Mechanics liens are powerful legal tools that are meant to help contractors, subcontractors, and other construction parties get paid. Without the ability to file a mechanics lien claim, many construction parties would be left with a more difficult path to receive payment for their services, furnishing of materials, and hard work. Mechanics liens fill an actual and important need in the construction industry, but just like most situations in construction, there is another to that coin. Mechanics liens, just like any other power, can be abused.
One of the ways in which a mechanics lien can be abused is by claiming a lien for a (known) excessive amount, or claiming a (known) invalid lien merely to cloud the title to property. Some states have looked to stop the filing of unauthorized or excessive lien claims, by imposing penalties in the form of awards of costs and/or attorneys fees. Other states have also set up a process by which arbitration proceedings can take place rather than taking a claim to court. Back in January of 2014, an article by Scott Wolfe here on The Construction Payment Blog noted the potential of “Stiff Penalties and Required Arbitration” contained within a Utah mechanics lien bill, and discussed some issues associated with the same. That bill, House Bill 56, didn’t pass, but Utah Governor Gary Herbert recently signed a similar bill, House Bill 46, modifying the Utah mechanics lien law.
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If At First You Don’t Succeed, Tone It Down A Little
Last year, Rep. Mike K. McKell sought to pass House Bill 56, which had the same goal of preventing “execessive and unauthorized claims of preconstruction and construction liens.” Although sounding like a fair and just reason to amend the Utah Code, this previous bill attempted to impose stiff penalties and mandatory arbitration. Some argued that H.B. 56 would have intimidated and deterred construction parties from exercising their mechanics lien rights. An in depth analysis of H.B. 56 can be found by clicking here. Although the new bill introduced and signed into law this year is different from the past bill in writing, the outcome and intentions may be similar.
This year’s bill toned down the language, and appeared to attempt to smooth out the edges. At first glance, it appears that mandatory arbitration and the statutory definition of a “wrongful lien” have been taken out, but what have they been replaced with? The bill highlights two main reasons for amendment:
- To create procedures to initiate, conduct, and appeal an arbitration proceeding to resolve a claim for an excessive notice of preconstruction lien or an excessive notice of construction lien; and
- To establish an expedited procedure to nullify a preconstruction lien or a construction lien that is invalid because the lien claimant did not file a notice of preconstruction service or a preliminary service
These highlights seem like worthy causes, but are they really necessary?
Possible Effects/Fallout of Arbitration
Arbitrating under Section 38-1a-308 of the Utah Code will simply add on to litigation rather than avoid it. By creating a procedure for arbitration that both parties must “agree” to, it appears that this amendment attempts to be fair in the arbitration requirements, but if the history of construction contracts has taught anything, it’s that the reality may be to the contrary. Parties with more leverage (the top-of-the-chain) may just write arbitration agreement provisions into their contracts, in essence mandating “agreement”. If the top-of-the-chain supports and includes these arbitration clauses in all of their contracts, lower parties have no choice but to agree. This arbitration clause is not universal in application, however,as it is limited to residential projects of $50,000 or less.
A real question, though, is whether or not this contemplated arbitration proceeding is worth it. The reason is simple: the arbitration proceeding will strictly be about the “unauthorized or excessive” nature of the lien. That means the rest of the nuanced facts concerning the construction dispute and non-payment will most likely be simultaneously litigated in court. To put it in simpler terms: instead of preventing litigation, this amendment may just add another proceeding on top of litigation.
Beating a Dead Horse
As discussed by Scott previously in relation to House Bill 56, an amendment to Utah Code §38-1a-308 may be unnecessary. The provision already allows for “criminal and civil” penalties. The applicability of the provision is also “rare” since the provision requires intent. This element, along with the multitude of facts involved in a construction dispute, renders the applicability low, especially when considering the fact that protection for excessive liens was already built into the law. .
Expedited Procedure for “Wrongful Liens”
One aspect of the amendment that may actually have some benefit in streamlining the lien process, is the new expedited procedure to dismiss liens that are not timely or properly filed. This procedure is now found in Utah Code §38-1a-805 and outlines a petition process that, if done properly, triggers an expedited hearing specifically to determine the validity of a lien. Any petition for damages cannot receive an expedited process. The effects of this are obvious and benefit all parties. If a mechanics lien is not filed timely or properly, it will be thrown out eventually anyways. This speeds up the process, and in the case of not properly filed liens, it may allow for parties to refile properly without going over the statute of limitations. The expedited procedure also will help parties save money in litigation and other costs. The advice for this is simple: make sure your liens are filed properly and timely and you follow the Utah requirements.
House Bill 46 Highlighted Points
- Arbitration proceeding must be agreed upon by both parties.
- The arbitration proceeding outlined in the bill is only for residential projects for $50,000 or less.
- Arbitrating limited to determination of whether the lien is “unauthorized or excessive”.
- The Amendment of Utah Code §38-1a-308 is likely more trouble than it’s worth given the protections already available, and the limited applicability.
- The expedited procedure for “wrongful liens” added in §38-1a-805 is potentially beneficial for all parties.