucy & Coates, P.C. 1045 Cottontown Road Lynchburg, VA 24503 434-528-3400 BLucy@freemandunn.com

Daniel David Rounds, Esq. Co-Newsletter Editor Smith Pachter McWhorter PLC 8000 Towers Crescent Dr., Ste. 900 Tysons Corner, VA 22182 703-847-6305 drounds@smithpachter.com

Jesse Brian Gordon, Esq. Co-Newsletter Editor Pender & Coward, A Professional Corporation 222 Central Park Ave., Ste. 400 Virginia Beach, VA 23462 757-490-6266 jgordon@pendercoward.com

Quinton Bowman Callahan, Esq. Clark & Bradshaw, P.C. 92 N Liberty St. Harrisonburg, VA 22802 540-433-2601 Qcallahan@clark-bradhshaw.com

Tara Louise Chadbourn, Esq. ReavesColey PLLC 505 Independence Pkwy Ste 103 Chesapeake, VA 23320 757-410-8066 tara.chadbourn@reavescoley.com

Joseph Scott Guarino, Esq. Varela Lee Metz & Guarino LLP 1600 Tysons Blvd., Ste. 900 Tysons Corner, VA 22102 703-454-0174 jguarino@vlmglaw.com

Joshua Charles Johnson, Esq. Johnson, Rosen & O'Keeffe, LLC 131 Kirk Avenue SW Roanoke, VA 24011 540-491-0636 johnson@johnsonrosen.com

Jesse Spencer Keene, Esq. Cozen O’Connor P.C. 1200 19th Street, NW, 3rd Floor Washington, DC 20036 202-747-0795 jkeene@cozen.com

Chandra Dore Lantz, Esq. Office of the Attorney General 202 North 9th Street Richmond, VA 23219 804-786-1925 clantz@oag.state.va.us

Arnie Bruce Mason, Esq. Williams Mullen 8300 Greensboro Drive, Suite 1100 Tysons Corner, VA 22102 703-760-5235 amason@williamsmullen.com

Lauren P. McLaughlin, Esq. Smith, Currie & Hancock, LLP 1950 Old Gallows Road, Suite 750 Tysons, VA 22182 703-506-1990 lpmclaughlin@smithcurrie.com

Andrew Payne Pearson, Esq. Petty, Livingston, Dawson & Richards P.O Box 1080 Lynchburg, VA 24505 434-846-2768 APearson@pldrlaw.com

Jonathan James Straw, Esq. Kraftson Caudle, PLC 1600 Tysons Boulevard, Suite 250 McLean, VA 22102 703-873-5513 jstraw@kraftsoncaudle.com

Spencer McLaughlin Wiegard, Esq. Gentry Locke Rakes & Moore LLP 10 Franklin Road, SE, Suite 900 P.O. Box 40013 Roanoke, VA 24022-0013 540-983-9454 swiegard@gentrylocke.com

Stanley Paul Klein, Esq., Ex-Officio Judicial Blankingship and Keith 4020 University Drive, 3rd Floor Fairfax, VA 22030 703-691-1235 sklein@bklawva.com

Richard Peter DiMeglio, Esq., VaCLE Liaison 2674 English Oaks Circle Charlottesville, VA 22911 434-973-9520 rich.dimeglio@vacle.org

Ms. Paulette J. Davidson, Liaison Virginia State Bar 1111 E Main St., Ste. 700 Richmond, VA 23219-0026 804-775-0521 davidson@vsb.org

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1111 East Main Street Suite 700 Richmond, VA 23219-0026

PRESENT: All the Justices JAMES G. DAVIS CONSTRUCTION CORPORATION OPINION BY v. Record No. 190345 JUSTICE STEPHEN R. McCULLOUGH May 14, 2020 FTJ, INC., F/K/A CIESCO, INC.

FROM THE CIRCUIT COURT OF ARLINGTON COUNTY Louise M. DiMatteo, Judge

Relying on the doctrine of unjust enrichment, the trial court held that a general contractor,

James G. Davis Construction Corporation (“Davis”), was liable for construction materials

provided by a supplier to one of Davis’ subcontractors. Davis challenges this judgment on a

number of grounds. For the reasons noted below, we affirm the trial court’s judgment.

BACKGROUND

Davis served as the general contractor for a residential condominium project in Arlington

County. On February 19, 2016, Davis contracted with H&2 Drywall Contractors to complete the

drywall and metal framing for this project. H&2 was required to provide all labor, materials,

supervision, and equipment to complete those aspects of the construction project. The revised

contract between Davis and H&2 called for H&2 to be paid a total of $1,269,396, which was to

be paid in installments. The contract also called for 10 percent retainage, to be withheld until

final payment was due.

H&2 agreed to purchase materials for the project from Ciesco, now known as FTJ, Inc.

H&2 completed a Credit Application and Agreement, in which it agreed to pay Ciesco for

materials delivered to H&2. Renan Buendia, the principal of H&2, also provided a personal

guarantee to pay Ciesco any amounts H&2 owed to Ciesco for building materials.

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To ensure the smooth operation of the project, Davis and H&2 entered into a joint check

agreement. That agreement provided as follows:

JOINT CHECK AGREEMENT

THIS JOINT CHECK AGREEMENT (“Agreement”) is made this 29 day of April, 2016 by and among (1) JAMES G. DAVIS CONSTRUCTION CORPORATION, whose address is 12530 Parklawn Drive, Rockville, Maryland 20852 (“DAVIS”), (2) H&2 Drywall Contractors (“Subcontractor”) whose address is 6702 Braddock Rd. Annandale VA 22003 and (3) (“Supplier”) Ciesco Inc. whose address is Corporate Office

109 Millers Ln Harrisburg PA 17110 The parties to this agreement hereby agree as follows:

1. Any and all material checks issued by DAVIS to Subcontractor for invoices submitted by Supplier to Subcontractor on sales of materials in connection with the construction project known as Lot 3 Gas line (“Project”) shall be made payable to Supplier and Subcontractor, provided Subcontractor and Supplier agree upon the amount actually owed by Subcontractor to Supplier for such invoices.

2. All such checks issued by DAVIS to Subcontractor shall be immediately endorsed by Subcontractor, then promptly delivered by Subcontractor to Supplier at the above address (or such other address as Supplier may designate in writing).

3. DAVIS will only make payments to Subcontractor and Supplier by joint check to the extent that DAVIS actually owes money to Subcontractor on the Project.

4. The sole purpose of this Agreement is to assist Subcontractor in making payment to Supplier of invoices on sales of all materials furnished by Supplier to Subcontractor for use in connection with the Project. This Agreement does not constitute an assignment of fund[s]. Nothing contained in this Agreement is intended by the parties to create any contractual relationship or equitable obligation between DAVIS and Supplier; this Agreement is solely for the convenience of the parties. This Agreement may be cancelled at any time by DAVIS upon written notice to Subcontractor and Supplier.

JAMES G. DAVIS CONSTRUCTION CORP. SUBCONTRACTOR H&2 drywall contractor By Michelle Christen By Renan Buendia

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Michelle Christen - VP Accounting & Renan Buendia PM Financial Reporting SUPPLIER By Jeffrey G. Depew CFO Jeffrey G. Depew II

The agreement thus specifies a method for how Ciesco would be paid for the materials it

shipped to the job. Ciesco would send its invoices to Davis and H&2. Davis would pay via a

joint check made payable to both H&2 and Ciesco and deliver the check to H&2. H&2 would

then endorse the check and turn it over to Ciesco to apply against the invoices for the project.

The joint check agreement specifies that “DAVIS will only make payments [to H&2] and

[Ciesco] by joint check to the extent that DAVIS actually owes money to [H&2] on the

Project.”1

Joint checking agreements are common in the construction industry. A joint checking

agreement facilitates payment to a supplier, by providing a greater assurance to the supplier that

it will be paid. With a joint check, the subcontractor cannot abscond with money owed to the

supplier. From Ciesco’s perspective, the joint check agreement meant that there was no credit

limit on the amount of materials it would ship to H&2 at one time. The agreement made Ciesco

more confident that it would be paid and alleviated any concerns it might have about shipping a

larger increment of materials.

Ciesco began shipping materials in July 2016. Payment was due within 60 days of the

date of the invoice. When Ciesco experienced repeated delays in the payment of its invoices,

Jolene Finley, an accountant with Ciesco, reached out to Davis at repeated intervals: November

11, 2016, December 13, 2016, and January 10, 2017. Ciesco’s policy was not to ship additional

1 The joint check agreement does not provide that it is subject to the terms of Davis’ subcontract with H&2.

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materials on accounts that are past due. Each time Ciesco inquired about the past due invoices,

Davis responded that a check had been or would be written. Initially, the parties contemplated

that the check would be written pursuant to the joint check agreement and that is how Davis paid,

writing joint checks to H&2 and Ciesco. Davis sent two “release of liens” forms to Ciesco for

invoices that had been paid. Davis paid the invoices for materials Ciesco provided through

December of 2016. Benjamin Mahoney, who managed the project for Davis, acknowledged that

a supplier who is not paid might cut off supplies, and that there is “always a concern” about

non-payment generating delays. Mahoney explained that Davis’ involvement with Ciesco’s

invoices is “not a typical scenario for us to be in.” He testified that, ordinarily, the subcontractor

is hired “to manage that process, to manage the orders, [and] to manage the invoices.” Davis’

assurances to Ciesco in January 2017 resulted in Ciesco continuing to ship materials to H&2

rather than withholding materials because the account was past due.

As work on the project progressed, Davis noticed that H&2 was in difficulty. In early

2017, Davis learned that H&2 had “payroll payment problems” and was not paying its

employees. As a predictable result of not paying its employees, H&2 was having trouble

supplying enough personnel to complete the project. By March 22, 2017, Davis came to the

conclusion that H&2 would not be able to pay its suppliers. For its part, Ciesco was not aware of

any issues H&2 was having. However, while Davis was communicating with Ciesco about

Ciesco’s unpaid invoices, Davis was concerned about Ciesco cutting off supplies to H&2 based

on, at least in part, H&2’s financial condition.

Ciesco made deliveries of materials from January 10 through March 22. Neither H&2

nor Davis paid for those materials. Ciesco did not deliver any additional materials after March

2017.

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On March 21, 2017, Davis issued a “notice to cure” to H&2, detailing the issues Davis

was having with H&2. The second paragraph of the notice highlighted the ongoing nature of the

problems with H&2. It stated “As previously notified, H&2 Drywall Contractors continued to

underperform and manpower has steadily declined.”

The following day, on March 22, 2017, Mahoney called Jolene Finley of Ciesco to

inform her that there were “some problems between Davis and H&2” and he asked her not to

ship any further materials on the joint check account. Mahoney requested a Ciesco credit

application and a W-9 form. Finley and Mahoney discussed payment of Ciesco’s invoices.

Mahoney assured Finley that there were ample funds to pay Ciesco. Ciesco discussed internally

whether it needed to take any action, such as filing a mechanic’s lien or hiring legal counsel to

collect the outstanding amounts due. Finley testified that Ciesco decided that it did not need to

take any action, explaining that “we felt confident in the assurances we were provided by Mr.

Mahoney and the Davis Company.”

On March 23, 2017, Davis added Ciesco to its accounting system. Approximately two

weeks later, Davis requested copies of invoices from January 2017, and Ciesco provided them

the next day. Ciesco requested a status update on Davis’ outstanding payments on April 10.

Davis responded that a $160,670.05 payment was being processed, and that the delay was due to

moving from the joint checking agreement account. Prior to replying to Ciesco’s request for a

status update, Davis’ internal emails confirmed that the payment to Ciesco was being processed.

The owner of H&2 responded to Davis’ notice to cure by stating that he could not

provide the required personnel to complete the project, and that Davis should find a new

subcontractor. After 72 hours had passed from the issuance of that notice, Davis terminated

H&2 as a subcontractor. Davis paid H&2 a total of $969,779.70, or $299,616.30 less than what

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the revised contract contemplated as full compensation for H&2. Davis then hired another

subcontractor on March 28, 2017. Davis paid that subcontractor a total of $260,007 to complete

the job. The scope of the work was the same for the new subcontractor. H&2’s default caused

Davis to settle claims with other suppliers.

On April 12, when Finley called again about invoices that were past due, Mahoney

responded that payments in the amount of $160,670.05 were being currently processed, and he

explained that “there was a slight delay with our Accounting program when we switched over

from the joint check payments.” On April 21, however, Mahoney called Finley to tell her that,

because of the problems between H&2 and Davis, the money that Davis had planned to use to

pay Ciesco’s invoice had to be used instead to complete the project. What remained, Mahoney

stated, was $58,000, and Mahoney offered to settle all the remaining invoices for this amount.

Davis never ordered materials directly from Ciesco. Ciesco shipped $252,062.18 in

materials for which it was not paid, either by H&2, Buendia, or Davis. Davis used these

materials to complete the project. Ciesco invoiced Davis for the materials, and its prices were

reasonable. Mahoney agreed that if Davis had not used those supplies, it would have had to pay

the new subcontractor or supplier for those materials.

Ciesco filed an amended complaint against Davis, H&2 and Buendia. Ciesco alleged

breach of contract and unjust enrichment. Ciesco further sought to enforce a mechanic’s and

materialmen’s lien. Ciesco obtained a default judgment against H&2 and Buendia. Following a

bench trial, the court ruled in favor of Ciesco on its claim of unjust enrichment against Davis.

The trial court further ruled that the joint check agreement was not a binding contract due to lack

of consideration. Finally, the trial court found in favor of Davis on Ciesco’s mechanic’s lien.

This appeal followed.

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ANALYSIS

The doctrine of unjust enrichment effects a “contract implied in law” requiring one who

accepts and receives goods, services, or money from another to make reasonable compensation

for those services. See Po River Water & Sewer Co. v. Indian Acres Club of Thornburg, Inc.,

255 Va. 108 (1998). It arises from the simple principle that one person may not “enrich himself

unjustly at the expense of another.” Rinehart v. Pirkey, 126 Va. 346, 351 (1919). Typical

examples of unjust enrichment involve a payment or overpayment under a mistake of fact,

Central Nat. Bank of Richmond v. First & Merchants Nat. Bank of Richmond, 171 Va. 289, 311

(1938), or the acceptance of services without a contract for those services. See Po River Water

& Sewer Co., 255 Va. at 115 (unjust enrichment compelled payment for water and sewer

services the association accepted and received).

“Unjust enrichment” is a term of art. Restatement (Third) of the Law of Restitution and

Unjust Enrichment § 1, at 4 (2011). The Third Restatement rightly cautions that “[i]n reality, the

law of restitution is very far from imposing liability for every instance of what might plausibly

be called unjust enrichment.” Id. at 5. A variety of limiting principles restrict the reach of this

doctrine. Several such limiting principles are at issue in this case. In particular, Davis argues

that unjust enrichment is unavailable to Ciesco because: (1) the existence of a contract, the joint

check agreement, forecloses relief; (2) Davis ended up paying more than the original price to

complete the project and, therefore, it has not been unjustly enriched; and (3) Ciesco had no

expectation of being paid by Davis and Davis had no expectation of paying Ciesco.2

2 Davis assigns the following errors:

1. The trial court erred as a matter of law by ruling that there was no consideration for the JCA which governed the payment obligations and expectations of DAVIS, H&2 Drywall,

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I. THE JOINT CHECK AGREEMENT DOES NOT FORECLOSE RELIEF.

Davis’ first argument in support of reversal is that the existence of a contract, the joint

check agreement, bars any quasi-contractual relief. Whether the contract bars an unjust

enrichment claim is an issue of law we review de novo. CGI Fed. Inc. v. FCi Fed., Inc., 295 Va.

506, 519 (2018). We have stated that “[t]he existence of an express contract covering the same

subject matter of the parties’ dispute precludes a claim for unjust enrichment.” Id. See also

Southern Biscuit Co. v. Lloyd, 174 Va. 299, 311 (1940) (“[A]n express contract defining the

rights of the parties necessarily precludes the existence of an implied contract of a different

nature containing the same subject matter.”); Restatement (First) of Restitution § 107(1) (1937).

As the commentary to a pertinent provision of the modern version of Third Restatement on

Restitution and Unjust Enrichment explains,

[c]onsiderations of both justice and efficiency require that private transfers be made pursuant to contract whenever reasonably possible, and that the parties’ own definition of their respective obligations – assuming the validity of their agreement by all pertinent tests – take precedence over the obligations that the law would impose in the absence of agreement. Restitution is

and Ciesco, because the JCA gave Ciesco assurances that monies would be paid to Ciesco, and that H&2 Drywall could not abscond with monies it owed to Ciesco.

2. The trial court erred as a matter of law by ruling that DAVIS was unjustly enriched by Ciesco’s delivery of drywall materials to H&2 Drywall because Ciesco had no reasonable expectation to be paid by DAVIS for the balance of monies owed by H&2 Drywall to Ciesco for those materials given Ciesco’s prior written acknowledgment that DAVIS would not pay for materials except to the extent it owed money to H&2 Drywall, and the trial court determined that no monies were due from DAVIS to H&2 Drywall.

3. The trial court erred as a matter of law in determining that DAVIS was unjustly enriched by Ciesco’s delivery of drywall materials to H&2 Drywall because DAVIS paid the full amount of the Subcontract for H&2 Drywall’s completed scope of work, which included the drywall materials, in accordance with the express, written Subcontract.

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accordingly subordinate to contract as an organizing principle of private relationships, and the terms of an enforceable agreement normally displace any claim of unjust enrichment within their reach.

Restatement (Third) of Restitution and Unjust Enrichment § 2, cmt. c, at 17. At the same time, and despite its forceful embrace of the primacy of contract over

remedies implied in law, the Third Restatement acknowledges as “plainly erroneous” broad

statements such as “there can be no unjust enrichment in contract cases.” Id. For example,

unjust enrichment is not precluded where “a valuable performance has been rendered under a

contract that is invalid, or subject to avoidance, or otherwise ineffective to regulate the parties’

obligations.” Id. See also George E. Palmer, The Law of Restitution § 18.2, at 8 (1978). Sister

courts have acknowledged such limitations. See, e.g., Campbell v. Asbury Automotive, Inc., 381

S.W.3d 21, 35-37 (Ark. 2011) (existence of contract did not bar claim for unjust enrichment

based on allegation that fees charged were illegal); Clapp v. Goffstown Sch. Dist., 977 A.2d

1021, 1025 (N.H. 2009) (“Unjust enrichment may be available to contracting parties where the

contract was breached, rescinded, or otherwise made invalid, or where the benefit received was

outside the scope of the contract.”).

Davis argues that the joint check agreement “was an express, written contract, supported

by adequate consideration, that provided the terms and conditions by which Davis would pay

Ciesco and H&2 Drywall by joint check for the Drywall Materials.” Davis Br. at 19-20.

Persuasive authority supports the conclusion that joint check agreements are supported by

consideration. See Plains Builders, Inc. v. Steel Source, Inc., 408 S.W.3d 596, 608 (Tex. Ct.

App. 2013); City of Phila. ex rel. Allied Roofers Supply Corp. v. Joseph S. Smith Roofing, Inc.,

599 A.2d 222, 226 (Pa. Super. Ct. 1991). For purposes of this opinion, we will assume, without

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deciding, that this particular joint check agreement is supported by consideration. That,

however, does not end the inquiry.

By its plain terms, the joint check agreement states that its “sole purpose” “is to assist

Subcontractor in making payment to Supplier of invoices on sales of all materials furnished by

Supplier to Subcontractor for use in connection with the Project.” It further states that “[n]othing

contained in this Agreement is intended by the parties to create any contractual relationship or

equitable obligation between DAVIS and Supplier.” Davis seeks to stretch the plain terms of the

joint check agreement far beyond its stated, and limited, purpose. Ciesco is not making any

claim governed by the contract. For example, Ciesco does not contend that Davis issued checks

to H&2 that were not joint checks. The expressly limited contract here does not foreclose a

claim for unjust enrichment when that claim falls outside of the plain terms of the agreement.

Moreover, as Ciesco notes, the joint check agreement did not “preclude the parties from

creating further or other expectations about payment through their actions and communications.”

Ciesco Br. at 20-21. Here, Davis and Ciesco interacted at regular intervals when the invoices

were past due. Davis’ involvement with Ciesco’s invoices was not typical for Davis. Mahoney

testified that, ordinarily, the subcontractor is hired “to manage that process, to manage the orders,

[and] to manage the invoices.” In this instance, Davis did not refer Ciesco to H&2 but instead

responded directly to Ciesco by either paying the invoice or providing assurances that the invoice

would be paid. Ciesco’s policy was to stop shipping materials when its invoices had not been

paid within a certain time frame. Davis’ repeated direct dealings with Ciesco and the repeated

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assurances it received from Davis, prompted Ciesco to continue shipping supplies with the

expectation that Davis would pay for those supplies.3

II. DAVIS IS NOT BEING COMPELLED TO PAY TWICE FOR THE MATERIALS. Courts have denied unjust enrichment claims when an owner or general contractor has

previously paid for the goods or services in question. See, e.g. Kern v. Freed Co., Inc., 224 Va.

678, 680 (1983) (appliance store not entitled to unjust enrichment because homeowner had paid

general contractor’s fee that included the appliances).4 An owner or contractor should not have

to pay twice for the same supplies or service. In that situation, there is no enrichment, much less

unjust enrichment. As the commentary to the Third Restatement of Restitution and Unjust

Enrichment indicates, there is no restitution when the defendant “has already paid the contract

price for the benefits received, even if the contract price is less than the cost or value of the

performance in question.” Restatement (Third) § 25, at 371; see also 2 Palmer, supra, § 10.7, at

3 Davis did not provide Ciesco with a copy of the subcontract between Davis and H&2.

Paragraph 15 of the subcontract provided that in the event H&2 breached the subcontract, “Davis . . . may then have the work completed and may use Subcontractor’s material, supplies, tools, and equipment to complete. Subcontractor and its surety shall continue to be liable for all costs to complete and any damages and expenses . . . .” Paragraph 9 of the subcontract provided that “Material paid for shall belong to [] Davis . . . .” Construing these two provisions together, it is apparent that Davis would use the supplies of a defaulting subcontractor to finish the job, and that the subcontractor would have to be liable for any damages that flowed from the default, but that Davis did not have ownership over the supplies because, according to Mahoney’s testimony and as found by the trial court, Davis did not pay for them (and neither did H&2).

