Experience

Minnesota Court Of Appeals Rules
The Existence Of A Valid Mechanic's Lien
Is For The Arbitrator To Decide

By James Killian and Elizabeth Anderson

The Minnesota Court of Appeals recently ruled that a clause in a construction contract requiring the parties to arbitrate "any dispute" extends to claims involving the validity of mechanic's liens. In McMahon v. Schepers, 2002 WL 31013031 (Minn. Ct. App., September 10, 2002), a home builder contracted with an owner to remodel a home. Conflicting documents were executed during contract formation. Both contained arbitration clauses, though the terms of each differed. Disputes arose, culminating in the contractor's mechanic's lien foreclosure action. The owner moved to compel arbitration. The district court construed the arbitration agreement to extend to the validity of the mechanic's lien, and referred the resolution of that issue to the arbitrator. Subsequent to this, the parties agreed that the arbitrator had the authority to address "any disagreement" arising out of their contract "or from the breach thereof." The only issues excepted were attorneys' fees and priority of liens. The arbitrator ruled that the mechanic's lien was invalid for failure to provide pre-lien notice, and also awarded the contractor a sum that he determined constituted the value of the work performed. The owner moved the district court to confirm the award and award the owner his attorneys' fees as the prevailing party in the lien action. The district court did just that, and the contractor appealed.

On appeal the contractor argued that the issue relating to the enforceability of the mechanic's lien was not an arbitrable issue. The court disagreed, reasoning that the parties expressly submitted "any disagreements," including those relating to the validity of a mechanic's lien to arbitration. The court of appeals implicitly upheld the district court's decision that the legal existence of a valid mechanic's lien under Minnesota law is an arbitrable issue.

Contractors often face this question. Typically, their lawyers file a demand for arbitration of the payment claim and independently file a mechanic's foreclosure action (in fact the act seems required by the foreclosure procedure called for in our lien laws). This dual filing requires the litigants to split their proof between proving entitlement to the lien and damages, and proof of the amount of fees or foreclosure remedies. Here, the court ruled that the arbitrator had the power to determine the validity of the contractor's lien. The court relied heavily on the behavior of the parties, reasoning that they had "waived" any opportunity to enforce their lien rights in the district court by presenting evidence on the issue to the arbitrator. Whether the court would have ruled differently had the issue of waiver been less strong is unclear. Suffice it to say, a safer method to test the authority of the arbitrator to resolve lien claims is to take an appeal from the Order compelling arbitration before trying the issue in the other forum.

The risk of compromising lien rights can also be minimized by crafting front end documents that expressly detail the process by which a contractor's lien rights are to be protected and enforced. The Maslon Firm's Construction Law Group helps contractors manage these risks every day. For assistance in evaluating whether your construction agreements are properly crafted to protect your legal rights, contact James Killian or Elizabeth Anderson.

James Killian is a partner in the Maslon construction law group, representing owners, contractors, and design professionals in all forms of construction disputes. He also advises owners and contractors in the negotiation and drafting of construction contracts for all forms of project delivery systems, and has significant experience in general commercial litigation ranging from products liability defense to employment litigation.

Elizabeth Anderson is an associate member of Maslon's commercial litigation team, focusing primarily in the areas of construction, business disputes and real estate litigation. Beth received her bachelor's degree in accounting from the University of Minnesota's Carlson School of Management in 1997. She received her juris doctor degree from the University of Minnesota Law School in 2001.