I love arbitration and arbitration clauses. In my attorney days, I’d recommend arbitration clauses for every contract and arbitration or mediation for nearly every situation. There is a lot of debate on this issue, but I personally believe that alternative dispute resolution is less expensive and more productive than litigation.

Nevertheless, from a mechanics lien perspective, there are some problems. Alternative dispute resolution requirements are sometimes at odds with mechanics lien statutes.

Why Arbitration Clauses Are At Odds With Mechanics Lien Laws: Multiple Parties Have Multiple ADR Obligations

The biggest thing you need to know about arbitration clauses and alternative dispute resolution is that it is a creature of contract. This means that in nearly every instance you will have the constitutional rights to adjudicate your dispute in a court of law, and you will only be required or allowed to seek an “alternative” dispute resolution process if you and the other party agree to waive that right and submit to the alternative.

Mechanic liens, on the other hand, are a creature of statute. Material suppliers, contractors, construction professionals and others acquire the right to file a lien because a state statute gives them that right under certain circumstances. In most instances, a lien claimant will file a mechanics lien and acquire rights against parties who they have not contracted with.

This creates an ADR mess.

Let’s consider the example of a construction project where no one has a duty to arbitrate. If a supplier to a subcontractor files a mechanics lien, the supplier will file suit against all parties in a court of law.  It will be supplier v. subcontractor, prime and owner.  The Subcontractor will sue the prime in that proceeding, the prime will sue the owner, and so on.

Now let’s consider what happens when arbitration clauses come into play.  Let’s say the owner and the prime do not have an arbitration clause, but the sub and the prime do.  Now, the supplier will sue the subcontractor in court, but the subcontractor must initiate an arbitration proceeding against the prime, and the prime and owner will be in court.  The subcontractor and prime contractor will have two proceedings (the arbitration and the court proceeding) instead of one, and the judgment in one may be inconsistent with the judgment in another.

Why Arbitration Clauses Are At Odds With Mechanics Lien Laws: Statutory Rights Reserved For Judges

Another potential  mess created by arbitration clauses in the mechanics lien context arises when a tribunal or court is asked to consider the merits of a lien claim. When a mechanics lien claim is exaggerated or contains procedural errors, most states provide the owner or prime contractor a right to petition the court to have the claim declared invalid. Since the rights involve property rights, the laws specifically provide the courts with this power.

But, what if there is an arbitration clause?  Who decides if the lien is valid – the court or the arbitrator?

Courts are conflicted about this issue nationwide, and sometimes even within single states. It’s a real wonky issue.  I like a recent article written by our friend in New York who operates the New York Mechanics Construction Payment Blog titled: Exaggerated Liens and Arbitration Clauses. Here is a quote from that article that goes a long way to summarizing the issue confronting NY courts on this topic:

But can the arbitration resolve the defense (and usually counterclaim) that the mechanic’s lien was willfully exaggerated? New York courts are very split on this issue and there is no definitive authority out there. Some arbitrators will go so far as to determine that there was a willful exaggeration but stop short of imposing the damages that result out of Lien Law Section 39 and 39-a (voiding of the entire lien and awarding to the aggrieved party the amount of the exaggeration). Other arbitrators will avoid the exaggeration issue all together.

In previous blog posts we’ve only scratched the surface on this topic. Read these posts at the dispute resolution tag.  Stay tuned for more.