4 See also Breckenridge Mat’l Co. v. Allied Home Corp., 950 S.W.2d 340, 342 (Mo. Ct. App. 1997) (holding that unjust enrichment cannot exist when an owner would have to pay twice despite the subcontractor not having collected its fee); Hydro Conduit Corp. v. Kemble, 793 P.2d 855, 858 (N.M. 1990) (finding that unjust enrichment will not lie against a property owner who has already paid for the benefit supplied by the subcontractor); Columbia Wholesale Co. v. Scudder May N.V., 440 S.E.2d 129, 131 (S.C. 1994) (denying recovery on a claim of unjust enrichment by a subcontractor against an owner where the owner paid on its contract with the general contractor).

12

424 (1978). Relying on this principle, Davis argues that it had to pay more than originally

projected to finish the job, so it was not unjustly enriched.

We find this argument unpersuasive. In this instance, it is the payment for specific

supplies that is at issue, not the overall cost of the project. The evidence from Davis’ own

project manager established that Davis did not pay anyone for the supplies Ciesco delivered to

the job site and that it used those supplies. The evidence further established that, absent those

materials, Davis would have had to obtain them elsewhere and pay for them. Whether the

installation of those materials was done by the original subcontractor or the replacement

subcontractor is similarly irrelevant to whether Davis was unjustly enriched by possessing them

without paying for them. Davis is not being forced to pay twice for supplies provided by Ciesco.

It is being asked to pay once.

Furthermore, the fact that Davis ultimately paid more than the original contract price to

complete the project does not bar recovery. A reduction in obligations to third parties qualifies

as “enrichment” in the context of unjust enrichment. Restatement (Third) § 1, at 7. It is

undisputed that Davis used, and did not pay for, Ciesco’s materials to complete the project. It

follows that if Davis was unable to use materials it obtained from Ciesco without payment, then

Davis would have needed to purchase replacement materials from another supplier, thereby

increasing the total cost of the project. Morris Pumps v. Centerline Piping, Inc., 729 N.W.2d

898, 905 (Mich. Ct. App. 2006) (“[T]he mere fact that [the subcontractor’s] breach cost

defendant more than originally anticipated does not undo the wrongful nature of [contractor]

defendant’s retention of [supplier] plaintiffs’ products. We reject the argument that payment in

full of the originally anticipated subcontract price [to a new subcontractor] somehow negates

defendant’s obligation to compensate plaintiffs for the inequitably retained materials.”).

13

This case is distinguishable from Kern. In Kern, the homeowner defendant paid the

general contractor an overall fee for a “turnkey” project that included the costs of the appliances.

224 Va. at 679. The homeowner also contracted with an interior designer, who ordered

appliances. Both the general contractor and the interior designer left the state without paying for

the appliances. Id. at 680. The store that provided the appliances sought to recover from the

homeowner under a theory of unjust enrichment. We concluded that the homeowner was not

unjustly enriched and the store could not obtain restitution against the owner. Id. at 681.

Persuasive authority supports our conclusion. For example, in Wang Elec., Inc. v. Smoke

Tree Resort, LLC, 283 P.3d 45, 49-50 (Ariz. Ct. App. 2012) the court observed that

[t]hese cases fall into two categories: ones in which the owner has fully paid the general contractor and ones in which the owner has not fully paid the general contractor . . . [R]ecovery under a theory of unjust enrichment is not available in the former category, because the owner is not unjustly enriched if it fully paid its obligation. But when the owner has failed to fully pay its obligation, our courts have held that recovery for unjust enrichment is available because permitting the owner to retain the benefit without fully paying for it would be unjust.5

5 Although the courts are divided on where to draw the line with claims of unjust enrichment, ample persuasive authority allows a recovery in circumstances similar to the one we face here, i.e. there is nothing “aberrant” about the conclusion we reach. Unerstall Foundations, Inc. v. Corley, 328 S.W.3d 305, 312-13 (Mo. Ct. App. 2010) (stating that “[p]ayment or non-payment determines whether a defendant was unjustly enriched” and upholding judgment for unjust enrichment because the evidence showed that the owner had not paid the contractor or the subcontractor for the work); Flooring Sys., Inc. v. Radisson Grp., Inc., 772 P.2d 578, 581-82 (Ariz. 1989) (reversing summary judgment because hotel had not fully paid anyone, either the bankrupt general contractor or the subcontractor, for carpet installation by the subcontractor); Eastern Metal Products, Inc. v. Deperry, 686 A.2d 1003, 1004 (Conn. Ct. App. 1997) (evidentiary hearing needed to determine if tenant was unjustly enriched by suppliers provided to contractor, who did not pay for them); Morris Pumps, 729 N.W.2d at 198 (“We recognize that defendant may have paid more than the full contract price originally contemplated in the subcontract . . . . However, this does not lessen or alleviate defendant’s obligation to compensate plaintiffs for the materials that were taken and used in the course of the construction project.”), Trane Co. v. Randolph Plumbing and Heating, 722 P.2d 1325, 1329 (Wash. Ct. App. 1986) (supplier stated a claim for unjust enrichment by alleging materials were incorporated into final project but were never paid for by bankrupt contractor).

14

Davis is not being forced to pay twice for supplies provided by Ciesco. Consequently,

this limiting principle does not bar Ciesco from seeking unjust enrichment relief against Davis.

III. DAVIS REASONABLY EXPECTED TO PAY FOR THE SUPPLIES AND CIESCO

REASONABLY EXPECTED TO BE PAID. We have adopted a three-part test to govern unjust enrichment claims: (1) the plaintiff

conferred a benefit on the defendant; (2) the defendant knew of the benefit and should

reasonably have expected to repay the plaintiff; and (3) the defendant accepted or retained the

benefit without paying for its value. Schmidt v. Household Fin. Corp., II, 276 Va. 108, 116

(2008). The first and third elements are not in dispute in this case. With respect to the first

element of the test, there is no question that Ciesco conferred a benefit on Davis. See R. 677.

Ciesco provided a significant supply of materials that Davis, by its own admission, used to finish

the project. With respect to the third element, it is plain that the defendant accepted or retained

the benefit without paying for its value. Davis raises a number of arguments concerning the

second element.

Davis argues that it had no expectation of paying for the materials based on the joint

check agreement. It cites to clause 3 of the joint check agreement, which specifies that “DAVIS

will only make payments to Subcontractor and Supplier by joint check to the extent that DAVIS

actually owes money to Subcontractor on the Project.” Davis points out that it did not owe H&2

any money under the subcontract. Here, however, Davis repeatedly responded directly to

Ciesco’s inquiries about late invoices and provided assurances that Ciesco would receive

payment. Davis was concerned about ensuring a continued flow of supplies. By January 2017,

Davis was aware of H&2’s precarious condition, notably its late payments to Ciesco and failure

to pay its employees. Nevertheless, Davis directly encouraged Ciesco to continue shipping

15

supplies. In addition, Davis’ internal communications and actions following termination of the

subcontract and JCA are consistent with an intent on the part of Davis to pay Ciesco’s

outstanding invoices, initially via joint check and later directly from Davis. On March 23, Davis

added Ciesco to its accounting system. By April 12, Davis internally approved and was

processing a $160,670.05 payment to Ciesco, although it soon halted that payment. The

factfinder could plausibly conclude that Davis expected to pay for the materials based on Davis’

course of conduct with Ciesco, and that Ciesco expected to be paid for materials it was

encouraged to ship. Based on these facts, we cannot say that the trial court’s award on the unjust

enrichment claim was “plainly wrong or without evidence to support it.” Online Res. Corp. v.

Lawlor, 285 Va. 40, 61 (2013).

This case is closely analogous to Morris Pumps. In that case, the general contractor

continued using supplies provided by a supplier to a bankrupt subcontractor. The general

contractor did not pay anyone for those supplies. 729 N.W.2d at 901-02. The Michigan Court of

Appeals held that the general contractor was unjustly enriched, reasoning as follows:

[N]either defendant nor the replacement contractor retained by defendant to finish the project ever paid plaintiffs for the materials and supplies. As the general contractor, defendant was responsible for overseeing all construction and was charged with supervising all subcontractors present on the site, including the replacement contractor retained after [the subcontractor] left the project. Moreover, as the general contractor, defendant was surely aware that the materials and supplies used to complete the project had been specially delivered to the site by plaintiffs. Defendant was also likely aware that [the subcontractor], which had gone out of business and had left the project, had not paid for the items. Regardless of whether defendant itself retained and used the materials, or merely acquiesced in the replacement contractor’s retention and use of the materials, defendant was necessarily a party to the decision to use and retain the materials without paying plaintiffs.

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If defendant’s retention of the materials supplied by plaintiffs had been completely innocent and without knowledge, we might be inclined to conclude that defendant’s enrichment was not unjust. . . . . However, we simply cannot classify defendant’s act of retaining and using the materials, without ever ensuring that plaintiffs were compensated for the materials, as innocent, just, or equitable.

Id. at 904-05.

Davis contends that we should not “allow[] any lower-tiered subcontractor or supplier to

‘leap frog’ up the chain of privity to recover against remote a party.” Davis Br. 6. But here it is

Davis that willingly climbed down the chain of privity to deal directly with a supplier in order to

keep supplies flowing. Davis then used the supplies to complete the project without paying

anyone for those supplies.6

We emphasize the limited scope of our decision. In ordinary circumstances, a supplier of

labor or materials to a subcontractor will not be able to obtain a judgment against an owner or a

general contractor. Moreover, where a contract actually governs the relationship of the parties, it

will foreclose relief under an unjust enrichment theory. Contractors, subcontractors and

suppliers remain free to structure their contracts and their conduct in such a way as to preclude

claims for unjust enrichment. Here, the limited scope of the joint check agreement does not bar

the unjust enrichment claim. In addition, unjust enrichment precludes an owner or a general

contractor from having to pay twice for a service or supplies. That is not the situation here.

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

6 Ciesco did not plead fraud. The trial court based its judgment on the theory of unjust enrichment. No part of our decision is based on a theory of fraud.

17

for those supplies would be forthcoming. These distinct circumstances permit Ciesco to obtain

relief for Davis’ unjust enrichment.

CONCLUSION

For all of these reasons, we will affirm the judgment of the trial court.

Affirmed.

JUSTICE KELSEY, with whom CHIEF JUSTICE LEMONS and JUSTICE CHAFIN join, dissenting.

The construction industry relies heavily upon financial and legal predictability, a public

policy highly favored by the law of contracts. In this case, that reliance has been undermined by

an aberrant use of the doctrine of quasi-contracts. The scenario is typical: A supplier does not

get paid by an insolvent subcontractor, the only party that had agreed to pay the supplier, so the

supplier sues the general contractor. The result is atypical: A trial court orders the general

contractor to pay the subcontractor’s debt to the supplier, and the majority affirms.

I respectfully dissent.

I.

The very use of the adjective “quasi” (legalese for “sort of”) betrays itself as a linguistic

stretch. A quasi-contract is not sort of a contract. It is “no contract at all.” J.B. Ames, The

History of Assumpsit, 2 Harv. L. Rev. 53, 63 (1888). No one agrees to a quasi-contract. It is

imposed upon a party against his will. The idea originated in the Roman civil law, migrated into

continental ecclesiastical law, and was absorbed into English equity practice. See generally City

of Norfolk v. Norfolk Cty., 120 Va. 356, 360-68 (1917). English and American courts ultimately

18

incorporated the idea into the common-law “action of assumpsit.” Id. at 361.1 They did so with

considerable caution, however, recognizing that “[i]n this class of cases, the notion of a contract

is purely fictitious.” Id. at 363 (citation omitted). And they no doubt knew, as do we, that a

legal “fiction becomes wholly safe only when it is used with a complete consciousness of its

falsity,” L.L. Fuller, Legal Fictions, 25 Ill. L. Rev. 363, 370 (1930).

Generations of jurists and legal scholars have attempted to sculpt the quasi-contract

concept into a workable legal doctrine. This effort has produced the cause of action generally

called “unjust enrichment.”2 To be successful, an unjust-enrichment plaintiff must satisfy a

threshold requirement — proving that the defendant was “enriched” at the plaintiff’s “expense.”

See Hamm v. Scott, 258 Va. 35, 38-39 (1999); Kern v. Freed Co., 224 Va. 678, 680-81 (1983).

In the context of commercial disputes involving goods or services, one is enriched only if his

economic position has been measurably improved. If a defendant’s economic position is exactly

1 See also Great-West Life & Annuity Ins. v. Knudson, 534 U.S. 204, 213 (2002);

Baltimore & Ohio R.R. v. Burke & Herbert, 102 Va. 643, 646-47 (1904) (quoting Lord Mansfield’s opinion in Moses v. Macferlan (1760) 97 Eng. Rep. 676, 681; 2 Burr 1005, 1012, which states that the “gist” of a quasi-contract action in assumpsit is that the defendant “is obliged, by the ties of natural justice and equity, to refund the money”); Dan B. Dobbs & Caprice L. Roberts, Law of Remedies § 4.2(2), at 391-92 (3d ed. 2018) (explaining that restitution developed in common law through assumpsit and stating that quasi-contract cases first arose in assumpsit “sometime between around 1650 and 1700”). See generally Restatement (Third) of Restitution and Unjust Enrichment § 4 (2011) (“Liabilities and remedies within the law of restitution and unjust enrichment may have originated in law, in equity, or in a combination of the two.”).

2 We are not dealing here with an implied-in-fact contract, which is a true (not fictitious) contract implied from the parties’ “acts and conduct” and is “created only when the typical requirements to form a contract are present, such as consideration and mutuality of assent,” Spectra-4, LLP v. Uniwest Commercial Realty, Inc., 290 Va. 36, 45 (2015) (citing City of Norfolk, 120 Va. at 361-62). The measure of recovery for an implied-in-fact contract is quantum meruit — the reasonable value of the services provided. See Mongold v. Woods, 278 Va. 196, 203 (2009); Hendrickson v. Meredith, 161 Va. 193, 200-02 (1933). Properly understood, quantum meruit denotes only a “measure of damages” and not an underlying theory of obligation. John L. Costello, Virginia Remedies § 12.03, at 12-10 & n.39 (4th ed. 2011).

19

the same after the plaintiff’s actions as before, the expenses incurred by the plaintiff in taking

such actions are irrelevant.

The plaintiff’s threshold requirement, even if fully satisfied, is insufficient to justify an

award of unjust enrichment. “One may not recover under a theory of implied [in law] contract

simply by showing a benefit to the defendant . . . .” Nedrich v. Jones, 245 Va. 465, 476 (1993).

An “enrichment of the defendant” does not alone “suffice since the defendant will be deprived of

the enrichment only if its retention is regarded as unjust.” 1 George E. Palmer, The Law of

Restitution § 1.7, at 41 (1978). “Issues of considerable difficulty sometimes arise with respect to

the question whether there is an enrichment, but in a much larger number of cases the problem is

whether retention of a recognizable enrichment is unjust.” Id.

To prove an unjust enrichment, the plaintiff must show that the defendant “knew of the

benefit” and could “reasonably have expected” to pay for it. Schmidt v. Household Fin. Corp.,

II, 276 Va. 108, 116 (2008). The key qualification, legal reasonableness, has well-recognized

limits. As a matter of law, an enrichment cannot be unjust if the defendant has “a bona fide

hostile claim of right” to whatever benefit was allegedly bestowed on him. City of Norfolk, 120

Va. at 374. In such a circumstance, “the law will not indulge the fiction of the existence of an

implied promise of defendant to plaintiff; for that would in such case be in itself inequitable.”

Id.

In multi-party commercial transactions, a plaintiff may render a benefit to a defendant

while performing a contractual obligation to a third party. The defendant, in turn, may claim a

right to retain the benefit because he contracted to receive it from the third party. This scenario

differs from the two-party scenarios that typically arise in the unjust-enrichment context. The

usual examples are situations in which the plaintiff mistakenly confers a benefit on the wrong

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person, delivers the wrong goods to the right person, or performs under a contract that is

unenforceable.3 Those situations do not involve a third party in direct, but separate, privity

relationships with both the plaintiff and the defendant.

In the third-party context, “[l]egitimate concerns about privity of contract” must be

“accommodated by imposing a test of unjust enrichment that is highly protective of the

defendant,” Restatement (Third) of Restitution and Unjust Enrichment ch. 3, topic 2, intro. note

(2011) (emphasis added), and by establishing “a rigorous test of unjust enrichment as a threshold

requirement of the claim,” id. § 25 cmt. b (emphasis added). This protective, rigorous test

focuses on whether the defendant has paid anyone for the benefit received and thus has a bona

fide claim of right to it. See generally J.R. Kemper, Annotation, Building and Construction

Contracts: Right of Subcontractor Who Has Dealt Only with Primary Contractor to Recover

Against Property Owner in Quasi Contract, 62 A.L.R.3d 288, § 2 (1975) (collecting cases).

It is a “fundamental requirement of unjust enrichment in these circumstances . . . that [the

defendant] must stand to obtain a valuable benefit at [the plaintiff’s] expense without paying

anyone for it.” Restatement (Third) of Restitution and Unjust Enrichment § 25 cmt. b (emphasis

added). As a matter of law, therefore, there can be “no unjust enrichment” if the defendant has

“paid the contract price” to a third party — that is, “the price originally fixed by contract for the

work to which [the plaintiff] has made an uncompensated contribution.” Id.; see also Dobbs &

Roberts, supra note 1, § 12.18(3), at 889-90; 2 Palmer, supra, § 10.7, at 424.

This fundamental requirement can never be satisfied, for example, where an “[o]wner can

show that its aggregate payments to Builder and the other firms with which it dealt following

3 See Dobbs & Roberts, supra note 1, § 4.1(2), at 380 (categorizing unjust-enrichment

cases into common patterns).

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Builder’s default equal or exceed the original contract price for the work performed.”

Restatement (Third) of Restitution and Unjust Enrichment § 25 cmt. b, illus. 1. This principle

holds true “even if the contract price is less than the cost or value of the performance in

question.” Id. § 25 cmt. b. If a claimant seeks an unjust-enrichment award “for a performance

that the defendant has previously agreed to pay for — the typical setting of the claim asserted by

an unpaid subcontractor — the issue of unjust enrichment will be dominated, in many instances,

by the question of defendant’s payment.” Id. § 25 cmt. c. “If the defendant has paid (or remains

liable to pay) the agreed-on price for the benefits in question, the defendant has not been unjustly

enriched.” Id.

These requirements are not esoteric points on the edges of a debatable legal doctrine.

“Cases denying restitution to an unpaid subcontractor on the ground that the [defendant] has

already paid all of (or more than) the price fixed by contract for the work in question, counting

payments made both to the defaulting [party] and to other parties, are extremely numerous.” Id.

§ 25 reporter’s note (emphasis added).4 In this context, “restitution frequently is sought from the

4 See, e.g., Datastaff Tech. Grp., Inc. v. Centex Constr. Co., 528 F. Supp. 2d 587, 598

(E.D. Va. 2007) (stating that “[w]here one is obligated by an express contract to pay for a benefit he receives, and has in fact paid, he is not liable for that benefit to another party under a theory of unjust enrichment” (citation omitted)); Providence Elec. Co. v. Sutton Place, Inc., 287 A.2d 379, 382 (Conn. 1971) (finding that if the defendant “has paid its contractor . . . for those appliances, then the enrichment, in the absence of fraud, has not been unjust”); Commerce P’ship 8098 Ltd. P’ship v. Equity Contracting Co., 695 So. 2d 383, 390 (Fla. Dist. Ct. App. 1997) (“As we have observed, where an owner has given consideration for the subcontractor’s work by paying out the contract price for the work, an unpaid subcontractor’s claim that the owner has been unjustly enriched must fail.”); C. Szabo Contracting, Inc. v. Lorig Constr. Co., 19 N.E.3d 638, 649-50 (Ill. App. Ct. 2014) (granting payment to an unpaid sub-subcontractor when there was no evidence that the general contractor had paid the subcontractor, or anyone else, the contract price for the benefit in question); International Paper Co. v. Futhey, 788 S.W.2d 303, 306 (Mo. Ct. App. 1990) (finding that “[n]o unjust enrichment accrued to the [defendant] because [the general contractor] defaulted forcing them to expend additional sums in order to obtain what they were entitled to under the contract” and that “[t]he question of unjust enrichment focuses not upon what the contractor has received, but rather what the owner has paid”); Pella Windows & Doors,

22

landowner, but nearly always denied.” 2 Palmer, supra, § 10.7, at 423. In short, absent a

showing of fraud or other tortious wrongdoing, traditional unjust-enrichment principles have

never required a defendant to pay a remote, non-privity plaintiff when the defendant has already

paid or is legally obligated to pay a party with whom he is in privity for the same benefit.

Virginia law is entirely in agreement with this traditional understanding of unjust-

enrichment principles. In Kern v. Freed Co., a homeowner hired a general contractor to build a

house for a fixed price. The house was to include major kitchen appliances. The homeowner

also retained an interior designer to decorate the house for a fixed price. After the house had

been constructed, a supplier of kitchen equipment sued the homeowner because neither the

general contractor nor the interior designer had paid for the equipment supplied to the house.

The supplier argued that the homeowner had received the equipment and should pay for it. The

trial court agreed; we did not.

Reversing the unjust-enrichment award, we pointed out the third-party nature of the

dispute. The homeowner was never in privity of contract with the supplier. See Kern, 224 Va. at

680. “Therefore,” we concluded, the homeowner was “not liable” under contract principles to

the supplier for any appliances sold to the general contractor or to the interior designer. Id. We

Inc. v. Faraci, 580 A.2d 732, 733 (N.H. 1990) (per curiam) (denying restitution to an unpaid window supplier when the homeowner had “spent well in excess of their originally anticipated construction costs” and thus were not unjustly enriched); Sundance Mech. & Util. Corp. v. Atlas, 880 P.2d 861, 866 (N.M. 1994) (denying the subcontractor’s claim for unjust enrichment when the defendant had paid “a very substantial part” of the contract amount owed to the general contractor (citation omitted)); Columbia Wholesale Co. v. Scudder May N.V., 440 S.E.2d 129, 131 (S.C. 1994) (“Courts addressing a claim of unjust enrichment by a subcontractor against a property owner have typically denied recovery where the owner in fact paid on its contract with the general contractor.”); Morrisville Lumber Co. v. Okcuoglu, 531 A.2d 887, 889 (Vt. 1987) (“The retention of a benefit is not unjust where defendants have paid for it. Defendants were not unjustly enriched since defendants satisfied their obligation by paying in excess of the original contract price.”).

23

then pointed out that the homeowner had paid the general contractor and the interior designer

everything that they had been owed under their respective contracts — and both fixed-price

contracts included the delivery of major appliances. Id. at 680-81.

