Mechanics liens make it much easier to recover delinquent construction payments. However, unlike some other recovery tools, damages and interest are rarely available. Rather, recovery via mechanics lien claim will typically be limited to what’s in the contract. After a recent decision, this is clearly true for Michigan mechanics liens.
What amounts can be included in a Michigan mechanics lien?
Michigan mechanics liens can’t exceed the contract price, minus what’s already been paid. The Michigan lien statute is very clear about that – section 570.1107(1) states “A construction lien acquired pursuant to this act shall not exceed the amount of the lien claimant’s contract less payments made on the contract.”
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Granted, that doesn’t mean change orders aren’t lienable. When properly executed, a change order actually becomes a part of the contract. Though, unofficial or poorly documented change orders might not always be subject to lien. We discuss that idea in detail here: Change Order Form — Free Template Download and Best Practices.
Michigan contractor awarded excessive mechanics lien in arbitration, court tosses it aside
A recent Michigan case shows that the state won’t budge when it comes to what can and cannot be included in a lien claim. Let’s start with some of the basics: TSP Services (“TSP”) agreed to perform asbestos abatement and steel demolition and removal for National-Standard, LLC (“National”). The contract for work was for right around $400,000. However, this hardly represented all of the compensation that TSP was going to receive. TSP was expecting to salvage and resell the steel it removed from the property, and apparently, that was contemplated by both parties beforehand. However, under the contract, TSP was only entitled to the $400k – the value of the steel salvage was not included.
Not long into the agreement, National hit a rough patch and had TSP cease its work – including the steel salvaging. Ultimately, this led to a full-blown dispute and TSP filed a Michigan mechanics lien for $141,083 (the amount it was owed from National). And, as required by the contract, the parties entered arbitration.
For more on arbitration and other ADR methods:
Arbitrator awarded damages, including interest and lost profits
Ultimately, that arbitrator found in favor of TSP. They found that National breached its contract with TSP, and as a result, TSP incurred the following recoverable damages:
- $141,083.00 for the unpaid invoice under the contract
- $46,557.39 for interest on that unpaid invoice
- $391,809.00 for lost profits on steel inventory
- $33,793.00 for interest on those lost profits; and
- $169,226.13 for attorney fees and costs
All in all, the arbitrator found that National owed TSP over $780,000. Very crucially, the arbitrator found that TSP could recover all of the above amounts via its mechanics lien. So, instead of a $141,000 lien claim, TSP would now be entitled to nearly $800,000 in liens. National disagreed with the decision and filed suit to challenge the arbitrator’s decision.
Court finds lost profits, interest, and attorney fees can’t be included in Michigan mechanics lien claims
The court found that the arbitrator overstepped a bit with their arbitration award. Importantly, the court found no issue with the calculations for TSP’s damages. Courts generally give deference to an arbitrator, and that was the case here. However, the court couldn’t agree with the arbitrator allowing all of the damages to be recoverable in that lien claim.
The court put it simply: “The arbitrator’s approval of the construction lien in excess of the unpaid amount was a clear error of law.” It’s true – 570.1107(1) clearly limits mechanics lien amounts to what’s in the contract. And, TPS was only owed just over $141,000 for the work it performed.
Usually, arbitrators’ decisions are given a lot of weight. Courts are extremely reluctant to undo an arbitrator’s decision – after all, if a court can just jump in and reverse their decision, then what’s the point of ever going to arbitration? However, in this situation, the error by the arbitrator resulted in a mechanics lien that was excessive by over half a million dollars. That kind of mistake can’t be overlooked.
Michigan follows the general rule: mechanics liens can’t include extraneous amounts
Finally, it’s worth mentioning that this is the general rule across the United States. While some other recovery options might lead to a higher recovery, mechanics liens are typically limited to amounts that are owed and unpaid for work performed, as set out by the contract. And, including things like interest, attorney fees, or lost profits will usually result in an overstated lien claim.