Exaggerated Liens and Arbitration Clauses

Many construction contracts contain clauses requiring any dispute to be submitted to binding arbitration, rather than litigation, to reach a resolution.  The New York Mechanic's Lien Blog has previously discussed the fact that the filing of a mechanic's lien does not violate the arbitration clause or waive the arbitration clause (see Lien Law Section 35).  Typically, the lienor will record its lien then proceed to arbitration to determine the merits of the claim.  In certain situations, it becomes necessary to foreclose on the mechanic's lien in order to preserve it (to avoid expiration) but that usually then results in an immediate stay of the litigation pending determination of the arbitration.

But can the arbitration resolve the defense (and usually counterclaim) that the mechanic's lien was willfully exaggerated?  New York courts are very split on this issue and there is no definitive authority out there.  Some arbitrators will go so far as to determine that there was a willful exaggeration but stop short of imposing the damages that result out of Lien Law Section 39 and 39-a (voiding of the entire lien and awarding to the aggrieved party the amount of the exaggeration).  Other arbitrators will avoid the exaggeration issue all together.

The reason that the exaggeration issue probably is not subject to arbitration is that Lien Law Sections 39 and 39-a are penal in nature.  New York law prohibits an arbitrator from enforcing a penal statutes because only a judge has that power.  An arbitrator has not authority, regardless of the scope of the arbitration agreement, to void an otherwise valid lien because there was a willful exaggeration of a portion of the lien.  An arbitrator of course cannot direct the County Clerk to take any action in regards to the lien.  On the other hand, a judge can, and often does, direct the County clerk to vacate a lien (or void it in the case of an exaggeration).

So although there is no definitive authority, it would appear that the arbitrator can determine the issue of the validity of the underlying debt, and whether the amount claimed was justified, but any punishment for the exaggeration itself, whether it is voiding the lien (Lien Law Section 39) or awarding damages in the amount of the exaggeration (Lien Law Section 39-a) must be reserved for a judge.  This could lead to the scenario where an arbitration has determined an amount due to the lienor but also determined that the lien was exaggerated.  This leaves the lienor in the unenviable position of still having to defend the exaggeration claim in court to avoid the exaggeration damages wiping out the portion of the lien that was upheld by the arbitrator.

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice concentrates on construction law.