On this ground alone, we held that the “quasi-contract” award of unjust enrichment was

erroneous as a matter of law. See id. It was not enough that the supplier had not been paid and

that the homeowner was benefiting from the new appliances. The supplier “should not be

allowed to shift the burden of its loss” to the homeowner because the homeowner was

contractually entitled to the appliances under his fixed-price contracts with the general contractor

and interior designer. Id. at 681. In short, the homeowner “was not unjustly enriched by keeping

the items in question” because he had paid the general contractor and the interior designer

everything they were owed for providing the appliances. Id.

The conclusion in Kern should be all the more certain in construction scenarios, in which

the Virginia mechanics’ lien statute provides remedies to those “who, by their labor and

materials, have enhanced the value of a building or structure,” United Sav. Ass’n of Tex., F.S.B.

v. Jim Carpenter Co., 252 Va. 252, 260 (1996) (alterations and citation omitted); see Code § 43-

3. A “historic provision of the law,” Rosser v. Cole, 237 Va. 572, 576 (1989), the mechanics’

lien statute creates “a powerful weapon for the protection of small contractors, suppliers and

salaried employees,” Costello, supra note 2, § 16.14[6], at 16-33. This weapon — a statutory

lien — is “in derogation of the common law.” American Standard Homes Corp. v. Reinecke,

245 Va. 113, 119 (1993). The inverse could be said of unjust-enrichment law if it were extended

beyond its traditional boundaries. It would then become an unwitting judicial derogation of the

mechanics’ lien statute. See generally 2 Palmer, supra, § 10.7, at 423-24 (1978 & Supp. 2019)

(collecting cases).

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II.

The undisputed facts of this case fit squarely within the third-party, claim-of-right context

and therefore preclude the unjust-enrichment claim as a matter of law.

A.

This case involves the typical contractual hierarchy found in the construction industry.

An owner has a contract with a general contractor, who in turn has contracts with subcontractors,

who in turn have contracts with suppliers. The relational riggings that hold everyone’s

commercial expectations together are the actual contracts they entered into — not the “purely

fictitious” ones, City of Norfolk, 120 Va. at 363, that might be asserted later when the project

falls apart. In such scenarios, the parties’ actual contracts “convey clearly the limited kinds of

liability and exposure each party has in mind.” Dobbs & Roberts, supra note 1, § 4.8(4), at 494.

It is true that “[e]ach party may benefit by the work or payments of both other parties, but the

parties understand that their responsibilities and rights are only those set up by the contract.” Id.

“Respect for that contract arrangement requires the courts to refuse restitution between the

parties who did not contract with each other.” Id.

In this case, the contract between James G. Davis Construction Corporation (the “general

contractor”) and H&2 Drywall Contractor, LLC (the “subcontractor”) established a fixed

contract price of $1,194,000 in exchange for completed drywall and metal framing, among other

things. See 1 J.A. at 310. The parties later agreed to certain change orders that increased the

fixed price to $1,269,396. Id. The general contractor paid the fixed contract price in

installments calculated on a “percent complete basis” that allowed the general contractor to

“evaluate things on a 100 percent complete basis by area or by activity basis.” Id. at 438-40.

The installment payments covered “[e]verything that’s required to complete [the] scope” of that

25

area or activity basis. Id. at 440. Nothing in this contract obligated the general contractor to

calculate its installment payments to correspond to individual shipments of drywall sheets, metal

wall framing, or any other itemized list of materials.

The subcontractor needed raw materials, including drywall sheets, and contracted with

FTJ, Inc., formerly Ciesco, Inc., (the “supplier”) for a steady supply. Pursuant to an existing

credit agreement, the subcontractor agreed to pay the supplier for any materials supplied. The

subcontractor’s owner executed a personal guarantee to the supplier. The general contractor was

not a party to either the credit agreement or to the personal guarantee.

At no point did the general contractor agree to be liable to the supplier in the event that

the subcontractor failed to pay its own bills. Instead, in a form entitled “Joint Check

Agreement,” the general contractor stated that it would do only one very specific thing: When

the general contractor issued checks to the subcontractor who was seeking payment for the

subcontractor’s services, some of those checks would include the supplier as a joint payee. See

2 id. at 704. The “sole purpose” of doing so was to “assist” the subcontractor, not the general

contractor, in “making payment” to the supplier for “invoices on sales” of drywall by the

supplier to the subcontractor, not to the general contractor. Id. Consequently, joint checks

would “only” be issued “to the extent that [the general contractor] actually owes money to

[s]ubcontractor on the Project.” Id. As the supplier’s accountant testified, “My understanding

was that the joint checks were going to only come when there [were] payments due to [the

subcontractor].” 1 id. at 409.

The Joint Check Agreement was poorly named as it was not much of an agreement. It

stipulated that it did not create “any contractual relationship” between the general contractor and

the supplier. 2 id. at 704. Nor did it impose any “equitable obligation” on the general contractor

26

to pay the supplier anything. Id. Insisting further that it did not “constitute an assignment of

fund[s],” the Joint Check Agreement stated that it was “solely for the convenience of the parties”

and could be “cancelled at any time” by the general contractor upon written notice. Id.5

Under the Joint Check Agreement, the subcontractor and supplier would agree among

themselves what the former owed the latter for drywall delivered to the subcontractor. The

general contractor would then be informed of this agreed-upon amount and would include it in

the next installment check for payment to the subcontractor pursuant to the subcontract. The

general contractor did not pay the supplier directly for anything or agree to do so. The general

contractor was simply paying its subcontractor and, as an accommodation to its subcontractor’s

request, adding the supplier as a joint payee.

Contrary to the majority’s recitation of the facts,6 the general contractor did not directly

pay the supplier for any invoices that the supplier had issued to the subcontractor.7 The general

contractor did not order supplies, count the number of drywall sheets delivered to the

subcontractor, determine the timeliness of any shipments by the supplier, or approve the pricing

in the supplier’s invoices to the subcontractor.8 Every check that the general contractor issued to

5 The majority concludes that the Joint Check Agreement gave the supplier “a greater

assurance” that “it will be paid” for its supply of drywall to the subcontractor, see ante at 3. In fact, however, the supplier had no assurance at all (either greater or lesser) that it would ever be paid for a single shipment under the Joint Check Agreement. The supplier’s invoices became due 60 days after shipment. The Joint Check Agreement made clear that the general contractor could unilaterally cancel it at any time, before or after any shipment by the supplier to the subcontractor.

6 See ante at 3, 10, 14. 7 As described above, the general contractor issued each joint check pursuant to a Joint

Check Agreement Payment Verification form executed by the subcontractor and the supplier and then submitted to the general contractor, not pursuant to any invoices. It is undisputed that every joint check followed this same process. See 1 J.A. at 412-13, 461.

8 The majority implies that the general contractor managed the process, the orders, and the invoices with the supplier. See ante at 4. The general contractor’s project manager testified

27

the subcontractor was an installment payment required by the subcontract between the general

contractor and the subcontractor, not the revolving credit agreement between the subcontractor

and the supplier. In short, the Joint Check Agreement imposed no legal or equitable obligation

upon the general contractor to pay the supplier anything.

B.

When the subcontractor began to underperform on the project at some point in early

2017, the general contractor issued a notice to cure on March 21. On the next day, the general

contractor warned the supplier not to deliver any more materials to the subcontractor. Hoping to

nonetheless make the supplier whole, the general contractor predicted that there would be

“[p]lenty of money left in [the] project” to directly pay the supplier (outside the parameters of the

Joint Check Agreement) for the subcontractor’s breach of the supply agreement, see id. at 705.

That prediction turned out to be wrong.

During the next month, the general contractor began to calculate its expected losses

associated with the defaulting subcontractor and concluded that the drywall project appeared to

be financially underwater. On the date of the last joint check, March 1, the general contractor

had responded to every payment request made pursuant to the Joint Check Agreement. Earlier

deliveries by the supplier to the subcontractor were not overdue for payment on March 1 and, for

that reason, had not been paid yet. But the supplier made no drywall deliveries after March 22

when the general contractor had notified the supplier of the subcontractor’s breach. And the

supplier made no deliveries after the general contractor’s optimistic prediction that there would

only that being copied on invoices was “not a typical scenario,” but clarified that he did not check the invoices, manage the orders, or verify materials. See 1 J.A. at 474-75.

28

be sufficient project funds available to pay the supplier. It is illogical, therefore, to suggest that

the supplier relied at all on the general contractor’s prediction.9

After the general contractor had hired a replacement subcontractor to finish the drywall

project, the general contractor’s earlier fears of a financial loss proved to be true. The general

contractor and the original subcontractor had agreed (including the initial price and the agreed-

upon change orders) that the project would cost $1,269,396. See 1 id. at 310. The subcontractor

defaulted after the general contractor had made $969,779.70 in installment payments to the

defaulting subcontractor. Id. at 311-12. The stipulated damages associated with the default

amounted to $41,852.20.10 Id. at 313. Because the defaulting subcontractor had left the project

undone, the general contractor hired a replacement subcontractor at a cost of $260,007. In the

end, the general contractor lost $2,242.90 on the drywall project after having to pay the original

subcontractor everything that it was owed.

C.

We must filter these undisputed facts through the third-party, claim-of-right principles

governing unjust-enrichment claims. 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 answer

to that question is factually incontestable: The general contractor fully paid the defaulting

9 The majority points to the supplier’s testimony that they “felt confident in the

assurances [they] were provided” by the general contractor during the March 22 conversation. See ante at 5. But this statement is irrelevant because the supplier did not rely on that assurance to deliver any materials.

10 Though I do not think it analytically necessary, in calculating the general contractor’s overpayment, I have omitted the legal expenses that the general contractor incurred as a result of the subcontractor’s default. See 1 J.A. at 313 (payments to Peckar & Abramson).

29

subcontractor everything the subcontractor was owed and suffered a loss on top of that. The

general contractor was left with a $2,242.90 deficit on its books because of this subcontract — a

loss that it could not recover from any party. The unjust-enrichment award in this case only

compounds that loss. It is equally incontestable that the supplier’s materials fell within the scope

of the agreed-upon contract price.11

In other words, the general contractor had a bona fide claim of right to the drywall.12 The

subcontractor had a contractual duty to buy the drywall, deliver it to the job site, and install it.

The general contractor paid the subcontractor pursuant to a fixed-price subcontract that did not

atomize the duty to pay for any one piece, stack, or truckload of drywall. In the third-party,

claim-of-right context, the court cannot award unjust enrichment when the general contractor has

paid the contract price for the benefit it received “even if the contract price is less than the cost or

value of the performance in question.” Restatement (Third) of Restitution and Unjust

Enrichment § 25 cmt. b.

11 This is not a case in which the scope of the original contract “failed to cover significant

aspects of the project,” making it impossible for the court to determine whether the benefit received had been paid for in the installment payments and other payments after the subcontractor’s default. See Restatement (Third) of Restitution and Unjust Enrichment § 25 cmt. b, illus. 2.

12 The majority seems to imply that neither the general contractor nor the subcontractor acquired title to the drywall, and their contract only permitted the general contractor to “use the supplies” even though it “did not have ownership over the supplies” because it “did not pay for them,” see ante at 11 n.3. The only logical conclusion from the majority’s implication is that title to the drywall remained with the supplier. In this heavily litigated case, the supplier has never claimed to have title or an ownership interest in any of the goods it sold to the subcontractor, which were then re-sold in a labor and materials contract to the general contractor. The supplier never made that argument because it conveyed title of the goods to the subcontractor upon delivery, see Code § 8.2-401(2) (adopting the Uniform Commercial Code provision that unless otherwise agreed, the title for goods passes to the buyer upon physical delivery of the goods), and the supplier had no right of repossession or self-help, see Code § 8.2-702(2) (articulating the limited circumstances under which a credit seller can reclaim goods). See also 1 Palmer, supra, § 4.16, at 499-500 (explaining that a credit seller cannot ordinarily reclaim goods after delivery because it has given up both title to and possession of the goods).

30

The majority comes to a different conclusion based upon a legally flawed premise and a

mistaken interpretation of the factual record. The legal error stems from the majority

disregarding the fact that the general contractor “had to pay more than originally projected to

finish the job,” ante at 12. This very assertion misconstrues the general contractor’s argument.

The general contractor focuses its argument on the cost to finish the scope of work in the

subcontract — not the overall costs, projected or ultimately incurred, “to finish the job,” ante at

12. Regardless, the majority reasons that none of this matters because “it is the payment for

specific supplies that is at issue, not the overall cost of the project.” Ante at 12. That is akin to

saying that the defendant was unjustly enriched because he ended up a little less impoverished.

Such a view cannot possibly survive the “highly protective” legal standard applicable to

restitution awards in the third-party, claim-of-right context, Restatement (Third) of Restitution

and Unjust Enrichment ch. 3, topic 2, intro. note, which insists on “a rigorous test” as a threshold

requirement for the imposition of unjust-enrichment liability, id. § 25 cmt. b.

Taking an aberrant view of this issue, the majority adopts the reasoning of an

intermediate state court, see ante at 15-16, that is both internally inconsistent and in opposition to

the Restatement.13 In Morris Pumps v. Centerline Piping, Inc., 729 N.W.2d 898, 905 (2006), the

13 In an effort to demonstrate that its position is not aberrant, the majority cites to cases

that apparently allow “recovery in circumstances similar to the one we face here,” see ante at 13 n.5. In Flooring Systems, Inc. v. Radisson Group, Inc., 772 P.2d 578, 581 (Ariz. 1989) (en banc), the court reversed a summary judgment ruling against a subcontractor and remanded the case for an evidentiary hearing, noting that the owner had not paid the full contract price owed to the general contractor. In Eastern Metal Products, Inc. v. Deperry, 686 A.2d 1003, 1004 (Conn. App. Ct. 1997), the court reversed the trial court’s dismissal and remanded the case for an evidentiary hearing because the trial court had erroneously held that a tenant, unlike a landowner, could never be unjustly enriched by a general contractor’s work. In Trane Co. v. Randolph Plumbing & Heating, 722 P.2d 1325, 1328-29 (Wash. Ct. App. 1986), the court held that a general contractor was unjustly enriched when the defaulting subcontractor’s surety paid the general contractor to furnish and install six fans, and the general contractor did not pay the supplier for the fans it had delivered. Not only are these cases factually dissimilar in significant

31

Michigan Court of Appeals found that although the general contractor “may have paid more than

the full contract price originally contemplated in the subcontract,” it was still obligated to

compensate the supplier for the materials delivered to the job site. This view is opposed not only

by the Restatement,14 but also by the “extremely numerous” cases that turn on whether the

defendant paid the contract price under a contract that included the benefit at issue, see

Restatement (Third) of Restitution and Unjust Enrichment § 25 reporter’s note; supra note 4 and

accompanying text. The question of whether the general contractor paid for the supplies should

be answered by whether the general contractor paid the contract price for the scope of work

encompassing those supplies.

The majority also mistakenly implies that the general contractor, after the original

subcontractor’s default, simply lucked into some free stacks of uninstalled drywall that were

turned over to the replacement subcontractor in return for a dollar-for-dollar reduction in the cost

of picking up where the defaulting subcontractor had left off — thus, no harm, no foul. See ante

at 12. The supplier, however, has never made this factual assertion either at trial or on appeal,

and the record does not support it.

All we know is that the supplier did not deliver drywall to the job site after the general

contractor had fired the defaulting subcontractor. No witness or exhibit at trial suggested (much

less proved) that there had been stacks of drywall lying around on the job site ready for the

replacement subcontractor to use. Nor did the supplier attempt to establish how much of the

ways, but they do not support the majority’s conclusion that a general contractor can be unjustly enriched even when it has paid the full contract price for the benefit it received.

14 See Restatement (Third) of Restitution and Unjust Enrichment § 25 cmt. b (“There is accordingly no unjust enrichment if [the defendant] has paid the contract price to [the third party]; nor if [the defendant] has paid in full (to [the third party] and to others, following [the third party’s] default) the price originally fixed by contract for the work to which [the plaintiff] has made an uncompensated contribution.”).

32

drywall the subcontractor had already installed or left uninstalled prior to permanently leaving

the job site. Despite having the burden of proof, the supplier offered no evidence on any of these

factually dispositive points. The majority responds to this failure-of-proof point by summarily

dismissing it as legally “irrelevant,” see ante at 12. Under traditional principles of unjust

enrichment, I do not see how that could be true.

III.

Having failed to establish a quasi-contract claim, the majority adds to it a quasi-fraud

claim — as if two half theories of liability make a whole.

The majority emphasizes the general contractor’s conduct in dealing with the supplier,

alleging that it directly paid the supplier’s invoices and communicated “repeated assurances” of

payment. See ante at 10-11, 14, 16. The general contractor did this “to ensure a continued flow

of supplies.” Ante at 16. Although the general contractor was aware of the subcontractor’s

“precarious” financial position, it “directly encouraged [the supplier] to continue shipping

supplies.” Ante at 14 (emphasis added). These facts prove, the majority concludes, that the

general contractor misleadingly “led the supplier to believe that payment for those supplies

would be forthcoming.” Ante at 16.

This narrative comes quite close to accusing the general contractor of representing “as

true what [was] really false, in such a way as to induce a reasonable person to believe it, with the

intent that the person [would] act upon this representation,” Evaluation Research Corp. v.

Alequin, 247 Va. 143, 148 (1994), which is one of the definitions of common-law fraud. The

supplier, however, did not allege, prove, or even mention fraud of any kind. “Under Virginia

law, ‘fraud, whether actual or constructive, is never presumed and must be strictly proved as

alleged.’” Sweely Holdings, LLC v. SunTrust Bank, 296 Va. 367, 381 (2018) (alteration and

33

citation omitted). Litigants must plead fraud with particularity and prove it by clear and

convincing evidence, a burden of proof “higher than a mere preponderance,” id. at 382. “The

charge must be direct as the proof must be clear.” Id. (citation omitted). Virginia law does not

recognize claims of quasi-fraud.15

What is more, the majority’s enticement theory relies upon two unsupportable factual

assertions: (i) that the general contractor, breaking from industry custom, communicated directly

with the supplier and directly paid the supplier’s invoices, and (ii) that the general contractor

knew of the subcontractor’s inevitable default while enticing the supplier to continue shipments

with false promises of future payments. The evidence supports neither of these assertions.

As to the first assertion, the general contractor did not directly pay the supplier’s

invoices, see supra note 7 and accompanying text, but consistently followed the standard process

of issuing joint checks in response to payment-verification forms executed by the subcontractor

and supplier, see 1 J.A. at 461, which the supplier agreed “was the process that was followed for

all of the joint checks on this project,” see id. at 412-13. The communications between the

general contractor and the supplier merely discussed the status of the joint checks pursuant to the

payment-verification forms.

As to the second assertion, no evidence proves that the general contractor knew the

subcontractor would default (or be unable to pay suppliers) prior to sending the notice to cure on

March 21. The evidence demonstrates only that the general contractor knew that the

subcontractor had been having manpower issues at some unidentified point “early in 2017,” see

id. at 465, sent the notice to cure on March 21, id. at 310, and knew on March 22 that the

15 I say “quasi-fraud” because the majority expressly disclaims any effort to say the

general contractor committed actual fraud, see ante at 16 n.6.

34

subcontractor would not be able to pay its suppliers, id. at 467. The general contractor made no

promises, express or implied, that it would guarantee payment to the supplier if the subcontractor

defaulted.

The majority repeatedly claims that the general contractor gave “assurances” of payment

to the supplier. See ante at 4, 5, 10, 11, 14. The implication is that the general contractor’s

communication regarding joint checks morphed into some kind of false assurance to the supplier

of future payment for the continued delivery of supplies. The evidence the majority relies upon,

however, is wholly insufficient to support this implication.16 Not one conversation between the

general contractor and supplier suggested an assurance of payment for a future delivery of

supplies.

The evidence in this case cannot support a viable fraud claim, even if one had been

pleaded, and should not be used to support a quasi-fraud claim, even if one existed legally. I

thus reject the enticement-by-false-assurances narrative that is just below the surface of the

majority’s reasoning.

IV.

In sum, the trial court erred as a matter of law by awarding unjust enrichment to a

supplier that had not been paid by its customer, a defaulting subcontractor, in a case in which the

16 The majority mentions three specific communications from November 2016,

December 2016, and January 2017. Ante at 3. In November 2016, the general contractor replied to a question from the supplier regarding the status of its joint check by confirming the submitted payment-verification forms and providing the issue date for the next set of checks. See 2 J.A. at 706-09. In December 2016, the supplier asked about the status of the recently submitted payment-verification form, and the general contractor replied that the joint check had already been issued. See R. at 1534-35. In January 2017, the general contractor told the supplier that it would be able to issue the joint check for the October (now past due) and November payment-verification forms by the end of January, see 2 J.A. at 710, which it did. The subcontractor was routinely copied in these conversations. See id. at 706-07, 710-11; R. at 1533-35.

35

general contractor had paid the defaulting subcontractor everything the subcontractor had been

owed and still suffered a loss.

I respectfully dissent.

PRESENT: Lemons, C.J., Goodwyn, Mims, Powell, Kelsey, and McCullough, JJ. GEORGE TINGLER, ET AL. OPINION BY v. Record No. 180791 JUSTICE D. ARTHUR KELSEY OCTOBER 31, 2019 GRAYSTONE HOMES, INC.

FROM THE CIRCUIT COURT OF CULPEPER COUNTY Susan L. Whitlock, Judge

The pleadings in this case allege that George and Crystal Tingler entered into a

construction contract in 2009 with a home builder, Graystone Homes, Inc., to construct a new

home on property owned by a family-run company, Belle Meade Farm, LLC. After the house

had been built, rain water leaked into the house and mold developed. Graystone tried, but failed,

to fix the leaks and to remediate the mold.

The Tinglers and their four children1 abandoned the home due to the mold and sued

Graystone, seeking tort remedies for personal injuries, property damage, and economic losses.

The Tinglers and Belle Meade separately sued Graystone, seeking contract remedies for property

damage and economic losses. Sustaining Graystone’s demurrers, the circuit court dismissed all

claims in each of the complaints. We affirm in part and reverse in part.

I.

A.

“Because this appeal arises from the grant of a demurrer, we accept as true all factual

allegations expressly pleaded in the complaint and interpret those allegations in the light most

favorable to the plaintiff.” A.H. ex rel. C.H. v. Church of God in Christ, Inc., 297 Va. 604, 613

1 We use “the Tinglers” throughout to refer only to George and Crystal Tingler, the

couple that entered into the contract, rather than to the entire Tingler family. We use “the Tingler family” throughout to refer to George, Crystal, and their four children.

