When a contractor goes unpaid on a construction project, they have a few remedies available to them. These include claims under the state mechanics lien laws, breach of contract claims, and other claims such as quantum meruit and unjust enrichment. One way to settle these types of claims is to submit to arbitration, but how will claims in arbitration affect your lien rights? A recent Pennsylvania court declared that a lien foreclosure action will not be precluded by arbitration of breach of contract claims.
What is collateral estoppel?
There is a legal doctrine known as “collateral estoppel,” which is similar to the concept of double jeopardy. Black’s Law Dictionary defines it as “an estoppel by judgment where an issue that has been decided cannot be taken to another court by the same litigants in the same manner.”
Essentially, this prevents litigation of a certain set of facts and laws that have already resulted in a valid, final judgment.
The term “final judgment” includes both court judgments (minus appeals) and arbitration awards. This is a pretty straightforward rule that most are familiar with. But there are some nuances — one of which was the topic of a Pennsylvania Superior Court decision which tackled the issue of whether a mechanics lien foreclosure lawsuit was precluded (collaterally estopped) by an arbitration award for a breach of contract claim.
Dive deeper: Arbitration Clauses Can Create a Mechanics Lien Mess
Arbitration doesn’t necessarily mean “no more lien rights”
The case in question: Brackenridge Construction Company v. Lakeville DPP, LLC.
- Owner: Dollar Texas Properties, XV, LLC c/o GBT Realty (GBT)
- Assignee of Owner: Lakeville DPP, LLC (Lakeville)
- General contractor: Brackenridge Construction Co., Inc. (Brackenridge)
- Attorney(s) of record:
Brackenridge was hired by Lakeville for the construction of two Dollar General Stores. The contract between the parties included the following provision:
“If the matter is unresolved after submission of the matter to a mitigation procedure or to mediation, the Parties shall submit the matter to the binding resolution procedures selected below.“
The provision went on to selecting the Construction Industry Arbitration Rules of the American Arbitration Association. The contract also stated that “[n]othing in this article shall limit any rights or remedies not expressly waiver by the Contractor that the Contractor may have under lien laws.”
Breach of contract claim submitted to arbitration
Upon completion of the projects, Brackenridge claimed that they were still over $170,000 worth of labor. This resulted in two PA mechanics liens being filed by Brackenridge against each property. Also, according to the terms of the contract, the parties submitted the unpaid labor claims to arbitration. The arbitration resulted in an award in favor of Brackenridge totaling, after a $70,000 offset, $109,188.21 (plus interest).
Neither party was happy with the results. Brackenridge sought to decrease the $70,000 offset, while GBT wanted the award to include language that stated the award also settled any derivative lien claims arising from the contract. The arbitrator denied both.
Lien enforcement actions initiated
GBT refused to pay the arbitration award until Brackenridge released the lien filings. In response, Brackenridge filed enforcement actions in both counties.
Lakeville filed objections asserting that the underlying basis for the lien (unpaid labor) claims was already litigated and decided in arbitration.
The trial court agreed with GBT and dismissed Brackenridge’s complaints. Brackenridge appealed.
The main issue on appeal was whether collateral estoppel precluded the contractor from enforcing a mechanics lien claim after there was an arbitration award involving claims between the parties.
Brackenridge argued two main points: First, that the contract expressly provided that nothing in the dispute resolution provisions limited its right to file a mechanics lien claim. The second argument was that a mechanics lien claim differs from the unpaid labor claim because liens attach to property (in rem) and the unpaid labor claims attach to a party/person (in personam).
The unpaid labor arbitration didn’t preclude lien enforcement
The court agreed with Brackenridge:
“[A]n arbitration award does not preclude a mechanics’ lien enforcement proceeding because they protect different, though overlapping, interests, Mechanics’ liens are designed to protect persons who improve a piece of property by giving them a lien against that property for payment for material and labor independent of contractual remedies… However, because the type of damages are limited to materials and labor, a mechanics lien is not the basis for recovery of unliquidated damages for breach of contract because it is not intended to settle contractual obligations of the parties… As a result, in a mechanics’ lien proceeding, the owner may not raise a true counterclaim but only the right to setoff that is limited to the amount of the lien itself.”
Accordingly, Brackenridge was allowed to maintain the mechanics lien proceeding even though there was an existing arbitration award.
Contract claims and mechanics liens are separate remedies
Mechanics liens are a different beast altogether. Liens aren’t meant to settle contract disputes — they’re a “concurrent and cumulative” remedy. The court even pointed to 49 PS §1702 of Pennsylvania’s lien laws which provides that “nothing in this act shall alter or affect the rights of a claimant to proceed in any other manner for the collection of his debt.”
Although the actions have some overlap, they aren’t the same. As the Brackenridge case pointed out, these claims (and subsequent judgments) are different in nature as one attaches to a party and the other to the property itself.
Obviously, if Brackenridge is successful in their lien foreclosure, GBT can have the judgment offset by the arbitration award. However, this case highlights the fact that just because a dispute is submitted to arbitration doesn’t necessarily mean that mechanics lien claims are no longer available.