Tension Between Arbitration and Mechanic's Lien Rights

There has always been a tension between the right to arbitrate disputes and the right to place a mechanic’s lien on the project owner’s property. Arbitration is a creature of contract. The parties to a construction contract have mutually agreed to resolve their disputes through binding arbitration. As with any contractual right, however, the right to arbitrate can be waived through conduct inconsistent with the assertion of that right.

Mechanic’s lien rights are created by statute. The remedy is inherently judicial. A mechanic’s lien can be foreclosed only through a suit in a court of law. This creates a conflict with arbitration. The argument can be made that the filing of a mechanic’s lien is inconsistent with, and a waiver of, the right to resolve disputes through arbitration.

A Florida court recently grappled with this issue. The court concluded that a contractor could simultaneously perfect and maintain its mechanic’s lien rights while arbitrating its payment claim. The underlying dispute, the amount owed the contractor, was to be resolved through arbitration. The mechanic’s lien served to secure payment of any eventual arbitration award.

This Florida ruling reflects what has emerged as the prevailing approach nationwide. The Advisor invites your comments on best practices when it comes to the interplay between arbitration and mechanic’s liens. Should contractors be allowed to simultaneously pursue these two remedies? How is arbitration conducted if the contractor is concurrently perfecting and asserting its lien rights?

Featured in next week's Construction Claims Advisor:

• Convenience Termination Can’t Be Used to Get Better Deal

• Wyoming Supreme Court Distinguishes Materialman from Contractor

• Contract Modifications Had Differing Waiver Effects

Bruce Jervis, Editor
Construction Claims Advisor

Comments

[TG Trachsel]

Interesting information, thank you. In all contracts AIA form or otherwise, that I execute on behalf of clients, my firm or in an advisory role to others... I always stipulate that in any arbitration issue...all parties MAY be consolidated and Joined into the arbitration issue.. Past AIA forms prevented consolidation and Joinder of the Architect in issues. This quite often would prevent an Owner from presenting his case to an Arbitrator with BOTH the Contractor and Architect at the table. Instead the owner would be required to present an arbitration case twice - once with the GC and once with the Architect. A result could be a finding against the owner in BOTH hearings, with different arbitrators.
Not a solution for an owner caught in the middle..
In my example above switch the parties around... the same unsatisfactory ruling could result for any of the 3 parties.

Consolidation and Joinder OPTIONS are important to amicably resolve disputes.
T2

[Samar Mukhopadhyay]

Due to the statutory nature of Lien, it can not be waived. So, the choice is whether to include Arbitration clause in the contract or not. Possible "alternate" solutions can be to include clauses such as:
1. Once Lien is filed, Arbritration right for the entire contract is terminated.
2. Arbitration is a must before filing any Lien.
3. A binding Arbitration clause will not preclude filing of Lien but will weeken Lien proceedings.
4. Have parties sign Waiver of Lien before going to Arbitration.

[Joseph M.]

The Florida court adopts the practice used here in California. In California the protocol is for the contractor to record the lien, file an action on the lien, and filing an petition for Arbitration. At the time of filing, the contractor then seeks a stay of the ML case until completion of the Arbitration.
That can be difficult for the Owner who is unable to make a bond, as the lien continues to have effect on title until the Arbitration and its enforcement by the court is completed.

[Eden Milroy, Pilot Development Partners, Inc.]

Under Massachusetts law, lien rights are very strong, and contractors cannot be forced to waive them as a condition to executing a contract. However, we and others in our area have interpreted lien rights, as a protection for payment, not as a means of resolving disagreement.

[Scott Wolfe]

Very good article - I practice construction law in Washington, Oregon and Louisiana, and in all three of these states a claimant is able to file a lien even when required to arbitrate. This is the case for most states.

The way the law sees it is that the lien is not a lawsuit (and it is not). As such, the filing of a lien does not compromise the agreement to arbitrate. As you hint at in your post.

After filing a lien, the parties can then arbitrate the enforcement of that lien.

It's important for potential claimants to realize that an arbitration clause will not postpone the lien period. The lien period will expire if they wait too long.

[Scott Wolfe]

By the way, a decision was just handed down by the California Court of Appeals on this issue just yesterday (June 10, 2010). See it here:

http://www.leagle.com/unsecure/page.htm?shortname=incaco20100610029

[Bill Geils]

I reside in CT; can mechanic’s liens expire?

[Melissabrumback]

Sounds like North Carolina follows the national trend here-- lien perfected and motion to stay filed while arbitration proceeds.

Melissa Brumback
www.constructionlawNC.com

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