2

(2019) (citation omitted). “‘To survive a challenge by demurrer,’ however, factual allegations

‘must be made with “sufficient definiteness to enable the court to find the existence of a legal

basis for its judgment.”’” Id. (citation omitted).2 “A plaintiff may rely upon inferences to satisfy

this requirement but only ‘to the extent that they are reasonable.’” Id. (emphasis in original)

(citation omitted). “Distinguishing between reasonable and unreasonable inferences is ‘a

context-specific task that requires the reviewing court to draw on its judicial experience and

common sense’ guided by the principle that ‘a well-pleaded complaint may proceed even if it

strikes a savvy judge that actual proof of those facts is improbable.’” Id. (citations omitted).

B.

In 2015, the Tingler family and Belle Meade filed a single complaint alleging 24 contract,

tort, and statutory claims against Graystone. On the ground of misjoinder, the circuit court

entered a consent order requiring the plaintiffs to file separate complaints. The order specified

that the Tinglers and their four children must file separate complaints asserting “each of their

personal injury claims.” J.A. at 4. The order further directed that the Tinglers and Belle Meade

must file a single complaint asserting “any non-personal injury claims.” Id.

After the plaintiffs had refiled seven separate complaints pursuant to the court’s

directions, the court sustained Graystone’s demurrers to all counts and dismissed each complaint

with leave to amend. The court held that, under the source-of-duty rule, no negligence claim

could prevail because “Graystone’s alleged misdeeds consist[] of its failure to perform or fully

2 “The ‘sufficient definiteness’ requirement has long anchored our application of notice-

pleading principles.” A.H. ex rel. C.H., 297 Va. at 613 n.1 (collecting cases). In A.H., we acknowledged that “[t]here will always be a tension between a pleader’s duty to state succinctly the ‘essential facts’ supporting his claim, Rule 1:4(j), and the absence of any need to detail ‘the particulars’ of a negligence claim, Rule 3:18(b).” Id. “As decades of adjudicated cases show, however, the line between the two can only be fairly drawn on a case-by-case basis that focuses on which factual allegations are truly essential and which are inessential particulars.” Id.

3

perform its contractual duties.” Id. at 452-53. The court dismissed Belle Meade’s contract

claims, holding that Belle Meade was not a party to the agreement and thus had no standing to

bring the claims. The court dismissed the Tinglers’ contract claims because the Tinglers had no

standing given that the home had become a fixture of the land owned by Belle Meade, not by the

Tinglers.3

In response to the circuit court’s ruling on the demurrers, the Tinglers and Belle Meade

filed a second amended complaint,4 which amplified their contract claims that were based upon

agency and third-party-beneficiary principles. They also asserted negligence claims for various

forms of property damage: real and personal as well as tangible and intangible.5 The Tinglers

and their children each filed amended complaints that attempted to bolster their tort claims for

personal injuries. The Tingler family also claimed to have sustained property damage to the

home and its contents and to have incurred unspecified expenses. Graystone responded with

another round of demurrers to each of the complaints. The court sustained the demurrers,

3 Graystone asserted various additional arguments in support of its demurrers, but the

circuit court “decline[d] to rule on the remaining assertions set forth in [Graystone’s] Demurrers as they [had been] mooted” when the court sustained the demurrers on other grounds. J.A. at 454.

4 The pleading was titled “Second Amended Complaint” because the order severing the initial, aggregate complaint into seven separate actions had the effect of designating the subsequent complaint by the Tinglers and Belle Meade, which asserted only non-personal injury claims, as the first amendment to the initial complaint, and thus, that case retained the same case number (15-L-201) assigned to the original proceeding. The circuit court clerk assigned separate case numbers to the remaining six personal-injury complaints: CL15000735-00, CL15000736-00, CL15000737-00, CL15000738-00, CL15000739-00, and CL15000740-00.

5 See J.A. at 81 (stating that the complaint was “an action to recover for property damage and economic losses suffered by the owners of both real and personal property”); id. at 89 (stating that the “dangerous condition inside the Home contaminated both the personal property” and “made the Home itself uninhabitable and unsafe”); id. at 90 (alleging that Belle Meade and the Tinglers “suffered property damage, economic losses, and other damage to its real property and all fixtures thereto, all personal property, diminution in value of the Home and other property, loss of use of the Home, and all other consequential and incidental damages”); see also id. at 91-93, 96-97.

4

finding that its earlier reasoning applied equally to all the amended complaints. In its final

orders, the court dismissed all claims in each of the cases with prejudice.

C.

With a few exceptions, the amended complaints assert a common set of factual

allegations. We repeat these allegations as if they were true, but, of course, we only presume

them to be so given the procedural posture of the case.

1.

In 2009, Graystone entered into a construction contract with the Tinglers to build a new

home with a purchase price of $495,000. The first paragraph of the contract states: “This

agreement is made this date between George and Crystal Tingler (hereinafter referred to as

‘Owner’) and Graystone Homes, Inc. (hereinafter referred to as ‘Contractor’) for the purpose of

erecting a new home.” Id. at 99 (emphasis omitted). At the end of the contract, under the

heading “Owner,” the Tinglers signed their names. Id. at 106 (altering capitalization). Under

George Tingler’s signature appears the title “Owner Representative.” Id.

The contract does not mention Belle Meade or expressly state that the Tinglers were

executing the contract in any agency capacity. At the time of construction, however, Belle

Meade was the title owner of the farm land on which the home was built. The address listed for

the location of the new home was “21416 Belle Meade Farm Road.” Id. at 82, 123, 136, 149,

161, 174, 186; see id. at 99, 107, 121. The second amended complaint asserts that Graystone

knew that Belle Meade would and did make all payments due under the contract. Graystone

further understood that “Belle Meade Farm and the Tinglers intended in the future to partition

the real property on which the Home was located from the rest of the farm land . . . and transfer

ownership of both the real property and the completed Home to the Tinglers.” Id. at 83. Based

upon these allegations, the Tinglers claim that they entered into the contract on behalf of their

5

principal, Belle Meade, and thus, that Belle Meade was in privity of contract with Graystone and

could sue to enforce the contract. In the alternative, they claim that Belle Meade was an

intended third-party beneficiary of the contract with Graystone.

The second amended complaint avers that in early 2010, “[a]t the time of the 30-day

inspection of the Home” permitted under the contract, the Tinglers discovered leaks at the patio

French doors in the dining room and reported the leaks to Graystone. Id. at 84. Graystone

responded by applying additional sealants and by replacing damaged hardwood flooring. In

early 2011, the Tinglers discovered and reported another leak in the dining room. Graystone

responded by installing additional flashing and by replacing hardwood flooring. On neither

occasion did Graystone specifically look for mold.

After experiencing medical symptoms in early 2014, the Tinglers hired an inspector who

discovered mold in the basement underneath the dining room where the leaks had occurred,

elevated levels of airborne mold spores throughout the home, and elevated levels of moisture in

the dining and kitchen areas near the patio French doors. In October 2014, Graystone removed

and reinstalled the patio French doors, windows, and hardwood flooring. Graystone also

installed drain pans underneath the patio French doors. When the patio French doors continued

to leak rainwater thereafter, Graystone installed additional sealants around the patio French

doors. Graystone also applied an anti-microbial solution, attempting to clean up the mold and to

prevent its growth. At that time, however, Graystone did not inspect for mold behind the drywall

in this area.

Later that month, a reinspection of the home revealed elevated moisture levels in the

dining and kitchen areas near the patio French doors. A Graystone employee met the inspector

at the home. The Graystone employee cut a hole in the dining room drywall and removed from

the wall cavity “a large section of wet, moldy” insulation. Id. at 86, see also id. at 125-26, 138-

6

39, 152, 164, 176, 188. The employee dropped the insulation on the floor and cleaned up the

mess with the Tinglers’ vacuum cleaner. Before the Graystone employee performed this work,

Crystal Tingler had asked whether the personal property and furniture in the area should be

covered, but the Graystone employee said that such action was not necessary and did not place a

containment barrier around the work site.

After removing the mold-laden insulation, the Graystone employee covered the drywall

hole with a black garbage bag. In November 2014, Graystone placed containment sheeting in

the dining room at the Tinglers’ request. A little over a week later, the Tingler family vacated

the home because of continued physical symptoms that they attributed to mold exposure. After

the Tinglers had vacated the home, a remediation contractor concluded that Graystone’s

containment sheeting had been improperly placed, and another inspector visited the home and

found elevated levels of mold spores and moisture.

2.

In their second amended complaint, the Tinglers and Belle Meade allege that Graystone

breached the contract during the construction process by failing to supervise its workers and by

failing to construct the home as promised — “skillfully, carefully, diligently, in a good,

workman-like manner, and in compliance with all applicable laws, ordinances, and building

codes.” Id. at 90. They also allege that Graystone breached its contractual warranty by not

building the home in accordance with industry standards, by not fixing the original defects, and

by not remediating the mold that occurred as a result. They add various negligence claims as

well, alleging theories of negligent construction, negligent repair, and negligence per se.6

6 The second amended complaint also includes a statutory claim alleging violations of the

Virginia Consumer Protection Act under Code § 59.1-200(A)(10). The circuit court’s ruling as to this claim, however, was not the subject of any assignment of error on appeal.

7

In the amended personal-injury complaints, the Tinglers and their children each allege

that Graystone negligently constructed the home, negligently attempted to repair it, and

committed negligence per se by violating building codes. All of the amended complaints at issue

in this appeal allege various examples of Graystone’s poor workmanship with a list of 24 items.

Of those 24 items, 15 begin with the phrases “[f]ailure to” or “[f]ailing to” do a particular

contractual task, including inter alia:

“[f]ailure to construct the Home so that it had a weather-resistant exterior wall envelope”;

“[f]ailure to provide a means to drain water which entered the building components of the Home”;

“[f]ailure to install the manufactured stone veneer siding (‘MSV’) with drainage provisions”;

“[f]ailing to sufficiently fasten the vinyl siding”; and

“[f]ailing to properly install doors, and corner seal pads and weather stripping with or adjacent to the doors, in the Home to prevent water intrusion[.]”

Id. at 87-89, 127-29, 140-42, 153-55, 165-67, 177-79, 189-91.

Of those 24 items, 8 state and 1 implies that Graystone “[i]ncorrectly” or “[i]mproperly”

performed some contractual task. Id. Examples include “[i]ncorrectly taping the weather

resistant barrier” and “[i]mproperly installing or not installing required flashing.” Id. at 88, 128,

141, 154, 166, 178, 190. These allegations are repeated verbatim in the second amended

complaint as specific instances in which Graystone breached its contractual duty to construct the

home in a workmanlike manner and to competently repair any later-discovered defects pursuant

to the warranty provisions of the contract.

In the negligence counts, each complaint alleges that “Graystone breached this duty . . .

by failing to use proper workmanship in the construction of the Home; failing to use due care in

the inspection of the Home; and failing to use due care in the supervision of the work of others

on the Home.” Id. at 95, 130, 142, 155, 168, 180, 192. Each complaint also alleges in the

8

negligent-repair counts that “Graystone breached this duty . . . by failing to use proper

workmanship in the repair of the Home, failing to use due care in the inspection of the Home,

and failing to use due care in the remediation of mold growth of the Home.” Id. at 96, 131, 143,

156, 168, 181, 193. Based upon these allegations, the complaints contend, it was reasonably

foreseeable that the poor workmanship in the construction and repair of the home would allow

rain water into the home, that the water would cause mold, and that the mold would make the

Tingler family ill and would damage their property.

The Tingler family alleges that they suffered “personal injury” by being “exposed to the

unhealthy conditions that developed in the Home.” Id. at 130-31, 143, 156, 168-69, 180-81, 192-

93. The Tinglers and two of their children, the complaints assert, have been “diagnosed with

mold toxin syndrome as a result of [their] exposure to the conditions in the Home,” id. at 126,

140, 153, 165, and the entire Tingler family remains under continuing medical care for their

symptoms, see id. at 126, 139, 152, 164, 177, 189. The Tinglers and two of their children each

seek $5 million in damages for their personal injuries, while the remaining two Tingler children

each seek $200,000 in damages for their personal injuries.

II.

This appeal focuses on two arguments. First, the Tingler family contends that their

personal-injury and property-damage claims should have survived demurrer because the source-

of-duty rule does not preclude tort remedies for Graystone’s negligence. Second, the Tinglers

and Belle Meade contend that their contract claims also should have survived demurrer because

they pleaded that the Tinglers had served as agents for Belle Meade when they had entered into

the contract and, in the alternative, that Belle Meade was an intended third-party beneficiary of

the contract.

A. NEGLIGENCE TORT CLAIMS ARISING OUT OF A CONTRACTUAL RELATIONSHIP

9

1. General Principles

In Virginia, “‘[t]he question of liability for negligence cannot arise at all until it is

established that the man who has been negligent owed some duty to the person who seeks to

make him liable for his negligence.” Dudley v. Offender Aid & Restoration of Richmond, Inc.,

241 Va. 270, 277 (1991) (quoting Le Lievre v. Gould [1893] 1 Q.B. 491 at 497 (Eng.) (opinion of

Esher, M.R.)). The ultimate question “[w]hether a legal duty in tort exists is a pure question of

law to be reviewed de novo.” Brown v. Jacobs, 289 Va. 209, 215 (2015) (citation omitted).7

When we look for an answer to that “pure question of law,” id. (citation omitted), we

begin with the axiom that “there is no such thing as negligence in the abstract, or in general, or as

sometimes is said, in vacuo.” Kent v. Miller, 167 Va. 422, 425-26 (1937).8 The history of our

common law, Justice Holmes reminded us, has made “clear that the featureless generality, that

the defendant was bound to use such care as a prudent man would do under the circumstances,

ought to be continually giving place to the specific one, that he was bound to use this or that

precaution under these or those circumstances.” Oliver Wendell Holmes, Jr., The Common Law

7 See also Parker v. Carilion Clinic, 296 Va. 319, 348 (2018); Terry v. Irish Fleet, Inc.,

296 Va. 129, 139 (2018); Commonwealth v. Peterson, 286 Va. 349, 356 (2013); Chesapeake & Potomac Tel. Co. of Va. v. Bullock, 182 Va. 440, 445 (1944); Acme Mkts. v. Remschel, 181 Va. 171, 178 (1943); Kent Sinclair, Personal Injury Law in Virginia § 2.1[B], at 2-4 (4th ed. 2019) [hereinafter Sinclair, Personal Injury Law]; 13 Peter Nash Swisher et al., Virginia Practice Series: Tort and Personal Injury Law § 3:2, at 62 n.1 (2018-2019 ed.); id. § 3:10, at 79. See generally Restatement (Second) of Torts § 328B & cmt. e (1965).

8 Our caselaw includes several examples of individuals held to be not liable in tort despite doing or not doing things that could foreseeably injure others. See, e.g., Cline v. Dunlora S., LLC, 284 Va. 102, 106 (2012) (stating that, under “common law, a landowner owed no duty to those outside the land with respect to natural conditions existing on the land, regardless of their dangerous condition”); Isbell v. Commercial Inv. Assocs., 273 Va. 605, 614 (2007) (stating that, under common law, “a landlord is not liable in tort for a tenant’s personal injuries” because the landlord failed to repair leasehold property); Chesapeake & Potomac Tel. Co. of Va. v. Dowdy, 235 Va. 55, 61 (1988) (refusing to recognize a “duty of reasonable care imposed upon an employer in the supervision of its employees”); Williamson v. Old Brogue, Inc., 232 Va. 350, 353-54 (1986) (holding that the common law does not recognize a tort duty to not serve alcohol to an inebriated patron who could foreseeably injure others).

10

111 (1881). “From the time of Alfred to the present day, statutes and decisions have busied

themselves with defining the precautions to be taken in certain familiar cases; that is, with

substituting for the vague test of the care exercised by a prudent man, a precise one of specific

acts or omissions.” Id. at 112.

Following in that tradition, we do not ask simply whether Graystone’s actions or

inactions could have foreseeably caused water leaks, mold growth, and resultant personal

injuries, property damage, and economic losses. We ask instead whether, under our common-

law precedents, tort liability may be imposed upon a home builder who negligently fails to

weatherproof the home as required by a construction contract. This question takes us to the very

definition of a tort:

The word “tort” has a settled meaning in Virginia. “A tort is any civil wrong or injury; a wrongful act (not involving a breach of contract) for which an action will lie.” “Tort” is also defined as the violation of some duty owing to the plaintiff imposed by the general law or otherwise. Generally, the “duty must arise by operation of law and not by mere agreement of the parties.” Stated differently, a “tort” is a “legal wrong committed upon the person or property independent of contract.”

Glisson v. Loxley, 235 Va. 62, 67 (1988) (citations omitted), superseded by statute on other

grounds, 1993 Acts ch. 928 (codified as amended at Code § 8.01-581.2). See generally J.F.

Clerk & W.H.B. Lindsell, The Law of Torts 1 (1889) (“A tort may be described as a wrong

independent of contract, for which the appropriate remedy is a common law action.”); Thomas

M. Cooley, The Elements of Torts 2 (1895) (“A tort, then, is any wrong not consisting in mere

breach of contract, for which the law undertakes to give to the injured party some appropriate

remedy against the wrong-doer.”).9 By its very nature, tort law imposes duties upon the

9 These distinctions evolved from liability regimes crafted and honed over the centuries

11

otherwise unwilling. Consent concepts that are inherent in contract law offer no solace to

tortfeasors.

“In determining whether a cause of action sounds in tort, contract, or both, ‘the source of

the duty violated must be ascertained.’” MCR Fed., LLC v. JB&A, Inc., 294 Va. 446, 458 (2017)

(citation omitted). In making this determination, we examine the specific nature of the

allegations of negligence:

If the cause of complaint be for an act of omission or non-feasance which, without proof of a contract to do what was left undone, would not give rise to any cause of action (because no duty apart from contract to do what is complained of exists) then the action is founded upon contract, and not upon tort. If, on the other hand, the relation of the plaintiff and the defendants be such that a duty arises from that relationship, irrespective of the contract, to take due care, and the defendants are negligent, then the action is one of tort.

Richmond Metro. Auth. v. McDevitt St. Bovis, Inc., 256 Va. 553, 558 (1998) (emphases added)

(citation omitted); accord Atlantic & Pac. Ry. v. Laird, 164 U.S. 393, 399 (1896); Burks, supra

note 9, § 234(1), at 406.10

We have also emphasized that “the mere fact that [a] plaintiff has sought recovery for

pain and suffering does not, standing alone, convert [a] contract claim into an action in tort.”

Glisson, 235 Va. at 69. No matter the alleged harm, tort liability cannot be imposed upon a

contracting party for failing to do a contractual task when no common-law tort duty would have

by English and American common-law courts. See 3 William Blackstone, Commentaries *117 (distinguishing between “[p]ersonal actions” that are “founded on contracts” and those arising out of “torts or wrongs” (emphases omitted)). “[A]ll ordinary common-law actions are either founded on contract as the cause of action, or are not so founded. The former are called actions ex contractu, the latter ex delicto.” Martin P. Burks, Common Law and Statutory Pleading and Practice § 73, at 145 (T. Munford Boyd ed., 4th ed. 1952).

10 See also Crosby v. ALG Tr., LLC, 296 Va. 561, 568 (2018); Station #2, LLC v. Lynch, 280 Va. 166, 171 (2010); Augusta Mut. Ins. v. Mason, 274 Va. 199, 207-08 (2007); Oleyar v. Kerr, 217 Va. 88, 90 (1976).

12

required him to do it anyway — and thus, as the maxim restates, “in order to recover in tort, the

duty tortiously or negligently breached must be a common law duty, not one existing between

the parties solely by virtue of the contract,’” MCR Fed., LLC, 294 Va. at 458 (citation omitted);

see Holles v. Sunrise Terrace, Inc., 257 Va. 131, 136 (1999).11 Framed this way, the source-of-

11 “In certain circumstances, a single act or occurrence can support causes of action for

both breach of contract and for breach of a duty arising in tort.” MCR Fed., LLC, 294 Va. at 457-58. Examples include contractors involved in public callings, such as common carriers, see, e.g., Spence v. Norfolk & W. R.R., 92 Va. 102, 113-15 (1895), and other special relationships, such as between an innkeeper and a guest, see 19 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 53:85, at 331-34 (4th ed. 2016) (describing the common-law relationship of innkeeper and guest and recognizing that duties arise from that relationship “irrespective of contract and may arise when no contract is or can be made” and that “although an innkeeper’s duty apparently originated in tort, a breach of this duty may sound in contract”). See generally A.H. ex rel. C.H., 297 Va. at 620-21 (describing various special relationships recognized under common law).

When applied to intentional torts, such as fraud, the source-of-duty rule involves more finely drawn distinctions. Claims of actual and constructive fraud arising solely out of a contractual relationship may be barred by the source-of-duty rule when the damages arise solely out of the underlying contractual relationship. See, e.g., Richmond Metro. Auth., 256 Va. at 560 (stating so while emphasizing that this scenario “is not one of fraud in the inducement”). Claims for fraudulent inducement, however, logically preexist before the contract allegedly induced and thus stand as a viable tort claim. See Abi-Najm v. Concord Condo., LLC, 280 Va. 350, 363-64 (2010) (holding that when the alleged fraud occurred “before a contract between the two parties came into existence, . . . it cannot logically follow that the duty . . . allegedly breached was one that finds its source in the [c]ontracts”). If a claim for constructive fraud arises out of a contractual relationship between the claimant and the fraudfeasor alone, the source-of-duty rule bars the claim. See Filak v. George, 267 Va. 612, 618-19 (2004) (finding that plaintiffs failed to assert a valid claim of constructive fraud because the only duties assumed “arose solely from the parties’ alleged oral contract”). But we have never held, despite the presence of an existing contractual relationship, that a claim for actual fraudulent inducement, which involves a new contract induced with a third party, is barred by the source-of-duty rule. See Station #2, LLC, 280 Va. at 173 n.4 (declining to consider “whether a claim for fraud in the inducement exists when the party engaging in the alleged fraudulent conduct is not a party to the contract fraudulently induced” (citation omitted)); Augusta Mut. Ins., 274 Va. at 206 n.4 (finding it unnecessary “to decide whether a claim for fraud in the inducement exists when the party engaging in the alleged fraudulent conduct is not a party to the contract fraudulently induced”). See generally City of Richmond v. Madison Mgmt. Grp., Inc., 918 F.2d 438, 446-50 (4th Cir. 1990) (finding that plaintiff’s actual fraud claim was not barred “even where the parties have agreed to a contract” and that plaintiff had presented sufficient evidence of actual fraud by showing that it relied upon the representation of a third-party supplier when deciding whether to award a contract to a construction contractor).

