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The Intersection of Arbitration Clauses and Mechanics Liens

Usually, arbitration or other alternative dispute resolution methods are more efficient, productive and less expensive than traditional litigation.

Arbitration clauses can be used to leverage a strong position into (potentially unfair) legal results just as traditional lawsuits can, but on the whole, arbitration is a worthy process and well-suited for the resolution of many different disputes.

It’s no surprise, then, that arbitration clauses can be found throughout construction contracts. Staying out of court is generally a good thing, and arbitration clauses can help limit exposure, keep projects on track and streamline the resolution of disputes in the construction context. Nevertheless, there are some problems with arbitration from the perspective of mechanics liens. Alternative dispute resolution requirements are sometimes at odds with mechanics lien statutes.

Why Don’t Arbitration Clauses Play Nicely With Mechanics Liens?

Arbitration clauses (terms in contracts allowing or requiring alternative dispute resolution) are just that: contractual terms. This means that the parties must agree to the arbitration agreement as a matter of the contract between them. In nearly every situation, a party has the right and ability to adjudicate a dispute in a court of law. This is only allowed to be supplanted by alternative means of resolution through a different process if the parties have agreed to waive their rights to litigate and submit to an alternative.

On the other hand,mechanic liens are statutory, not contractual. Construction industry participants, from suppliers to General contractors, acquire the right and ability to file mechanics liens directly from a state’s statutory law. These rights are hard-wired into construction projects, with no need to specifically mention them in the contracts. In most instances, a party filing a mechanics lien pursuant to their statutorily given right will acquire rights against parties with whom they never contracted.

To shine a light on the difficulties presented by the interplay of mechanics liens and arbitration clauses, one can consider how differently things might play out in two different situations.

The first situation arises in a construction project where no one is required to arbitrate disputes. In this situation, if a supplier to a subcontractor files a mechanics lien, the supplier will file suit against all parties when attempting to enforce it. The eventual lawsuit will be supplier vs. subcontractor, general contractor and owner (at least). Accordingly, the subcontractor will then sue the general contractor in that proceeding, the general contractor will sue the owner, and so on up the chain.

It’s different when alternative dispute resolution clauses become involved. If, for instance, the owner and the general contractor do not have an arbitration clause, but the subcontractor and the general contractor do, that presents a wrinkle that can complicate the proceedings. After the supplier files the mechanics lien and moves to enforce it, the supplier will sue the subcontractor in court. The subcontractor may be required to initiate an arbitration proceeding against the general contractor, and the general contractor and owner will be in court along with the supplier and the subcontractor. This means that the subcontractor and prime contractor will be involved in two separate and distinct proceedings (the arbitration and the court proceeding) instead of one, with the risk of the judgment in one being inconsistent with the judgment in another.

Another sticky issue created by arbitration clauses in relation to mechanics liens arises when a tribunal or court is asked to consider the underlying merits of a lien claim. Most states allow an owner or general contractor to petition the court to have a lien declared invalid in the event the mechanics lien claim is exaggerated or contains procedural errors. Because mechanics liens necessarily involve property rights, the laws specifically provide the courts with the power to make the validity determinations.

However, it is unclear who can make the determination as to validity in situations in which an arbitration clause exists. Must a court still decide the issue or can an arbitrator decide? There is conflict on this point in the courts, even within a state. Further, in the event that a mechanics lien is filed, it will eventually need to be enforced or it eventually will be rendered invalid. Whether the “enforcement” is mandated to be a foreclosure action in court is not necessarily well-defined. In at least some states, the initiation of an arbitration proceeding may work to satisfy the deadline for “enforcement.” In Georgia, for example, the initiation of an arbitration proceeding will satisfy the requirement of the commencing of an action within the 365-day period (a lawsuit is not required).

The intersection of mechanics lien rights and arbitration clauses is messy, undefined and constantly subject to change. Unfortunately, that means there are no easy answers as to what will happen given any particular mechanics lien, arbitration agreement or set of circumstances surrounding a situation where those two things collide.

While mechanics liens and arbitration agreements can promote fairness and streamline dispute resolution, when they come together the process can be burdensome and confusing. It pays to spend a little time working through what may happen if a lien is filed on a project where arbitration clauses exist.

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