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Lien and Bond Claim Rights Unaffected by ADR Contract Provisions

A construction contract without an alternative dispute resolution (ADR) clause are scarce these days. When payment gets held up on a project, therefore, the parties in a dispute frequently circle back to one of these ADR provisions and start to contemplate their options.

Normally, an unpaid party on a construction project can file a mechanics lien or bond claim. Is this option eliminated when the parties have agreed to alternative dispute resolution? Answering this question is complicated, but the answer is simple: mechanics lien and bond claims survive and thrive when contracts have ADR provisions.

ADR Clause and Lien Laws Are Different

At first blush, ADR clauses seem to be at odds with mechanics lien and bond claim laws. After all, if the parties are agreeing to resolve their disputes outside the legal system, isn’t filing a mechanics lien or bond claim leveraging the legal system and defying the spirit of the provision? In some jurisdictions, such as Maryland, the friction is more obvious, since a “mechanics lien” claim actually involves the filing of a complaint in court.

Further review of these two concepts, however, will expose important differences and nuances. First, the ADR clause is a creature of contract, and is only binding between the parties that actually sign the contract. Lien and bond claim laws, on the other hand, are quasi-contractual and arise directly out of state statutes. Unlike ADR and other contractual clauses, lien and bond claim laws can apply to multiple parties without explicit agreement.

For example, a subcontractor is hired by a general contractor and there is an ADR clause in the contract. If a payment dispute arises, the subcontractor can “sue” the general contractor, but only by asserting an ADR claim. If the subcontractor files a lien, however, the lien attaches to the property itself, which involves the lender and the owner – two parties who are not part of the contract and ADR clause.

The two concepts are completely independent of and distinct from one another and nothing can prevent the hypothetical subcontractor from pursuing his claim against the property itself.

Most states prohibit companies from waiving their lien rights or signing “no lien” clauses. Accordingly, if an ADR provision could be interpreted to disable a party’s lien rights, it would likely be void based on the state’s policy against lien waiver clauses.

What Happens When ADR and Lien Laws Cross Paths

First, the ADR clause is not invalidated by the mechanics lien or bond claim filing. As between the two parties who agreed to ADR, they must proceed with their dispute in ADR. This is true even after a mechanics lien or bond claim is filed.

Second, since mechanics liens and bond claims must be foreclosed on within a certain period of time and in accordance with strict legal guidelines, the filing party may actually have to file a foreclosure lawsuit within the allotted time. This requirement is addressed in one of two ways by the states:

  1. The state specifically allows for the foreclosure period to be “stayed” while ADR is pending, which further allows the parties to proceed with the ADR without a foreclosure filing, and only requires a foreclosure filing at the conclusion of the ADR proceeding; or
  2. The state does not provide a stay period, and therefore, a lawsuit must be filed before the foreclosure period has closed.

If a foreclosure lawsuit is filed on a claim while ADR is pending or before the ADR requirement is fulfilled, the parties can “stay” the case with the court until the ADR proceeding is concluded. It is critically important, however, that the suit be filed and the stay be acquired, even though it may feel like a formality.

In other words, the parties cannot agree or sign any contract to extend this period. The period is concrete, and set by law. It cannot, in almost every circumstance, be changed.

Since the mechanics lien and bond claim involves other parties, it is possible – and maybe a good idea – for lien claimants to proceed against the other parties (i.e. the property owner) without pursuing anything against the party with the ADR requirement.

Instead of filing the ADR proceeding against the customer, the filing party can simply go after the owner and the property through the lien, and let the owner bring a third party claim against the customer. In many cases, this is a legitimate back door out of an ADR clause.

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