13

duty rule attempts to mark off the boundaries of civil liability and to protect our jurisprudence

from the modern trend that is intent on “turning every breach of contract into a tort,” MCR Fed.,

LLC, 294 Va. at 458 (citation omitted), a goal pursued through the “‘more or less inevitable

efforts of lawyers” seeking extra-contractual remedies, Kamlar Corp. v. Haley, 224 Va. 699, 706

(1983) (citation omitted).

While we recognize that “[t]he borderland of tort and contract, and the nature and

limitations of the tort action arising out of a breach of contract, are poorly defined,” it is equally

true that “the very uncertainty of the rules has permitted a degree of flexibility which has

advantages of its own.” William Lloyd Prosser, Selected Topics on the Law of Torts 452 (reprt.

ed. 1982) [hereinafter Prosser, Selected Topics]. This flexibility is reason enough, we believe, to

resist the modern “Contort” trend toward amalgamating contract and tort law into a grand legal

“syncretism.” Grant Gilmore, The Death of Contract 98 (Ronald K.L. Collins ed., 2d ed. 1995).

Professor Costello once described the source-of-duty rule as “charmingly simple.” John

L. Costello, Virginia Remedies § 21.05[6][d], at 21-43 (4th ed. 2011). Critics of the rule say that

the charm wears off as soon as one tries to apply it. Yet, apply it we must. And in this

application, as in so many areas of jurisprudence, we cannot be stymied “by the question where

to draw the line. That is the question in pretty much everything worth arguing in the law,” Irwin

v. Gavit, 268 U.S. 161, 168 (1925). To be sure, the truism that a particular outcome often

“depends upon differences of degree” is no great discovery because “[t]he whole law does so as

soon as it is civilized.” Daniels v. Williams, 474 U.S. 327, 334-35 (1986) (citation omitted).

The source-of-duty rule finds its most secure roots in the historical distinction between

the escalating degrees of blameworthiness recognized by the common-law doctrines of

“omission or non-feasance” on the one hand, Richmond Metro. Auth., 256 Va. at 558 (citation

omitted), and “misfeasance” or malfeasance on the other, Prosser, Selected Topics, supra, at 387

14

& n.37. This distinction developed “quite early” in English common law. Id. at 387.

Nonfeasance is “[t]he failure to act when a duty to act exists.” Black’s Law Dictionary 1265

(11th ed. 2019). Misfeasance is “[a] lawful act performed in a wrongful manner,” or, “[m]ore

broadly, a transgression or trespass.” Id. at 1197. And malfeasance is an affirmative, “wrongful,

unlawful, or dishonest act,” id. at 1145, or in other words, something wrongful in itself.

Though subject to various exceptions, the traditional view recognizes that “[t]here is no

tort liability for nonfeasance, i.e., for failing to do what one has promised to do in the absence of

a duty to act apart from the promise made.” William L. Prosser & W. Page Keeton, Prosser and

Keeton on the Law of Torts § 92, at 657 (Dan B. Dobbs et al. eds., 5th ed. 1984) (emphasis

omitted). “There is a fundamental difference between doing something that causes physical

harm and failing to do something that would have prevented harm . . . .” Id. Put another way, a

fundamental difference exists “between lack of performance of something that would have

prevented harm and defective performance that caused harm either from a dangerous force or a

dangerous condition of something.” Id.

This first premise of the source-of-duty rule — distinguishing between nonfeasance and

misfeasance or malfeasance — is a conceptual “line of division,” and it is fair to generalize that,

despite notable exceptions, “the courts have adhered to the line thus drawn” in most cases. Id. at

659-60. Drawing the line there leads to liability in a host of tortious malfeasance and

misfeasance scenarios, like when a home builder swings a hammer and hits someone visiting the

site. That act would be malfeasance if the home builder had intended to strike the visitor and

misfeasance if he had merely been reckless. In either scenario, it would be no defense to a tort

action against the builder to point out that the construction contract required him to carefully

swing his hammer and that he simply had failed to do so.

15

Beyond such easy hypotheticals though, it is a fair criticism to point out that “[t]here has

been little consideration of the problem of just where inaction ceases and ‘misfeasance’ begins,”

id. at 661.12 As Dean Prosser has explained, the answer to the distinction between nonfeasance

and misfeasance “is not always a question of action or inaction as to the particular act or

omission which has caused the damage.” Id. Eschewing a simplistic action-inaction test, “[t]he

question appears to be rather whether the defendant’s performance, as distinct from his promise

or his preparation, has gone so far that it has begun to affect the interests of the plaintiff beyond

the expected benefits of the contract itself, and is to be regarded, by analogy to the cases of

gratuitous undertaking, as a positive act assuming the obligation.” Id. at 662 (footnote omitted).

Viewed in this manner, the nonfeasance-misfeasance distinction has a centuries-old

provenance. Its poorly tailored seams, if any are to be recognized, are best left for legislative

resolution where they can be “tried and tested in the crucible of public debate” and where “[t]he

decision reached by the chosen representatives of the people reflects the will of the body politic.”

Bruce Farms, Inc. v. Coupe, 219 Va. 287, 293 (1978). Our judicial role is far more modest — to

apply the ancient distinction in a pragmatic and sensible way.

We sought to do just that in Kaltman v. All American Pest Control, Inc., a case in which a

home owner entered into a contract with a pesticide contractor “to apply chemicals to control”

pests in the home. 281 Va. 483, 487-88 (2011). Instead of applying a pesticide licensed for use

in residential buildings, the contractor used a commercial pesticide with dangerous

“concentrations” of a particular “toxic ingredient.” Id. at 487. When haled into court for civil

damages, the contractor claimed that no tort remedy existed because he had only breached the

12 The line has been drawn between nonfeasance and misfeasance, and it logically

follows that malfeasance could never be treated more favorably than misfeasance for the purposes of the source-of-duty doctrine. Hereinafter, we thus focus our discussion on the distinctions between nonfeasance and misfeasance.

16

contractual duty to use the proper pesticide in the home. See id. at 490. We disagreed and held

that the home owner had alleged a prima facie tort claim. See id. at 493. The gist of the case

was clear: It was the contractor’s affirmative act of using a dangerous pesticide, not the failure

to use a safe pesticide, that mattered.13 Without going into any extended discussion on the point,

the Kaltman holding squared well with the nonfeasance-misfeasance distinction recognized in

our common-law tradition.

Another example of this required line-drawing exercise is a landlord’s duty to maintain

leased premises in a safe condition during the term of the lease. Even when the landlord has a

“contractual duty” to repair leased premises under the tenant’s exclusive control, the landlord

generally cannot be “liable in tort for injuries sustained by the tenant as a result of the landlord’s

breach of a covenant to make such repairs.” Isbell v. Commercial Inv. Assocs., 273 Va. 605, 611

(2007); see also Cherry v. Lawson Realty Corp., 295 Va. 369, 377 (2018) (“At common law, the

landlord had no such [tort] responsibility.”). Though exceptions exist to this general rule, see

Luedtke v. Phillips, 190 Va. 207, 211-12 (1949) (naming fraud or concealment as exceptions), no

tort duty arises simply because the landlord fails to make the contractually required repairs

irrespective of the foreseeability of the harm to the tenant.

We have also recognized that, in some cases, a putative tort can become so inextricably

entwined with contractual breaches that only contractual remedies are available. In Dunn

13 In a later case, we observed in dicta that “[t]he existence of a duty of care running from

the tortfeasor to the injured party was not at issue in . . . Kaltman. The statute[] at issue . . . set the standard of care for compliance with a duty of care the tortfeasor[] owed the injured party.” Steward ex rel. Steward v. Holland Family Props., LLC, 284 Va. 282, 290-91 (2012). Kaltman, however, involved two issues: whether the defendant could be held liable in tort and, if so, whether the applicable statute established the standard of care for purposes of negligence per se. See A.H. ex rel. C.H., 297 Va. at 630-31 (“[N]egligence per se only exists ‘where there is a common-law cause of action. The doctrine of negligence per se does not create a cause of action where one did not exist at common law.’” (emphases in original) (citation omitted)). Implicitly finding a common-law duty of care existed, Kaltman answered “yes” to both questions.

17

Construction Co. v. Cloney, a home builder breached its construction contract by failing to

properly build a foundation wall of a new home. See 278 Va. 260, 263, 268 (2009). When the

builder claimed that he had fixed the problem, the home owner paid the remaining amount due

under the contract. See id. at 263-64. The home owner later sued the builder for fraud, claiming

that the builder had falsely assured the owner that he had repaired the defects. See id. at 264.

We held that the home owner had no tort remedy because the builder had been under a

contractual duty to construct the foundation wall “in a workmanlike manner” and because his

“false representation that he had made adequate repairs thus related to a duty that arose under the

contract.” Id. at 268. The “misrepresentations of the contractor entwined with a breach of the

contract,” and thus, those misrepresentations could not fairly be said to fall “outside of the

contract relationship.” Id.; see also MCR Fed., LLC, 294 Va. at 459-60; Station #2, LLC v.

Lynch, 280 Va. 166, 171-73 (2010).

2. Tort Claims Against Home Builders

The Tingler family’s allegations assume that the common law imposes tort liability upon

a home builder for personal injuries, property damage, and economic losses allegedly caused by

the builder’s failure to perform certain tasks required by the construction contract. The circuit

court rejected this presupposition on all fronts and did not err by doing so. Whether viable tort

claims arose under the facts pleaded in this case depends both upon the nature of the alleged torts

and the types of the alleged damages.

a. Torts Causing Injuries During the Construction Process

Under traditional principles, negligent acts of misfeasance during the construction

process that cause reasonably foreseeable personal injuries could implicate tort liability

irrespective of a contractual duty to prudently avoid injuring others during the performance of

the contract. A home builder, for example, could be sued in tort if he negligently dropped a

18

beam on a bystander or if he negligently left an inconspicuous hole in an unfinished floor into

which a visitor fell. See generally Restatement (Second) of Torts § 384 (1965) (recognizing that

“[o]ne who on behalf of the possessor of land erects a structure or creates any other condition on

the land” is generally liable “for physical harm caused to others upon and outside of the land by

the dangerous character of the structure or other condition while the work is in his charge”);

William B. Hale, Handbook on the Law of Torts § 232b(b), at 472 (1896) (recognizing tort

liability for negligence “[o]ccurring in the performance of a contract resulting in direct and

immediate damage to one’s person or property”).

b. Torts Causing Injuries After Delivery to the New-Home Owner

Historically, a different liability paradigm governed after the delivery and acceptance of a

new construction. Personal injuries “to person or to property of one not a party to the contract”14

that occurred “after the independent contractor ha[d] completed the work and turned it over to

the owner . . . , and the same ha[d] been accepted by him” would be recoverable in tort only if

“peculiar circumstances” showed that the builder’s negligent acts had created an “inherently or

imminently dangerous” condition. City of Richmond v. Branch, 205 Va. 424, 429 (1964)

(citation omitted). “Such an act of negligence being imminently dangerous to the lives of others,

the wrong-doer is liable to the injured party, whether there be any contract between them or not.”

Savings Bank v. Ward, 100 U.S. 195, 204 (1879) (citation omitted). But “[w]here the wrongful

act is not immediately dangerous to the lives of others, the negligent party . . . [wa]s in general

14 This rule only applied to personal injuries and property damage asserted by third

parties. See Theophilus J. Moll, Independent Contractors and Employers’ Liability § 228, at 347-48 (1910); 2 Thomas G. Shearman & Amasa A. Redfield, A Treatise on the Law of Negligence § 267, at 675 (Clarence S. Zipp ed., rev. ed. 1941); 1 Seymour D. Thompson, Commentaries on the Law of Negligence in All Relations § 686, at 623 (1901).

19

liable only to the party with whom he contracted, and on the ground that negligence [wa]s a

breach of the contract.” Id.15

In 1977, the General Assembly modified the independent-contractor rule discussed above

when it adopted Code § 8.01-39, which provides, in relevant part, that

[i]n any civil action in which it is alleged that personal injury, death by wrongful act or damage to property has resulted from the negligence of or breach of warranty by an independent contractor, it shall not be a defense by such contractor to such action that such contractor has completed such work or that such work has been accepted as satisfactory by the owner of the property upon which the work was done or by the person hiring such contractor.

Though the statute removed the common-law bar to certain claims of liability after delivery and

acceptance, the statute did not create a tort duty where none had previously existed. See

Radosevic v. Virginia Intermont Coll., 651 F. Supp. 1037, 1041 (W.D. Va. 1987). Nor did the

statute affect liability, when a tort duty does exist, in those “peculiar circumstances” in which a

builder’s negligent acts created an “inherently or imminently dangerous” condition. Branch, 205

Va. at 429 (citation omitted).

We acknowledge that some courts have gone considerably further and have abandoned

the common-law rule distinguishing between nonfeasance and misfeasance in favor of a “modern

rule” that applies tort-liability principles “paralleled [after] the development of products liability

law.” Emmanuel S. Tipon, Annotation, Modern Status of Rules Regarding Tort Liability of

Building or Construction Contractor for Injury or Damage to Third Person Occurring After

Completion and Acceptance of Work; “Foreseeability” or “Modern” Rule, 75 A.L.R.5th 413,

15 This liability concept predated the statutory abolition of privity as a “defense” to tort

liability for personal injuries, see Code § 8.01-223, and remained fully intact after the fall of the “citadel of privity,” William L. Prosser, The Assault Upon the Citadel (Strict Liability to the Consumer), 69 Yale L.J. 1099, 1099 (1960) (citation omitted); William L. Prosser, The Fall of the Citadel (Strict Liability to the Consumer), 50 Minn. L. Rev. 791, 791 (1966).

20

§ 2[a], at 437 (2000). We think it unwise, however, to judicially import products-liability law

into the unique context of new-home-construction contracts. Our reluctance to do so is

particularly appropriate given the legislature’s long history of addressing these topics.

The Uniform Commercial Code, see Code §§ 8.2-101 to -725, specifically limits its reach

to transactions involving the “sale of goods,” Code § 8.2-106(1); see also Code § 8.2-102

(stating that “this title applies to transactions in goods”). The term “[g]oods” includes things

“which are movable at the time of identification to the contract for sale” and can include fixtures

to realty only if they are intended “to be severed from realty.” Code § 8.2-105(1). That

definition would necessarily exclude new-home-construction contracts, which most, if not all,

courts hold to be “primarily for services,” James J. White & Robert S. Summers, Uniform

Commercial Code § 10-2, at 450 (6th ed. 2010).16 By carving out this exception, the legislature

has implicitly ratified the historic common-law principles outside of the sale-of-goods context.

Similar observations can be made of the statute governing vendor-builders of new homes.

“At common law, a purchaser did not acquire an implied warranty associated with the sale of a

new dwelling.” Davis v. Tazewell Place Assocs., 254 Va. 257, 261 (1997). Since Lord Coke’s

“benediction upon the doctrine of [c]aveat emptor,” Bruce Farms, Inc., 219 Va. at 289, “a

purchaser of a dwelling did not acquire an implied warranty in conjunction with the sale of that

dwelling,” Vaughn, Inc. v. Beck, 262 Va. 673, 677 (2001). In 1979, however, the General

Assembly created an implied warranty “[i]n every contract for the sale of a new dwelling” that

the dwelling is “sufficiently (i) free from structural defects, so as to pass without objection in the

16 See, e.g., DeMatteo v. White, 336 A.2d 355, 358 (Pa. Super. Ct. 1975) (holding that the

construction of a residence from start to finish is not a UCC sale-of-goods transaction). See generally 2 Larry Lawrence, Lawrence’s Anderson on the Uniform Commercial Code § 2-105:81, at 199 (3d ed. 2012) (recognizing that Article 2 of the UCC “does not apply to a construction contract”).

21

trade, and (ii) constructed in a workmanlike manner, so as to pass without objection in the trade.”

Code § 55.1-357(B) (renumbering and recodifying, effective October 1, 2019, former Code § 55-

70.1). In doing so, the General Assembly provided a measured and carefully crafted warranty

remedy against a new-home vendor and conspicuously avoided a wholesale adoption of

products-liability tort principles.17

While the General Assembly has modified the common law on several related issues, in

doing so, it has not created tort duties for acts of nonfeasance, and we thus decline to judicially

adopt the “modern rule” that applies tort-liability principles “paralleled [after] the development

of products liability law” to the construction of new homes, Tipon, supra, at 437. As we have

said in many contexts, “[w]e express no view whether the new rule is better than the old, for we

must apply the law as we find it to be.” Bruce Farms, Inc, 219 Va. at 293. Consistent with our

traditions, we hew as closely as possible to common-law principles when determining whether a

builder who has allegedly breached a new-home construction contract is subject to tort liability.

3. Personal-Injury Tort Claims Arising Out of the Original Construction

In this case, the complaints filed against Graystone by the Tingler family allege various

negligence claims arising out of the original-construction process. The gist of these claims is

that Graystone breached its contractual promise to weatherproof the home. The allegations

17 It also cannot go unnoticed, given the facts of the present case, that the General

Assembly has addressed mold-liability claims in the context of landlord-tenant relationships. See Code § 8.01-226.12 (titled “Duty of landlord and managing agent with respect to visible mold”). Code § 8.01-226.12(E) provides: “If visible evidence of mold occurs within the dwelling unit, the landlord or managing agent with the maintenance responsibilities shall, exercising ordinary care, perform mold remediation in accordance with professional standards.” Subsections B, C, and D of that same statute provide carefully crafted boundaries for this liability. We recently held that the General Assembly did not “abrogate common law tort liability or immunity beyond the narrow confines of what is plainly expressed in Code § 8.01-226.12. The statute creates new obligations and clarifies existing immunities.” Cherry, 295 Va. at 377.

22

include failing to construct “a weather-resistant exterior wall envelope”; failing to properly

install “manufactured stone veneer siding . . . with drainage provisions,” “required flashing,” and

“corner seal pads and weather stripping”; and “incorrectly taping the weather resistant barrier.”

J.A. at 127-28, 140-41, 153-54, 165-66, 177-78, 189-90.

Because no personal injuries occurred during the construction process, it is unnecessary

to examine in detail each specific allegation to determine if any one of them, standing alone,

should be deemed nonfeasance or misfeasance. No one breach, by itself, allegedly caused the

injuries that accrued later. Thus, we examine the allegations in the aggregate to determine

whether the composite has the character of nonfeasance rather than misfeasance. This approach

takes into account the reality that no definitive standard “has been formulated to prescribe

whether courts are to characterize conduct as affirmative action with an embedded omission or as

simple non-action.” 2 Dan B. Dobbs et al., The Law of Torts § 406, at 659 (2d ed. 2011).

Instead, “the cases as a whole would justify the unsurprising and not so helpful conclusion that

judges avoid extremes in characterizing conduct” because “[t]hey do not characterize conduct by

segregating highly specific omissions (like failing to brake a car) from closely related conduct

(like driving),” but “they do not characterize conduct at its most abstract level, either.” Id. at

660.

Following a middle course, most courts focus on the “gist” or “gravamen” of the cause of

action. Prosser & Keeton, supra, § 92, at 666; see, e.g., Gaddy Eng’g Co. v. Bowles Rice

McDavid Graff & Love, LLP, 746 S.E.2d 568, 577 (W.Va. 2013) (applying the “gist of the

action” test to determine “whether a tort claim can coexist with a contract claim” by “examining

whether the parties’ obligations are defined by the terms of the contract” and “not ‘the larger

social policies embodied by the law of torts’”); Yao v. Chapman, 705 N.W.2d 272, 467 (Wis. Ct.

App. 2005) (looking to “the complaint in its entirety to see if, as a whole, it sounds in contract or

23

tort”). When the allegations are viewed in this manner, courts do not myopically focus on

whether some “action or inaction as to the particular act or omission . . . has caused the damage,”

Prosser & Keeton, supra, § 92, at 661, but rather, they look through the prism of the contractual

relationship to determine whether the allegations in the aggregate constitute nonfeasance or

misfeasance.

We acknowledge the criticism that “considerable confusion” in prior caselaw makes it

“difficult to generalize” on this topic. Id. at 666; see also Prosser, Selected Topics, supra, at

429-50. Seeking a generality that will end this confusion, the Tingler family appears to assume

that because they allege personal injuries, the cause of action must necessarily be deemed a tort

action. Some courts have used this generalization to hold that all personal-injury claims are

essentially tort actions. See Prosser & Keeton, supra, § 92, at 666-67 & n.17 (collecting cases).

We have said the opposite. See Glisson, 235 Va. at 69 (“[T]he mere fact that plaintiff has sought

recovery for pain and suffering does not, standing alone, convert [a] contract claim into an action

in tort.”). Having surveyed our case law, we conclude that the common theme of Virginia cases

is, as synthesized by Prosser and Keeton in the national landscape, “whether the defendant’s

performance, as distinct from his promise or his preparation, has gone so far that it has begun to

affect the interests of the plaintiff beyond the expected benefits of the contract itself,” Prosser &

Keeton, supra, § 92, at 661-62.

Viewing the claims against Graystone in this manner, the circuit court concluded that the

gravamen of the case is simply that Graystone had failed to do what the contract had required.

We agree with the court’s common-sense approach because it heeds the common law’s caution

against “turning every breach of contract into a tort,” MCR Fed., LLC, 294 Va. at 458 (citation

omitted), and because it protects the historic distinction between nonfeasance and misfeasance

from being swept away by the linguistic quip that every inaction could be characterized as an

24

action. In this case, the putative tort claims alleging personal injury caused by conditions created

during the construction process “are all entwined with a breach of the contract” and do not

reasonably fall “outside of the contract relationship,” Dunn Constr. Co., 278 Va. at 268; see also

MCR Fed., LLC, 294 Va. at 459-60; Station #2, LLC, 280 Va. at 171-73.

We draw the line here for each of the asserted acts of Graystone’s negligence in

weatherproofing the home during the original-construction process. These contractual failures

by Graystone, considered in the aggregate, predominate as instances of nonfeasance, not

misfeasance or malfeasance. No free-standing tort claim for personal injuries, therefore, can be

asserted in this context.18 Applying the source-of-duty rule, we hold that the claims of

nonfeasance asserted against Graystone sound only in contract, and thus, the circuit court did not

err in sustaining Graystone’s demurrers to these claims.

