Case Law Update: Liens and Arbitration Clauses

In a recent case decided on September 11, 2013 by the Appellate Division, Second Department, the Court once again affirmed subcontractor’s rights to file a mechanic’s lien even where there is an arbitration clause in the contract.

American Architectural, Inc. v. Marino, et al, 2013 NY Slip Op 5785, arises out of a construction subcontract.  The subcontract contained a detailed dispute resolution procedure which set forth various conditions precedent, the failure of which to comply with, resulted in a waiver of any claims for payment by the subcontractor.  The dispute resolution procedure also provided that the contractor was the “sole arbiter” of any claim arising out of the subcontract, regardless of what it was for.

The subcontractor filed a mechanic’s lien against the real property for more than $1million.  Afterward, the subcontractor commenced this action seeking payment on the payment bond (issued by Liberty Mutual), damages for breach of contract, and foreclosing on its mechanic’s lien.

The defendants/appellants moved to dismiss the complaint based on the subcontractor’s failure to comply with the conditions precedent contained in the dispute resolution procedure.

The Supreme Court determined that the dispute resolution procedure enumerated in the subcontract was void for illegality as it prevented the subcontractor from being able to file a lien pursuant to the Lien Law and/or the State Finance Law.

Specifically, the Supreme Court determined that the dispute resolution procedure created a conflict between the contractor’s “duty to trust beneficiaries and its own self interest and is unenforceable as an impediment to plaintiff’s right to bring an action under Article 3A of the Lien Law.”

Additionally, the court pointed to Lien Law §34 which in relevant part provides, “[n]otwithstanding the provision of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable. In addition, a condition precedent imposing requirements more stringent than those imposed by State Finance Law §137(3) is void as against public policy.

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