4. Personal-Injury Tort Claims Arising Out of Post-Delivery Repairs

The Tingler family’s complaints also assert that, even if no tort duties arose during

Graystone’s performance of the original-construction contract, such duties did arise when

Graystone later attempted unsuccessfully to repair the leaks and to remediate the mold. We

18 All of the complaints include a count of negligence per se based upon the building

codes. As we recently explained, however, “negligence per se only exists ‘where there is a common-law cause of action. The doctrine of negligence per se does not create a cause of action where one did not exist at common law.’” A.H. ex rel. C.H., 297 Va. at 630-31 (emphases in original) (citation omitted). “Put another way, the negligence per se ‘doctrine does not create a duty of care’ but ‘merely sets a standard of care by which the defendant may be judged in the common-law action,’” and therefore, “the absence of an underlying common-law duty renders the presence of a statutory standard of care irrelevant.” Id. (alteration and citation omitted). The circuit court did not err when it dismissed the negligence-per-se counts arising from the original-construction phase because we hold that a home builder has no freestanding, common-law duty to weatherproof a home. In addition, appellants have waived the issue whether the circuit court erred when it dismissed the negligence-per-se claims arising from the repair phase because they do not identify in their brief the particular statute(s) that they allege Graystone violated and fail to develop their argument on this ground. See Rule 5:27(d); Lafferty v. School Bd. of Fairfax Cty., 293 Va. 354, 365 (2017).

25

agree in theory that these allegations could support a tort claim, but only to the extent that the

complaints allege that the failed repairs made the original condition worse and, by doing so,

caused new personal injuries or aggravated preexisting injuries.

a. Negligent-Repair Allegations

The personal-injury complaints include allegations that Graystone performed repairs on

the patio French doors that leaked shortly after the Tinglers had moved into the home in 2010.

Graystone “performed some repairs, applied some additional sealants, and replaced some

damaged hardwood.” J.A. at 124, 137, 150, 162, 174, 186. However, “nothing was done to

inspect for or remediate any mold growth.” Id. A year later, in 2011, Graystone again replaced

some flooring and installed additional flashing after the Tinglers had reported another water leak.

Graystone again did not “inspect for or remediate any mold growth.” Id.

Three years later, in 2014, the Tingler family experienced what they thought were mold-

related symptoms, and the Tinglers hired an inspector who discovered mold in the basement

underneath the area of the leak in the dining room. Graystone “removed some windows, the

patio French doors, and hardwood flooring” and also “installed drain pans underneath the patio

French doors.” Id. at 124, 137, 151, 163, 175, 187. Additional efforts included the installation

of more “sealants” around the doors and the application of an “anti-microbial in an attempt to

clean and prevent any further mold growth.” Id. at 125, 138, 151, 163, 175, 187.

Subsequently, an inspector hired by the Tinglers found “continued elevated moisture

levels . . . near the leaking areas.” Id. A Graystone employee cut a hole in the drywall and

pulled out “a large section of wet, moldy” insulation, dropped it on the floor, vacuumed it up

with the Tinglers’ vacuum cleaner, and then placed a black garbage bag over the open hole. Id.

at 125-26, 138-39, 152, 164, 176, 188. Graystone later placed containment sheeting in the dining

room, which a remediation contractor subsequently deemed to be improperly placed. Claiming

26

that none of these efforts sufficed either to stop the leaks or to remediate the mold, the Tingler

family alleges that in early November 2014, “after feeling continued symptoms which they

attributed to mold exposure, [the Tinglers] and their children moved out of the Home and have

remained out since that time.” Id. at 126, 139; see id. at 152, 164, 176, 188.

b. Landlord-Tenant Analogy

The first question that we must answer is whether a tort duty arose at all when Graystone

attempted to make repairs to the home after it had been fully constructed and after the Tinglers

had taken possession of it. If Graystone had been under a contractual duty to make these repairs,

we would still ask the same question as before: Is the gist of the alleged negligence, viewed in

the aggregate, one of nonfeasance or misfeasance, and, if the former, is there a free-standing tort

duty recognized by existing common-law precedents that imposes liability upon Graystone for

negligent repairs? The Tingler family contends that our recognition of tort duties in the landlord-

tenant context applies with equal persuasive force in the builder-owner context. We find this to

be a fair analogy.

As noted earlier, see supra at 16-17, “the cases are practically agreed that,” when “the

right of possession and enjoyment of the leased premises passes to the lessee,” and “in the

absence of concealment or fraud by the landlord as to some defect in the premises, known to him

and unknown to the tenant, the tenant takes the premises in whatever condition they may be in,

thus assuming all risk of personal injury from defects therein.” Luedtke, 190 Va. at 211 (citation

omitted). Even if the landlord expressly agrees to keep the leased premises in good repair during

the leasehold term, most courts hold that “the failure of the landlord to keep his promise to repair

property in possession and control of the tenant does not impose upon him any liability in tort.”

Id. “Such contractual duty has no bearing on the outcome of this case because a landlord cannot

27

be liable in tort for injuries to a tenant that result from the breach of an agreement to repair.”

Paytan v. Rowland, 208 Va. 24, 27 (1967).19

Nonetheless, in cases where the landlord makes repairs to the leasehold premises and, in

the process of doing so, creates a dangerous condition by “a positive act of negligence on its

part,” Luedtke, 190 Va. at 212 (emphasis added), the landlord can be held liable in tort. We

addressed this scenario in Tugman v. Riverside & Dan River Cotton Mills, Inc., a case in which

the landlord entered the leased premises to build a new fence. See 144 Va. 473, 476 (1926).

While doing so, the landlord dug an “unguarded and unprotected” hole into which a young child

fell and was injured. Id. at 476-77. Recognizing the distinction “between nonfeasance and

misfeasance,” we held that the landlord could be liable in tort because of his “affirmative wrong

in creating a dangerous condition.” Id. at 479. This misfeasance requirement of a “positive act

of negligence” that creates a dangerous condition, in contrast to a mere failure to do something

that one has originally promised to do, “is a distinction that is recognized generally.” Oliver v.

Cashin, 192 Va. 540, 544 (1951) (emphasis added).

Our decision in Holland v. Shively provides another example of misfeasance while

making repairs. See 243 Va. 308, 311 (1992). In that case, a leased trailer had two entrances, a

front door with a porch and a back door with steps. See id. at 310. The landlord entered the

premises to make repairs to the front entrance and to build an additional room in the rear of the

trailer. See id. While building that room, the landlord removed the back door and directed that

plywood be nailed across the opening. See id. “Once the plywood had been nailed across the

opening, ingress or egress to the trailer could only be obtained by using the front porch and

19 “The duties and liabilities of the landlord to the guests and invitees of the tenant, with

respect to personal injuries, are ordinarily the same as those which the landlord owes to the tenant. They stand in the tenant’s shoes.” Oliver v. Cashin, 192 Va. 540, 543 (1951).

28

steps.” Id. The landlord then hauled away some rotten wood from the front porch but left in

place unsecured cinder-block steps that predictably “rolled over” when another tenant stepped on

them and injured herself. Id. We held that the landlord, by taking away the only safe method of

entering and exiting the trailer, could be held liable in tort for injuries caused by the “defective

condition resulting from the repairs.” Id. at 311 (emphasis added) (citation omitted).

We also considered an analogous situation in Sales v. Kecoughtan Housing Co., a case in

which a landlord entered the leased premises “to repair the moldy areas of the property.” 279

Va. 475, 478 (2010). Seeking a recovery in tort, a tenant claimed that the landlord had

negligently contributed to the “continued growth and spread of mold in the property” by

“painting over the mold” and then fraudulently claiming “that the repairs were adequate, that the

mold problem had been remedied and that the property was safe for habitation, with the intent of

inducing Sales to continue in his tenancy in the property.” Id. at 478-79. This active effort to

conceal the mold and make it appear to have vanished, coupled with a fraudulent effort to

mislead the tenants into believing that to be so, aggravated the preexisting condition. We held

that a tort duty had arisen given this admixture of misfeasance and malfeasance. See id. at 480,

482.20

An example of nonfeasance at the other end of the spectrum is Oliver, in which the tenant

made “repeated complaints” to her landlords about her “front steps,” which she claimed were in

disrepair. 192 Va. at 544. In response, the landlords “put up some back steps” and “put a nail or

20 Citing Holland, we said in Sales that “[a]s in the instant case, the danger that led to the

Holland plaintiff’s injury was not a new condition created by the landlord’s attempt to repair. The plaintiff was injured by the faulty steps, which existed before and after the landlord’s repair.” Sales, 279 Va. at 480. To be precise, however, Sales involved an old condition that had been painted over to fraudulently mislead the tenant into believing that a new condition existed, and in Holland, the landlord’s negligence had changed the old condition (two entrances, one safe and the other not) into a new condition (one unsafe entrance). From this perspective, Sales and Holland are best understood as cases involving landlord misfeasance.

29

two in the brick” to hold up the front steps. Id. The landlords’ efforts, the tenant claimed, had

done nothing to fix the “loose” front steps. Id. A visitor later sued the landlords when the front

steps “tilted over and caused him to fall.” Id. at 542. We held that the landlords’ repairs had left

the front steps in “structurally the same [condition] as they were at the beginning of the tenancy.”

Id. at 544. The steps were in disrepair when the landlords initially turned the premises over to

the tenant, and they were still in disrepair after the landlords had fecklessly tried to repair them.

In short, “[t]he act of the landlords” in their failed efforts at repairing the steps “had nothing to

do with [the visitor’s] fall.” Id.

c. Liability for Aggravated Personal Injuries

These common-law principles of landlord-tenant liability parallel the tort-liability regime

governing home builders, see supra Part II.A.2., and thus, we accept the analogy as a useful

baseline for analyzing Graystone’s alleged negligence in making repairs to the Tingler family’s

new home. Working from that perspective, we must determine whether the express allegations

in the personal-injury complaints, coupled with reasonable inferences therefrom, state viable

personal-injury claims for negligent repairs.

As noted earlier, the complaints allege that a Graystone employee cut into the drywall,

removed the mold-laden insulation, laid the insulation on the floor, vacuumed it up with the

Tinglers’ vacuum cleaner, covered up the hole with a black garbage bag, and improperly placed

(a later inspector concluded) containment sheeting in the work area. “As a result of the

deficiencies . . . in the remediation and repair efforts,” the personal-injury complaints assert,

“mold growth continued to occur, and harmful and dangerous mold was spread throughout the

Home,” exposing the Tingler family “to this harmful and dangerous mold” and causing “personal

30

injuries and property damage as a result.” J.A. at 129, 142, 155, 167, 179, 191.21 The Tingler

family’s complaints imply that, within a month after Graystone’s allegedly negligent remediation

efforts, their symptoms worsened enough that they had to move out of the home entirely.

These allegations of misfeasance, along with the reasonable inferences therefrom, assert

viable claims for negligent repairs because they reasonably suggest that Graystone either

increased the level of mold exposure to the home’s inhabitants or extended the duration of the

mold’s presence and, by doing either, aggravated preexisting mold-exposure injuries suffered by

the Tingler family. Graystone could be liable, if the evidence substantiates these inferences, for

this aggravation — but not for any preexisting injuries resulting from conditions created by

Graystone’s nonfeasance during the construction phase of the contract, as we explained earlier,

see supra Part II.A.3.22 To this extent, therefore, the circuit court erred in dismissing the

negligent-repair tort claims in the Tingler family’s personal-injury complaints.

5. Property-Damage & Economic-Loss Claims Against Graystone

Because all of the complaints at issue in this appeal seek tort remedies for either property

damage or economic losses, we must address the “economic loss doctrine,” Abi-Najm v. Concord

Condo., LLC, 280 Va. 350, 360-61 (2010), which serves as a remedy-specific application of the

source-of-duty rule. Under this doctrine, claims for “damages which were within the

contemplation of the parties when framing their agreement” — such as economic losses and

damage to property that is the subject of the agreement — remain “the particular province of the

law of contracts.” Id. at 360 (quoting Sensenbrenner v. Rust, Orling & Neale, Architects, Inc.,

21 These allegations are incorporated into the negligent-repair counts in all of the Tingler

family’s personal-injury complaints. See J.A. at 130, 143, 156, 168, 180, 192. 22 See generally Kent Sinclair, Sinclair on Virginia Remedies § 25-7[A], at 25-53 & n.10

(5th ed. 2016) [hereinafter Sinclair, Remedies]; Sinclair, Personal Injury Law, supra note 7, § 5.3[F], at 5-28.

31

236 Va. 419, 425 (1988)). A party may not use tort claims of negligence to seek such damages.

See id.

We applied the economic-loss doctrine in Sensenbrenner, a case in which a landowner

had entered into a contract with a home builder to construct a home with an enclosed swimming

pool. See 236 Va. at 421. The builder hired an architect to design the pool and a subcontractor

to build it. Claiming that the pool was negligently designed and built, the homeowner sued the

architect and the subcontractor. See id. at 421-22. We held that the homeowner could not assert

such tort claims for “purely economic losses,” id. at 425, or for “damages for injury to property”

that was the subject of the contract, id. at 423, 425; see also East River S.S. Corp. v.

Transamerica Delaval, Inc., 476 U.S. 858, 870 (1986) (holding that when “no person or other

property is damaged, the resulting loss is purely economic” (emphasis added)). See generally 14

Michael A. Branca et al., Virginia Practice Series: Construction Law § 12:6, at 417 (2018-2019

ed.).

All of the Tingler family’s complaints seek “property damages to the Home and its

contents” and unspecified “expenses.” J.A. at 129-33, 142-45, 155-57, 167-69, 179-82, 191-94.

The second amended complaint filed by the Tinglers and Belle Meade claims that they “suffered

property damage, damage to their personal property in the Home, diminution in value of the

property, [and] incurred costs in obtaining alternative housing.” Id. at 96-97. The economic-loss

doctrine precludes recovery in tort for any economic loss attributable to the alleged breach of

contract or for any property damage specifically involving the home itself, which was the object

of the contract.

With respect to the damage to personal property caused during the construction phase of

the contract, the source-of-duty rule precludes a tort recovery for these damages for the same

reason it precludes all other forms of damage — because the gist of the claim of liability

32

involves nonfeasance sounding only in contract. See supra Part II.A.3. Consistent with the

landlord-tenant analogy, however, damage to personal property caused by Graystone’s

misfeasance during post-construction repairs can be recovered in tort. Such damage could

consist of new damage caused entirely by the negligent repairs or any worsening of preexisting

damage (if the evidence can competently prove the degree of aggravation). In this respect, the

liability paradigm closely parallels the treatment of personal injuries caused by post-construction

repairs. See supra Part II.A.4.

These principles are fully consistent with the economic-loss rule. East River Steamship

Corp. held that, in the context of products-liability law, losses are “purely economic” when “no

person or other property” is damaged. 476 U.S. at 870. In Sensenbrenner, we noted that the

economic-loss rule in most jurisdictions permits tort recovery when the negligent actions resulted

in damage to “property other than the product itself.” 236 Va. at 424 (emphasis added); see also

Sinclair, Remedies, supra note 22, § 28-1[G], at 28-15. A strong consensus supports this other-

property exception to the economic-loss rule. See, e.g., Saratoga Fishing Co. v. J.M. Martinac

& Co., 520 U.S. 875, 881, 884-85 (1997); 2-J Corp. v. Tice, 126 F.3d 539, 544 (3d Cir. 1997);

Marshall v. Wellcraft Marine, Inc., 103 F. Supp. 2d 1099, 1111 (S.D. Ind. 1999).23 Finding this

reasoning to be consistent with Virginia law, we hold that the amended complaints assert a viable

23 See generally Restatement (Third) of Torts: Products Liability § 21 & cmt. e (1998)

(recognizing that damages for “harm to property other than the defective product itself” is not barred by the economic-loss rule); Restatement (Third) of Torts: Liability for Economic Harm § 2 cmt. b & illus. 2 (Tentative Draft No. 1, 2012) (noting that under products-liability law, “[l]iability in tort was recognized only when a product damaged other property besides itself” and that this reasoning “has since been extended to cases that involve the sale of real property, which typically fall beyond the coverage of the law of products liability as a formal matter,” and illustrating such an example when a defective warehouse collapses and causes damage to the inventory placed inside the warehouse after its purchase); 2 Dobbs, supra, § 449, at 887, 889-92; id. § 615, at 490-91, 495.

33

tort claim to the extent that they seek personal-property damage allegedly caused by Graystone’s

misfeasance during the repair phase after the construction of the home was completed.

B. CONTRACT REMEDIES

In their first amended complaint in the circuit court, the Tinglers and Belle Meade alleged

three alternative bases for recovery under the contract: (1) Graystone’s liability to the Tinglers

as individuals, (2) Graystone’s liability to the Tinglers and Belle Meade through the Tinglers’

agency relationship with Belle Meade, and (3) Graystone’s liability to Belle Meade as a third-

party beneficiary.

In its ruling on the demurrer to the Tinglers’ and Belle Meade’s first amended complaint,

the circuit court ruled that the Tinglers had no standing to sue on the contract because they had

no ownership interest in the land and that Belle Meade had no standing to sue on the contract

because it was not a party to the contract. In their second amended complaint, the Tinglers and

Belle Meade attempted to overcome the circuit court’s prior ruling on their contract claims by

amplifying their allegations that the Tinglers had acted as agents of Belle Meade and that Belle

Meade was a third-party beneficiary to the contract. These are the only two theories of contract

liability before us.24

1. Agency Claim

The Tinglers and Belle Meade argue that the circuit court failed to give their allegations

of an agency relationship in the second amended complaint “any significance or at least failed to

24 We need not, and indeed cannot, address the Tinglers’ standing to sue in their

individual capacities. The Tinglers and Belle Meade do not assign error to the circuit court’s finding that the Tinglers did not have standing to sue because they were not owners of the land, see Rule 5:17(c)(1)(i), and have thus waived this issue, see Martin v. Lahti, 295 Va. 77, 89 (2018). Moreover, even if their assignments of error could be construed to address this issue, they do not provide any “argument” or “authorities” on the subject, see Rule 5:27(d), and thus have waived any argument regarding it, see Lafferty, 293 Va. at 365. Therefore, we limit our discussion to the arguments regarding agency and third-party-beneficiary status.

34

construe all reasonable inferences from those allegations in favor of Belle Meade and the

Tinglers.” Appellants’ Br. at 29. We agree.

Agency is defined as a fiduciary relationship arising from “the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the agreement by the other so to act.” The party who alleges an agency relationship has the burden of proving it.

Hartzell Fan, Inc. v. Waco, Inc., 256 Va. 294, 300 (1998) (citations omitted); see also

Restatement (Third) of Agency § 1.01 (2006).

An agency relationship is never presumed; to the contrary, the law presumes that a person is acting for himself and not as another’s agent. . . . Further, whether an agency relationship exists is a question to be resolved by the fact finder unless the existence of the relationship is shown by undisputed facts or by unambiguous written documents.

State Farm Mut. Auto. Ins. v. Weisman, 247 Va. 199, 203 (1994), superseded by statute on other

grounds, 1995 Acts ch. 189 (codified as amended at Code § 38.2-2206(A)). “The relationship of

parties to a contract does not depend on what the parties themselves call the relationship, but

rather on what the relationship actually is in law.” Hartzell Fan, Inc., 256 Va. at 300-01. “The

power of control is the determining factor in ascertaining the alleged agent’s status.” Allen v.

Lindstrom, 237 Va. 489, 496 (1989).

An agent acting on behalf of either a disclosed or an undisclosed principal can sue in his

own name on behalf of the principal so long as he is a party to the contract. See Leterman v.

Charlottesville Lumber Co., 110 Va. 769, 772 (1910); Restatement (Third) of Agency § 6.01 &

cmt. e; id. § 6.03 & cmt. e.25 In the case of a disclosed principal, we look to the terms of the

25 As a party to the contract, the agent can also bring an action in his own name and on

his own behalf, i.e., in his individual capacity, on the contract against the third party. See Floyd R. Mechem, A Treatise on the Law of Agency § 755, at 606-07 (1888). However, as we have previously determined, see supra note 24, the Tinglers and Belle Meade have waived any

35

contract to determine whether an agent may sue in his own name. See Restatement (Third) of

Agency § 6.01 cmt. b. As one treatise writer correctly explains:

Where the contract is made with the agent as such but in such form as to appear to be made with him personally, . . . the other party is bound to the agent, . . . though his recovery is, of course, ordinarily for the benefit of his principal. It is, therefore, a general rule that where a contract, whether written or unwritten, entered into on account of the principal, is, in its terms, made with the agent personally, the agent may sue upon it at law.

2 Mechem, supra note 25, § 2024, at 1592-93 (2d ed. 1914).

We find that the Tinglers and Belle Meade allege sufficient facts to support the existence

of such a relationship. The second amended complaint alleges that “Crystal Tingler’s father, W.

Stanley Hawkins, is the sole managing [member] of Belle Meade Farm, and has all control over

the manner in which Belle Meade Farm is run and how all of its business is operated.” J.A. at

82. “Crystal Tingler performs certain office and accounting functions for Belle Meade Farm, at

the direction of her father,” and her husband George “is a full-time employee of Belle Meade

Farm, and works full time on the farm under the direction and control of Belle Meade Farm.” Id.

The Tinglers also allege that they entered into the contract “with the consent and approval

of Belle Meade” and that Graystone “was aware” that Belle Meade owned the property, that

Belle Meade would (and did) make the payments under the contract, and that Bell Meade

intended to transfer ownership of the home to the Tinglers for their residence. Id. at 83. Finally,

they allege that the Tinglers “were acting as agents for Belle Meade Farm and within the scope

of their authority” when they entered into the contract, with Belle Meade acting as “a principal

under the terms of the Agreement”; that Belle Meade “had full and complete control over the

argument regarding the circuit court’s ruling that the Tinglers lack standing to bring any action on the contract in their individual capacities.

36

Tinglers with respect [to] the Agreement”; and that “[t]he Tinglers consented to the agency

relationship.” Id. at 89-90.

These allegations are sufficient to state a contract claim based upon an agency

relationship.26 They either state or imply that Belle Meade authorized the Tinglers to enter into

the contract and that the Tinglers were acting under Belle Meade’s control specifically with

respect to the contract. Therefore, the circuit erred in finding the allegations insufficient to

support an agency relationship.27

2. Third-Party-Beneficiary Claim

The Tinglers and Belle Meade next argue that the circuit court failed to “consider[] the

facts, and those reasonably and fairly implied, in a light most favorable to Belle Meade” when it

“conclusively determine[d], as a matter of law, that there was no intent for Belle Meade to be a

third-party beneficiary.” Appellants’ Br. at 36-37. We agree that the circuit court erred because

26 The Tinglers and Belle Meade do not make any argument regarding “apparent or

ostensible agency” or “apparent authority,” see Sanchez v. Medicorp Health Sys., 270 Va. 299, 304 (2005) (citation omitted). They do allude to the concept of ratification, see generally A.H. ex rel. C.H., 297 Va. at 635-36; Smith v. Mountjoy, 280 Va. 46, 55-56 (2010), but their allegations of actual agency render it unnecessary for us to address that issue.

27 In the second amended complaint, the Tinglers allege their contract claims as agents “in the alternative” to Belle Meade’s contract claims as principal. J.A. at 91, 93. Graystone argues on appeal, as it did below, that “Belle Meade, even if deemed a principal, has given up its ability to sue because the original claims were brought in the name of the Tinglers” and because an agent and an undisclosed principal cannot both sue under the same contract. Appellee’s Br. at 35-36; see National Bank of Va. v. Nolting, 94 Va. 263, 264 (1897) (“[I]t is well settled that where a contract not under seal is made with an agent, and in the agent’s name, for an undisclosed principal, either the agent or principal may sue upon it.”); 2 Mechem, supra note 25, § 2024, at 1593 (2d ed. 1914) (noting that “the principal (who is the real party in interest although not named as such) has also a right of action upon the contract which usually is paramount to that of the agent, so that if the principal sues the agent may not” and that because “[t]he cause of action is alternative and not joint, . . . it is therefore not ordinarily proper for the principal and agent to join as plaintiffs”). Our finding that the Tinglers and Belle Meade sufficiently allege an agency relationship does not suggest that both may recover damages under the contract, and we need not decide which party may proceed under the agency theory of contract liability. The circuit court did not rule on this issue, and we thus leave it for the circuit court to decide in the first instance on remand.

37

we find that Belle Meade alleges sufficient facts to reasonably infer that the Tinglers and

Graystone intended for Belle Meade to benefit from the contract.

“It is well established in this Commonwealth that under certain circumstances, a party

may sue to enforce the terms of a contract even though he is not a party to the contract,” and “it

has been held, for two centuries or more, that any one for whose benefit the contract was made

may sue upon it.’” Levine v. Selective Ins., 250 Va. 282, 285 (1995) (emphasis and citation

omitted). Further, “if a covenant or promise is made for the benefit, in whole or in part, of a

person with whom it is not made, . . . such person, whether named in the instrument or not, may

maintain in his own name any action thereon that he might maintain as though it had been made

with him only.” Code § 55.1-119 (renumbering and recodifying, effective October 1, 2019,

former Code § 55-22). Therefore, “[t]he essence of a third-party beneficiary’s claim is that

others have agreed between themselves to bestow a benefit upon the third party but one of the

parties to the agreement fails to uphold his portion of the bargain.” Levine, 246 Va. at 285

(citation omitted).

In order to sufficiently allege a third-party-beneficiary claim, Belle Meade must allege

facts sufficient to show that it was an intended beneficiary of the contract between the Tinglers

and Graystone, not merely an incidental beneficiary. “An incidental beneficiary is so far

removed from the obligations assumed by the contracting parties that a court will not allow him

to sue on that contract,” but “an intended beneficiary is such an integral part of the obligations

assumed by the contracting parties that a court will permit him to sue on that contract.” Thorsen

v. Richmond Soc’y for the Prevention of Cruelty to Animals, 292 Va. 257, 273 (2016). Because

“an incidental beneficiary has no standing to sue,” id. (alteration and citation omitted), Belle

Meade must show “that the parties to the contract clearly and definitely intended it to confer a

benefit upon [Belle Meade],” Levine, 250 Va. at 286 (citation omitted).

38

While a contract may expressly state such an intent to benefit a third party, evidence of

such intent need not be limited to the four corners of the contract. See id. at 284, 286 (finding it

sufficient that “all parties expressly understood that the beneficiaries of [the contract] were the

[plaintiffs]” even though the plaintiffs were not expressly named therein); Ward v. Ernst &

Young, 246 Va. 317, 322, 330 & n.4, 331-32 (1993) (rejecting defendant’s contention that the

trial court was limited to the “‘four corners’ of the only written contract” and instead “look[ing]

to the entire record” when analyzing this issue).28

As Professor Williston has observed, “in most jurisdictions, the intent to benefit a third

party can be shown not only by the contract’s express language but also by surrounding

circumstances, and many modes of expression of intent are accepted by the courts.” 13 Williston

& Lord, supra note 1111, § 37:10, at 101-02 (4th ed. 2013); see Restatement (Second) of

Contracts § 302(1) (1981) (recognizing that “a beneficiary of a promise is an intended

28 While some of our prior opinions have held that the four corners of the contract did not

demonstrate an intent to benefit a third party, those holdings were predicated upon the fact that the contracts expressly stated who was intended to receive a benefit from the contract. See, e.g., Environmental Staffing Acquisition Corp. v. B&R Constr. Mgmt., Inc., 283 Va. 787, 793-96 (2012) (finding that plaintiff had no third-party-beneficiary status because the “plain language” of the contract “establish[ed] that the parties to the contract did not intend to confer any rights upon a third party” when it specifically identified who was to receive the benefit of the rights under the contract); Richmond Shopping Ctr., Inc. v. Wiley N. Jackson Co., 220 Va. 135, 142-43 (1979) (stating that “we need look no further than the four corners of this contract to determine” that the contract was clearly not intended “to benefit directly this plaintiff or any other member of the public” when the contract stated that “[i]t is not intended by any of the provisions of any part of the contract to create the public or any member thereof as a third party beneficiary hereunder” (altering capitalization)).

These cases are distinguishable from the case before us because the contract between the Tinglers and Graystone makes no mention of who was intended (or not intended) to receive a benefit from the contract. While Graystone points to language in the contract stating that “[t]his Contract constitutes the entire understanding between the parties and binds them, their successors or heirs and assigns,” J.A. at 105, as evidence that the contractual parties did not intend to benefit Belle Meade, see Appellee’s Br. at 38, this language only references the parties’ understanding of the terms of the contract itself, not who was intended to benefit from the performance of the contract, which is manifested from the alleged circumstances surrounding the contract.

39

beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate

the intention of the parties and . . . the circumstances indicate that the promisee intends to give

the beneficiary the benefit of the promised performance”); id. at reporter’s note cmt. a (collecting

cases and stating that “[a] court in determining the parties’ intention should consider the

circumstances surrounding the transaction as well as the actual language of the contract”).29

In light of these principles, we find that the second amended complaint alleges sufficient

facts, including the circumstances surrounding the contract, supporting an intent to benefit Belle

Meade. The second amended complaint alleges in its third-party-beneficiary count that

“Graystone was aware that the improvements to the real property would solely benefit the record

title owner of the property at the time it entered into the Agreement to construct the Home” and

that “Graystone was aware” that Belle Meade “desired to build living quarters for the Tinglers to

live on site while performing valuable services for Belle Meade.” J.A. at 93-94. The factual

allegations incorporated into each count also state that “Graystone was aware that Belle Meade

Farm, not the Tinglers, was the owner of the property at the time it performed the work on the

Home,” “that the intent of the contract was to build the Home for the Tinglers to live on the

farm, and that the Tinglers would thereafter reside on the farm and [in] their new Home even

though Belle Meade Farm would remain the record owner at all times of contract performance.”

Id. at 83, 93. The complaint further alleges that Graystone knew that the property was owned by

29 See also 13 Williston & Lord, supra note 11, § 37:7, at 76 (4th ed. 2013) (noting that

“[i]t is the general rule in contract law that a third party may enforce a promise as having been made for his benefit, if it appears from the face of the promise or in the light of the contracting situation that he was intended in fact to be a donee beneficiary of the promisee or — when the situation is one in which no intention to make a gift appears — if the promise has the effect as a matter of law, from the nature of the obligation, of according recognition to him, whether directly or by sound implication, as a creditor beneficiary of the promisee, so that in either situation he stands in the position of necessarily being more than a mere incidental beneficiary as to the promisor’s performance” (emphases added) (citation omitted)).

40

Belle Meade because Graystone had obtained a building permit for the construction and that

Graystone was aware that Belle Meade would and did pay the amount due under the contract.

See id.

Such factual allegations, if proven at trial, demonstrate that both Graystone and the

Tinglers intended for the contract to benefit Belle Meade not only by improving the fair market

value of the property, which all parties knew was owned by Belle Meade, but also by allowing

the Tinglers to live on the farm in order to assist Belle Meade with its daily operations. Because

the alleged benefits to Belle Meade were an “integral part of the obligations assumed” under the

contract, we cannot conclude that Belle Meade was “so far removed from the obligations

assumed by the contracting parties,” Thorsen, 292 Va. at 273, that it had no standing to sue as a

third-party beneficiary. See generally 13 Williston & Lord, supra note 11, § 37:7, at 39-40 (4th

ed. 2013). Therefore, the circuit court erred in finding that Belle Meade had failed to allege

sufficient facts to support its third-party-beneficiary claim.30

III.

Faced with a complicated fact pattern and anfractuous legal precedent on a host of issues,

the circuit court came to conclusions that we agree with in part and respectfully disagree with in

part. Affirming in part, we hold the following:

30 We need not speculate about the implications of a third-party-beneficiary claim

proceeding to trial under these circumstances. See generally Rastek Constr. & Dev. Corp. v. General Land Commercial Real Estate Co., 294 Va. 416, 425 (2017) (“In practical terms, a third-party beneficiary’s claim fails if the promisor could defeat the same claim if the promisee had asserted it directly against him. This general rule exists ‘because the rights of third parties are derivative,’ and as a result, ‘defenses and limitations created by the agreement are effective against beneficiaries as well.’ While the ‘rights of the beneficiary stem from the contract between the promisor and the promisee,’ the derivative nature of a third-party beneficiary’s rights implies that these rights can sink no lower than but cannot rise higher than those of the promisee unless the agreement specifically provides otherwise.” (alterations and citations omitted)).

41

The circuit court did not err in dismissing the negligence tort counts in all the complaints as to Graystone’s alleged failures during the original-construction phase.

The circuit court did not err in dismissing the negligent-repair tort count in the Tinglers’ and Belle Meade’s second amended complaint to the extent that it asserts property damage to the home and economic losses.

The circuit court did not err in dismissing the counts of negligence per se in all the complaints as to Graystone’s alleged failures during the original-construction phase, and the counts of negligence per se as to Graystone’s alleged failures during the repair phase have been waived.

Reversing in part and remanding, we hold the following:

The circuit court erred in dismissing the negligent-repair count in the Tingler family’s personal-injury complaints to the extent that those allegations claim that Graystone’s misfeasance worsened the mold conditions and, by doing so, aggravated preexisting personal injuries.

The circuit court erred in dismissing the negligent-repair count in the Tinglers’ and Belle Meade’s second amended complaint to the extent that it asserts that Graystone’s misfeasance during the repair phase caused damage to personal property that is not a subject of the contract.

The circuit court erred in dismissing the contract claims in the Tinglers’ and Belle Meade’s second amended complaint by finding that the allegations were insufficient to state a claim based upon an actual agency relationship.

The circuit court erred in dismissing the contractual claims in the Tinglers’ and Belle Meade’s second amended complaint by finding that the Tinglers and Belle Meade had failed to allege sufficient facts from which to reasonably infer that the Tinglers and Graystone had intended for Belle Meade to benefit from the contract.

Affirmed in part, reversed in part, and remanded.

PRESENT: All the Justices RADIANCE CAPITAL RECEIVABLES FOURTEEN, LLC, AS ASSIGNEE OF NEW SOUTH FEDERAL SAVINGS BANK, OPINION BY v. Record No. 180678 JUSTICE TERESA M. CHAFIN October 24, 2019 ROBERT D. FOSTER, ET AL.

FROM THE CIRCUIT COURT OF GLOUCESTER COUNTY Charles J. Maxfield, Judge Designate

This appeal requires us to determine whether a contractual waiver of the right to plead the

statute of limitations was valid or enforceable under Virginia law. Upon review, we conclude

that the waiver at issue was neither valid nor enforceable, and therefore, we affirm the circuit

court’s decision.

I. BACKGROUND

The pertinent facts of this case are undisputed. On February 21, 2006, Foster and Wilson

Building, LLC (the “Company”), executed a promissory note in favor of New South Federal

Savings Bank (“New South”) based on a construction loan.1 On March 2, 2006, Robert D.

Foster and James M. Wilson executed a Continuing Guaranty agreement (the “Guaranty”) with

New South in which they personally guaranteed and promised to pay all of the Company’s debt.

In the Guaranty, Foster and Wilson agreed to “waive[] the benefit of any statute of limitations or

other defenses affecting the . . . Guarantor’s liability” under the agreement.

1 On December 16, 2008, the Company executed an amended promissory note in favor of

New South in order to correct an error regarding the Company’s name. The execution of the amended note does not affect this appeal.

2

The Company eventually defaulted on the promissory note, and a notice of default and

demand for payment was sent to Foster and Wilson on August 27, 2010. On November 23,

2015, Radiance Capital Receivables Fourteen, LLC (“Radiance Capital”), the assignee of New

South and holder of the promissory note and Guaranty, filed a complaint against Foster and

Wilson in the Circuit Court of Gloucester County. Based on the Guaranty, Radiance Capital

sought to collect the principal balance due on the note, interest, and attorney’s fees. In response

to Radiance Capital’s complaint, Foster and Wilson asserted that Radiance Capital’s claim was

barred by the statute of limitations.

The circuit court held a hearing regarding the plea in bar based on the statute of

limitations on February 8, 2018. Although the Guaranty stated that it was governed by Alabama

law, both parties agreed that Virginia law supplied the applicable statute of limitations and that a

five-year statute of limitations applied to Radiance Capital’s claim. Foster and Wilson

acknowledged that the Guaranty contained a waiver of their statute of limitations defense. They

maintained, however, that the waiver was unenforceable because it did not meet the specific

requirements of Code § 8.01-232, the statute addressing the “[e]ffect of promises not to plead”

the statute of limitations.

In response, Radiance Capital emphasized that the present case involved a waiver of the

statute of limitations defense rather than a promise not to plead the statute of limitations at a later

date. Based on this distinction, Radiance Capital maintained that Code § 8.01-232 did not apply

to the waiver at issue. Citing the first sentence of Code § 8.01-232, Radiance Capital also argued

that Foster and Wilson should be estopped from asserting a statute of limitations defense because

the failure to enforce the contractual waiver would “operate as a fraud” on Radiance Capital.

3

After considering the parties’ arguments and additional briefing, the circuit court

concluded that the contractual waiver was not valid or enforceable according to the terms of

Code § 8.01-232. Thus, the circuit court sustained the plea in bar based on the statute of

limitations and dismissed Radiance Capital’s complaint with prejudice. This appeal followed.

II. ANALYSIS

Radiance Capital contends that the circuit court erred by determining that the statute of

limitations waiver set forth in the Guaranty was not valid or enforceable under Code § 8.01-232.

Radiance Capital’s arguments present issues of statutory interpretation. “Under well-established

principles, an issue of statutory interpretation is a pure question of law which we review de

novo.” Conyers v. Martial Arts World of Richmond, Inc., 273 Va. 96, 104 (2007). Likewise, an

“[a]ppeal of a decision on a plea in bar of the statute of limitations involves a question of law

that we review de novo.” Van Dam v. Gay, 280 Va. 457, 460 (2010). Upon conducting a de

novo review of the issues presented in this case, we conclude that the waiver at issue was neither

valid nor enforceable.

A. THE WAIVER CONTAINED IN THE GUARANTY WAS NOT VALID UNDER CODE § 8.01-232

In general, a party may contractually waive “any right conferred by law or contract.”

Gordonsville Energy, L.P. v. Virginia Elec. and Power Co., 257 Va. 344, 356 (1999). “[A] term

of the parties’ contract becomes the law of the case unless such term is repugnant to public

policy or to some rule of law.” Id. at 355.

The General Assembly has restricted a party’s ability to promise not to plead the statute

of limitations. In pertinent part, Code § 8.01-232 provides that

[w]henever the failure to enforce a promise, written or unwritten, not to plead the statute of limitations would operate as a fraud on the promisee, the promisor shall be estopped to plead the statute.

4

In all other cases, an unwritten promise not to plead the statute shall be void, and a written promise not to plead such statute shall be valid when (i) it is made to avoid or defer litigation pending settlement of any case, (ii) it is not made contemporaneously with any other contract, and (iii) it is made for an additional term not longer than the applicable limitations period.

Code § 8.01-232(A).

The waiver of the right to plead the statute of limitations at issue in this case does not

meet the specific requirements of Code § 8.01-232. The waiver was made contemporaneously

with the Guaranty and it attempted to waive the right to plead the statute of limitations for an

indefinite period of time. See Code § 8.01-232(A)(ii) and (iii). As the waiver was made when

the parties executed the Guaranty, it was not “made to avoid or defer litigation pending the

settlement of any case.” See Code § 8.01-232(A)(i). Contrary to Code § 8.01-232, the waiver at

issue attempted to permanently waive the right to plead the statute of limitations upon the

execution of the underlying contract, before any controversy regarding that contract existed.

On appeal, Radiance Capital attempts to distinguish a waiver of the right to plead the

statute of limitations from a promise not to plead the statute of limitations. As Code § 8.01-232

specifically applies to “promises” not to plead the statute of limitations, Radiance Capital

maintains that Code § 8.01-232 is inapplicable to the waiver at issue in this case. This argument

is without merit.

A “waiver” has been defined as “the intentional relinquishment of a known right, with

both knowledge of its existence and an intention to relinquish it.” Hensel Phelps Constr. Co. v.

Thompson Masonry Contractor, Inc., 292 Va. 695, 702 (2016) (quoting May v. Martin, 205 Va.

397, 404 (1964)). A “promise” is “[t]he manifestation of an intention to act or refrain from

acting in a specified manner, conveyed in such a way that another is justified in understanding

that a commitment has been made.” Black’s Law Dictionary 1466 (11th ed. 2019). Stated

5

differently, a “promise” is “a person’s assurance that the person will or will not do something.”

Id.

While a promise generally involves an undertaking to do something in the future, a

waiver of the right to plead the statute of limitations and a promise not to plead the statute of

limitations have the same practical effect. If enforceable, both a waiver of the right to plead the

statute of limitations and a promise not to plead the statute of limitations would bar a party from

asserting a statute of limitations defense. Moreover, when a party intentionally relinquishes its

known right to plead the statute of limitations through a contractual waiver, the party implicitly

makes a promise that it will refrain from pleading the statute of limitations in the future.

If Code § 8.01-232 only applied to “promises” not to plead the statute of limitations, the

parties to a contract could circumvent the requirements of that statute by simply characterizing a

promise not plead the statute of limitations as a contractual waiver. Despite the specific

requirements of Code § 8.01-232(A), a party could perpetually waive its right to plead the statute

of limitations at the inception of a contract. See 4 Samuel Williston & Richard A. Lord, A

Treatise on the Law of Contracts § 8:44, at 696-97 (4th ed. 2008) (“If a promise not to plead the

statute, made at the inception of the contract, were treated as valid, and ordinary principles of

contracts applied, the creditor would acquire a perpetual cause of action.”). Such a result would

be inconsistent with both Code § 8.01-232 and the policy considerations underlying that statute.2

2 “[S]tatutes of limitation serve an important and salutary purpose.” Burns v. Board of Supervisors, 227 Va. 354, 359 (1984); see also Bell v. Morrison, 26 U.S. (1 Pet.) 351, 360 (1838) (describing statutes of limitation as “wise and beneficial” laws). “The object of the statutes of limitation is ‘to compel the exercise of a right of action within a reasonable time,’ to prevent surprise and to avoid problems incident to the gathering and presentation of evidence when claims have become stale.” Truman v. Spivey, 225 Va. 274, 279 (1983) (quoting Street v. Consumers Mining Corp., 185 Va. 561, 575 (1946)).

6

Radiance Capital argues that this Court recognized the validity of a similar contractual

waiver of the right to plead the statute of limitations in Hensel Phelps Construction Co. v.

Thompson Masonry Contractor, Inc., 292 Va. 695 (2016). This argument is misplaced. In

Hensel Phelps, we examined the language of a subcontract between a prime contractor and a

subcontractor and determined that no provision demonstrated that the subcontractor had waived

its right to plead the statute of limitations. See Hensel Phelps, 292 Va. at 702-03. As the

subcontractor failed to waive its right to plead the statute of limitations, we did not determine

whether such a waiver was enforceable pursuant to Code § 8.01-232. Thus, the holding in

Hensel Phelps did not reach the issue presented in this case.

As the waiver of the right to plead the statute of limitations set forth in the Guaranty

failed to comply with the requirements of Code § 8.01-232, it was not valid under Virginia law.

B. THE WAIVER CONTAINED IN THE GUARANTY WAS NOT ENFORCEABLE UNDER THE EXCEPTION SET FORTH IN CODE § 8.01-232 PERTAINING TO ESTOPPEL AND FRAUD

The first sentence of Code § 8.01-232(A) states “[w]henever the failure to enforce a

promise, written or unwritten, not to plead the statute of limitations would operate as a fraud on

the promisee, the promisor shall be estopped to plead the statute.” Radiance Capital contends

that the circuit court erroneously construed this sentence of Code § 8.01-232(A). Again, we

disagree with Radiance Capital’s argument.

In its third assignment of error, Radiance Capital asserts that the circuit court erred by

finding that [Radiance Capital] must prove by clear and convincing evidence that [Foster and Wilson] signed a Commercial Guaranty waiving the benefits of any statute of limitations with the fraudulent intent to refuse to be bound by the signed waiver as a requirement for the waiver to be enforceable under the provisions of . . . Code § 8.01-232(A).

7

Assuming that the circuit court reached the specific conclusions that Radiance Capital alleges in

its assignment of error,3 it correctly applied the law.

In Soble v. Herman, 175 Va. 489, 500 (1940), we considered whether the failure to

enforce an oral promise not to plead the statute of limitations “would operate a fraud” on the

promisee. In doing so, we construed Code § 5821, the statutory precursor of Code § 8.01-232.

See Soble, 175 Va. at 499-501. Code § 5821 contained a sentence that was nearly identical to the

first sentence of Code § 8.01-232(A). In pertinent part, Code § 5821 stated “[w]henever the

failure to enforce a promise, written or unwritten, not to plead the statute of limitations would

operate a fraud on the promisee, the promisor shall be estopped to plead the statute.” Id. at 494

(quoting Code § 5821 (1936)).

In Soble, we noted that the allegation of fraud at issue involved an “unfulfilled oral

promise to pay [a] debt, and the broken promise not to plead the statute of limitations.” Id. at

500. We then recognized, as a “general rule,” that “fraud must relate to a present or pre-existing

fact, and cannot ordinarily be predicated on unfulfilled promises or statements as to future

events.” Id. After explaining that “a mere promise to perform an act in the future is not, in a

legal sense, a representation,” id., we concluded that “‘fraud’—as used in the phrase, ‘will

operate a fraud on the promisee’—must relate to a present or preexisting fact and cannot be

established by allegation or proof of a non-fulfilled, naked, oral promise.” Id. at 501 (some

quotation marks omitted). As the allegation of fraud in Soble was based only on unfulfilled

3 The circuit court sustained the plea in bar based on the statute of limitations because it

concluded that “the waiver of the statute of limitations that is set forth in the Guaranty is not valid and enforceable according to the terms of [Code] § 8.01-232.” It did not expressly determine that the exception contained in the first sentence of Code § 8.01-232(A) was inapplicable because Radiance Capital failed to prove that Foster and Wilson signed the Guaranty with the fraudulent intent to refuse to be bound by the waiver at issue.

8

promises, we held that the appellee was not estopped from pleading the statute of limitations

pursuant to Code § 5821. See id. at 500-01.

Other cases have illustrated an exception to the holding in Soble. “[I]f a defendant makes

a promise that, when made, he has no intention of performing, that promise is considered a

misrepresentation of present fact and may form the basis for a claim of actual fraud.” SuperValu,

Inc. v. Johnson, 276 Va. 356, 368 (2008). In such cases, “the promisor’s intention—his state of

mind—is a matter of fact.” Colonial Ford Truck Sales, Inc. v. Schneider, 228 Va. 671, 677

(1985). “The gist of fraud in such case[s] is not the breach of the agreement to perform, but the

fraudulent intent.” Patrick v. Summers, 235 Va. 452, 455 (1988) (quoting Lloyd v. Smith, 150

Va. 132, 145 (1928)). When this exception is applied to Code § 8.01-232(A), it establishes that

if a party promises not to plead the statute of limitations without any present intention to be

bound by that promise, the party may be estopped from pleading the statute of limitations in

order to prevent the operation of a fraud on the promisee.

In the present case, Radiance Capital’s argument pertaining to estoppel based on the

application of the first sentence of Code § 8.01-232(A) rested entirely on Foster’s and Wilson’s

contractual waiver of their right to plead the statute of limitations. Pursuant to Soble, however,

the unfulfilled promises of Foster and Wilson not to plead the statute of limitations were

insufficient in themselves to support an allegation of fraud. See Soble, 175 Va. at 501. Radiance

Capital would have been required to present additional evidence establishing that Foster and

Wilson signed the Guaranty with the fraudulent intent to refuse to be bound by the statute of

limitations waiver in order for Foster and Wilson to be estopped from asserting the statute of

limitations as a defense pursuant to Code § 8.01-232(A). Thus, the circuit court correctly applied

9

the law regarding Code § 8.01-232(A) and Radiance Capital’s third assignment of error is

without merit.

As Radiance Capital relied solely on the breach of the statute of limitations waiver

without providing any additional evidence to establish that Foster and Wilson did not intend to

comply with the waiver when they executed the Guaranty, Foster and Wilson were not estopped

from pleading the statute of limitations.

III. CONCLUSION

For the reasons stated, we conclude that the waiver of the right to plead the statute of

limitations contained in the Guaranty was not valid or enforceable. Accordingly, we affirm the

circuit court’s decision.

Affirmed.

NINETEENTH JUDICIAL CIRCUIT OF VIRGINIA Fairfax County Courthouse 4110 Chain Bridge Road

Fairfax, Virginia 22030-4009

703-246-2221 • Fax: 703-246-5496 • TDD: 703-352-4139

BRUCE D. WHITE, CHIEF JUDGE RANDY I. BELLOWS ROBERT J. SMITH

BRETT A. KASSABIAN MICHAEL F. DEVINE

JOHN M. TRAN GRACE BURKE CARROLL

DANIEL E. ORTIZ PENNEY S AZCARATE STEPHEN C. SHANNON

THOMAS P. MANN RICHARD E. GARDINER

DAVID BERNHARD DAVID A. OBLON DONTAE L. BUGG

JUDGES

Lauren P. McLaughlin, Esquire Thomas J. McKee, Jr., Esquire

Joshua E. Holt, Esquire Theresa A. Queen, Esquire

Raziye Andican, Esquire Alexander X. Jackins, Esquire

SMITH, CURRIE & HANCOCK LLP Daniel S. Phillips, Esquire

1950 Old Gallows Road, Suite 750 GREENBERG TRAURIG, LLP

Tysons, Virginia 22182 1750 Tysons Boulevard, Suite 1000

1pmclaughlin@smithcurrie.com McLean, Virginia 22102

jeholt@smithcurrie.com mckeet@gtlaw.com

randicangsmithcurrie.com queent@gtlaw.com

Counsel for Landlord jackinsa@gtlaw.com phillipsd@gtlaw.com

Counsel for Tenants

Re: Ebadom VA, LLC, et al. v. Steve S. Lee, et al.

Case No. CL-2018-1535 (Consolidated with CL-2018-2399 and CL-2018-3455)

Dear Counsel:

In this landlord-tenant dispute, the issue before the Court' is whether 1004 Palace Plaza,

LLC ("Landlord") is entitled to attorney fees per its lease,2 and if so, how much from Ebadom

Food, LLC ("Tenant") or Ebadom VA, LLC ("Assignee") (collectively "Tenants").

The Court previously found Landlord entitled to $2,034,737.76 in damages. In addition,

the Court now finds Landlord is entitled to attorney fees in the amount of $1,233,069.58.

1 Prior to trial, the Court agreed to bifurcate the issue of attorney fees. On January 15, 2020, the Court issued a

bench ruling as to most causes of action. Thus, the sole remaining issue to adjudicate now is the issue of whether

attorney fees should be awarded and, if so, in what amount.

2 The Court stated from the bench, and recorded in a bench verdict form, that it awarded attorney fees to Landlord.

However, this ruling was premature as it did not have the benefit of the extensive briefing and argument of counsel

on the issue. Since no final order has yet been issued, the Court hereby reconsiders its bench ruling on its awarding

attorney fees.

OPINION LETTER

COUNTY OF FAIRFAX CITY OF FAIRFAX

April 6, 2020

THOMAS A. FORTKORT J. HOWE BROWN F. BRUCE BACH

M. LANGHORNE KEITH ARTHUR B. VIEREGG

KATHLEEN H. MACKAY ROBERT W. WOOLDRIDGE, JR.

MICHAEL P. McWEENY GAYLORD L. FINCH, JR.

STANLEY P. KLEIN LESLIE M. ALDEN

MARCUS D. WILLIAMS JONATHAN C. THACHER CHARLES J. MAXFIELD

DENNIS J. SMITH LORRAINE NORDLUND

DAVID S. SCHELL JAN L. BRODIE

RETIRED JUDGES

Re: Ebadom VA, LLC, et al. v. Steve S. Lee, et al.

Case No. CL-20 I 8-1535 (Consolidated with CL-2018-2399 and CL-2018-3455)

April 6, 2020

Page 2 of 7

I. The Parties Contractually Agreed to an Award of Attorney Fees.

All three parties contractually agreed to an award of attorney fees, as seen in both the

original lease and the assignment.

The November 21, 2016, lease ("Lease") between Landlord and Tenant reads:

2701. Litigation Costs. Should an Event of Default occur and/or should Landlord file suit against

Tenant for any reason, including but not limited to, a suit for possession of the Premises, payment

of rent, damages, or to enforce or interpret the provisions of this Lease, then Tenant shall reimburse

Landlord for the reasonable attorneys' fees and all expenses and costs of litigation, including any

appeals. If suit is filed for past due Rent and/or money damages, Landlord shall be entitled to

attorneys' fees in an amount not less than fifteen percent (15%) of the monies awarded to Landlord.

The August 11, 2017, assignment of the Lease ("Assignment") between Landlord,

Tenant, Assignee, and Hyun-Ho Kim ("Guarantor"), reads:

14. Enforcement. Landlord shall be entitled to its reasonable attorneys' fees and court costs in connection with Landlord's enforcement of the terms and provisions of this Agreement.

Tenant and Assignee are each related to the same South Korean restaurateur. Guarantor

to the Assignment is also the signatory to the Lease on behalf of Tenant.

The Attorney Fees Provisions are Conscionable.

Tenants argue the terms of the attorney fees provisions are unconscionable because they

are not limited to Landlord prevailing. Moreover, they argue, the Lease and Assignment were

contracts of adhesion, abusive of an unbalanced sophistication of the parties. The Court finds the

provisions are conscionable.

A recent opinion from the Honorable David Bernhard of this Court, affirmed by an

unpublished Order of the Supreme Court of Virginia, held a contract of adhesion between a

private school and the parents of a student contained an unconscionable attorney fees provision.

McIntosh v. Flint Hill Sch., 100 Va. Cir. 32 (Fairfax 2018), aff d, Flint Hill Sch. v. McIntosh, No.

181678, 2020 WL 33258 (Va. Jan. 2, 2020).

The Court distinguishes Flint Hill School from the present case in three ways.

First, Tenants are related offspring to the same very large restaurant operator boasting

200 locations in and outside South Korea. With multiple restaurants and the resources of a major

company, they are far removed from the comparatively unsophisticated private school parents of

Flint Hill School. The fact that the present Lease was Tenant's first in the United States is of no

moment. The Court finds no inequality of bargaining power; Tenants and Landlord are each

sophisticated in business. In many ways, Tenants were the more sophisticated parties.

OPINION LETTER

Re: Ebadom VA, LLC, et al. v. Steve S. Lee, et al.

Case No. CL-2018-1535 (Consolidated with CL-20 I 8-2399 and CL-20 I 8-3455)

April 6, 2020

Page 3 of 7

Second, the Lease was not a contract of adhesion, as was the contract in Flint Hill School.

Tenant negotiated significant changes to the contract. (See Lease Ex. C.)

Third, the contract in Flint Hill School permitted the school to collect attorney fees even

if a parent sued it and it lost. The contract read, "We (I) agree to pay all attorneys' fees and costs

incurred by Flint Hill School in any action arising out of or relating to this Enrollment Contract."

Id. at 33. The Lease does not do this. Rather, it is a vanilla attorney fees provision that permits a

landlord to seek reimbursement of fees and costs should a tenant default or should the landlord

need to file suit against the tenant. Unlike the Flint Hill School mandate to pay "all" attorney

fees, the Lease only required Tenant to pay "reasonable" attorney fees. Had Landlord sued and

lost it would have a hard time persuading a court its fees were reasonable under the "results

obtained" consideration prong of the Chawla factors. Chawla v. BurgerBusters, Inc., 255 Va.

616, 623 (1998).3 The fact the provision is not mutual in the context of this case is merely one of

contract negotiations. Tenant simply chose not to negotiate a mutuality component to the

attorney fees provision. Presumably, Tenant got some other benefit in the Lease it prized ex ante

more than attorney fees mutuality.

III. Attorney Fees are Limited to the Virginia State Litigation.

This lawsuit involved proceedings in both state and federal court. The federal court

proceedings remain pending. Everyone seems to agree the two proceedings are parallel. Landlord seeks attorney fees from both, now, in state court.

The Court defers to its federal relative for a decision on attorney fees incurred there.

Theoretically, the federal court could render judgment opposite to that of this Court. This could

be the product of a differently developed record, or a plain disagreement with this Court's

judgment. Should this Court award fees from the federal action, and should the federal court find for Tenant or Assignee, this Court's award would be truly unfair. Furthermore, the federal court

is in the best position to determine the reasonableness of work performed there. This Court need

not hamstring it.

Therefore, this Court will not award fees incurred to prosecute or defend the federal

action. However, where legal work performed for Landlord in state court also incidentally

benefitted Landlord's case in federal court, it may recover fees for those services.

IV. Attorney Fees Include Fees Necessary to Defend Against Tenants' Claims.

Tenant and Assignee claim that any Landlord fees are limited to those necessary to bring

the enforcement action and not those to defend against Tenants' claims. The Court disagrees.

Landlord commenced litigation by filing an unlawful detainer lawsuit in the General

District Court. Tenants filed a counterclaim. And by the time this matter went to trial in this

3 See infra Section VI for a discussion of these factors.

OPINION LETTER

Re: Ebadom VA, LLC, et al. v. Steve S. Lee, et al.

Case No. CL-20 I 8-1535 (Consolidated with CL-2018-2399 and CL-2018-3455)

April 6, 2020

Page 4 of 7

Court, there were three consolidated lawsuits and a variety of claims by Tenant, such as breach

of contract, fraud, and statutory business conspiracy.4

The Lease provides for reasonable attorney fees resulting from an event of default and/or

Landlord filing suit against Tenant. (Lease § 2701.) It specifically provides a list of nonexclusive

examples of recoverable fees: (1) a suit for possession; (2) payment of rent; (3) damages; or (4)

enforcement or interpretation of the provisions of the Lease. (Id.) In this case, Landlord incurred

fees for all four examples. First and second, Landlord filed an unlawful detainer action in the

General District Court, which commenced the litigation between the parties for possession and

unpaid rent. Third, Landlord successfully sought significant damages to its building in the form

of incomplete build-out work. Fourth, Landlord successfully litigated both enforcement and

contract interpretation claims. Tenants set forth their own claims of breach of the Lease and

breach of the Assignment, which required Landlord to ask the Court to "enforce or interpret" the Lease.

This fourth category most clearly supports Landlord's claim for fees related to its defense against Tenants' tort claims. For example, it is true that a fraud in the inducement claim is inherently outside the contract allegedly procured by fraud. Had Tenants successfully proved fraud, the award of fees would be different. However, we now know there was no fraud. Nonetheless, Landlord could not enforce its Lease without first defending Tenants' wrong claims of fraud. This makes the defense against the fraud claims inextricably intertwined with enforcement of the Lease. Since Landlord may recover fees related to enforcement of the Lease, it may recover these fraud count-related fees. The same analysis applies to Tenant's conspiracy claims that we now know were wrong, too.

In any event, Virginia law considers defense of a tenant's breach of contract claim to constitute "enforcement" of the agreement for the purposes of recovering fees. Chawla, 255 Va. at 621 (permitting attorney fees for successful defense under fee provision providing for recovery of fees incurred enforcing the terms of the lease).

Landlord is entitled to fees for both prosecuting and defending this case.

V. Fees Related to Steve Lee and Annandale Properties, LLC.

Tenants argue attorney fees incurred for Defendants Steve Lee and Annandale Properties, LLC may not be shifted because neither party was a signatory to the Lease or Assignment containing the fee shifting provisions. The Court agrees.

Landlord tries to tie these two parties to the Lease and Assignment by arguing Tenants sued them only to improperly gain leverage in the litigation against Landlord. Even assuming

this to be true, however, defending Mr. Lee and Annandale Properties was not a necessary

4 Procedurally, the case ultimately went to trial on Tenants' claims and Landlord's counterclaims. However, this is

just form.

OPINION LETTER

Re: Ebadom VA, LLC, et al. v. Steve S. Lee, et al.

Case No. CL-2018-1535 (Consolidated with CL-2018-2399 and CL-2018-3455)

April 6, 2020

Page 5 of 7

condition to Landlord enforcing its Lease, as was the case for Landlord to defend against

Tenants' tort claims. In the former instance, Landlord could enforce its Lease whether Mr. Lee or

Annandale Properties defended themselves or not; in the latter instance, tort defense was a

necessary condition precedent to Landlord's enforcement of the Lease.

In any event, where legal work performed for Landlord also benefitted Mr. Lee or

Annandale Properties, Landlord is entitled to recovery of fees it would have expended had Mr.

Lee or Annandale Properties been absent from the lawsuit. If Landlord had to incur the fees to

defend itself, Tenants are contractually obligated to reimburse. Tenants cannot point to a third-party beneficiary (Mr. Lee and Annandale Properties) as an excuse to reduce their financial

obligation to Landlord.

Tenants take their argument a bit too far by arguing most of the attorney bills were

incurred by Mr. Lee and Victoria Lee—as individuals and not as Landlord's owner—because they were addressed to them and not Landlord, the company. The Court finds that the attorney

fee bills were directed to Landlord and not to the Lees as individuals, or to Annandale Properties. It reaches this conclusion for three reasons. First, companies operate through individuals. In this case, the Lees are the individuals who run Landlord. It is natural that a bill would be directed to the people running a small limited liability company like that of Landlord. Second, Landlord paid the bills. In notations on some of the bills, this is expressly stated—Landlord was payor. Third, the subject of the bills predominately relate to work for Landlord and not the Lees, individually, or Annandale Properties. The Court was unpersuaded by Tenants' argument that the attorneys predominately worked on behalf of the Lees and Annandale Properties as opposed to Landlord.

VI. Landlord is Entitled Only to Reasonable Attorney Fees.

Tenants correctly argue Landlord has the burden to prove its attorney fee request is reasonable. Landlord retorts that it has so met its burden. The Court generally agrees, with a few exceptions.

In calculating a reasonable attorney fee, the Court is guided by "seven non-exclusive factors," otherwise known as the Chawla factors: "(1) the time and effort expended by the attorney, (2) the nature of the services rendered, (3) the complexity of the services, (4) the value of the services to the client, (5) the results obtained, (6) whether the fees incurred were consistent with those generally charged for similar services, and (7) whether the services were necessary

and appropriate." Denton v. Browntown Valley Assocs., Inc., 294 Va. 76, 88 (2017) (quoting

Lambert v. Sea Oats Condo. Ass 'n, Inc., 293 Va. 245, 254 (2017)) (internal quotations removed)

(discussing the Chawla factors). In addition, the Court may "deduct from the award any fees and

expenses associated with claims and defenses the court views to be frivolous, spurious, or

unnecessary." Dewberry & Davis, Inc. v. C3NS, Inc., et al., 284 Va. 485, 496 (2012). The Court

has considered and carefully weighed each and every one of these factors in determining a fee

award.

OPINION LETTER

Re: Ebadom VA, LLC, et al. v. Steve S. Lee, et al.

Case No. CL-2018-1535 (Consolidated with CL-2018-2399 and CL-2018-3455)

April 6, 2020

Page 6 of 7

Tenants complain, generally, of block billing and redacted entries frustrating its ability to

agree or object to reasonableness of them. Tenants' objections are by category and in the

aggregate; Tenant does not highlight specific line items. Even so, the Court makes its own

independent review of attorney fee requests. Aided by expert witness evidence in the record and

its own knowledge of the trial as presiding judge, the Court is permitted to independently assess

the reasonableness of fees as line items and as the entire award. Where the Court cannot

understand the substance or gist of a line item due to redactions, or where it finds it cannot

conclude a particular block billed item is reasonable, the Court may cut them from its calculation

of a total attorney fees award. See RECP IV WG Land Inv 'rs, LLC v. Capital One Bank (USA),

NA., 93 Va. Cir. 282, 329 (Fairfax 2016), aff'd, 295 Va. 268 (2018). There are instances of this,

and as such, the Court excised those amounts from the ultimate award.

Tenants also complain Landlord unreasonably ran up legal fees. However, the Court finds

that this case featured two very well-represented sides exercising their prerogatives. Be it

remembered that this seemingly routine landlord-tenant case for unpaid rent and dueling breach of contract actions in the General District Court devolved into three complex Circuit Court cases, with counterclaims, that became one of this Court's most heavily litigated matters for the past two years until a jury, and then this Court, made findings. It spawned parallel proceedings in federal court. Certain issues were effectively litigated multiple times. Before this Court even decided a significant portion of the case and entered a final order, vows of appeal were made. One can charitably call this aggressive lawyering or uncharitably call it a war of attrition. In any event, both sides stood toe to toe, each expecting the other side to ultimately reimburse them their attorney fees when they prevailed. Landlord stood behind the contractual fee-shifting; Tenant behind the tort-based fee-shifting. Each side incurred over $1.3 million in attorney fees. Tellingly, total fees billed to Landlord were approximately 45 percent less than those billed to Tenants. (Gogal Decl. ¶ 13.) The Court cannot say Landlord alone brought the matter to this state of affairs. The Court finds the fees awarded the Landlord herein are reasonable in the face of its skilled opposition.

VII. There is No Material Conflict in the Attorney Fees Provision of the Lease and the Assignment.

Tenants argue there is a distinction with a difference between the attorney fees provision in the Lease and Assignment. The Lease permits recovery of "all expenses and costs of litigation"; the Assignment only permits recovery of "court costs." While textually different,

these differences between the documents are not material to the adjudication of this issue. In

other words, the dispositive factor is not on the text of the document (what it says), but on who is

the contractually bound party. For this purpose, Tenant and Assignee are virtually the same.

Ebadom Food, LLC (Tenant) signed the Lease, which it later assigned to Ebadom VA, LLC

(Assignee). Therefore, Assignee is obligated under all terms of the Lease—including the Lease's

attorney fees provision. The Assignment's provision is only applicable to breaches of that

assignment. Here, the Court found there was a breach of the Lease.

OPINION LETTER

Re: Ebadom VA, LLC, et al. v. Steve S. Lee, et al.

Case No. CL-2018-1535 (Consolidated with CL-2018-2399 and CL-2018-3455)

April 6, 2020

Page 7 of 7

Indeed, since the Court found no fraud in the assignment, Ebadom VA, LLC is the entity

subject to judgment and is responsible for breaches prior to the assignment. It is subject to the

attorney fees provision of the Lease. Stated differently, Ebadom VA, LLC stepped into the shoes

of Ebadom Food, LLC and was subject to the terms of the Lease. The attorney fees provision in

the Assignment did not negate the attorney fees provision in the Lease. Just as Ebadom Food,

LLC agreed to pay attorney fees for Landlord's enforcement actions, so did Ebadom VA, LLC as

the assignee of that lease.

The real issue in this case was breach of the Lease, for which the Lease's attorney fees

provision apply. It was not breach of the Assignment, for which the Assignment's attorney fees

provision applies. For the reasons discussed in Section IV, supra, Landlord was enforcing the Lease, as assigned. Thus, its work all fell under "enforce[ment]." (Lease § 2701.)

Tenants are correct to distinguish the enforcement of the Lease from enforcement of the Assignment. However, Landlord needed to defend Tenants' various fraud claims as part of its ability to enforce the Lease. The Court finds Landlord's work to enforce the Lease included work necessary to defend the challenges against the Assignment. All that work was work necessary to enforce its Lease and Ebadom VA, LLC agreed to pay those fees by accepting assignment of the Lease.

VIII. Preparation of Final Order.

Lauren McLaughlin shall please enter an attorney fees award of $1,233,069.58 in the sketch order being prepared, which incorporates the entirety of this Court's rulings and jury verdict in this case. The order shall incorporate by reference this Opinion Letter. Ms. McLaughlin shall then circulate it to Tenants' counsel for endorsement with any objections. This matter remains on the docket for May 8, 2020, at 10:00 a.m. for entry of the final order. But, should counsel submit a fully endorsed order before then, the Court will enter the order in Chambers, relieving counsel of the court appearance.

Kind regards,

David A. Oblon Judge, Circuit Court of Fairfax County 19th Judicial Circuit of Virginia

OPINION LETTER