Thursday, October 25, 2012

Liens, bonds and arbitration clauses - oh my!

Mechanic's liens and arbitration clauses are two very common concepts in construction law.  Unfortunately, they are also two very often confusing topics that can lead to mistakes and headaches for the unprepared.  Throw in a mechanic's lien discharge bond and you have yourself a recipe for construction law disaster.  A lienor in Kings County may not have hit disaster yet, but it certainly is dealing with a massive headache and a cruel trick days before Halloween.

In PGA Mechanical Contractors v. GPNZ Realty Co. LLC the Court was faced with a request to discharge and vacate a mechanic's lien and a Lien Law Section 19 surety bond that was obtained to secure the lien.  A brief recitation of the facts indicated that the lien was filed and a foreclosure action was then timely commenced.  After the commencement of the action, but before a final judgment, the parties agreed to discontinue the mechanic's lien foreclosure action and, instead, pursue the claim in arbitration.  The mechanic's lien discharge bond was obtained after the action was commenced and before the action was discontinued in favor of arbitration.  In its decision, the Court points out that the stipulation of discontinuance is silent on the issue of whether the discharge bond must be maintained during the pendency of the action.

Much to the lienor's dismay, the Court granted the defendant's motion to discharge and cancel the surety bond and in doing so noted that a surety bond given to discharge a mechanic's lien is only obligated to satisfy a judicially established lien.  Because the action to foreclose on the mechanic's lien was discontinued, the lien could no longer be judicially established and the bond was therefore no longer necessary and could not be liable for payment of any arbitration award.

There are a few things that lienors and their attorneys can learn from this action.  First, if you have  mechanic's lien in place and you have an arbitration clause in your contract be very careful how you plot your strategy to proceed.  You want to maximize your security by keeping the lien in place for as long as possible.  Typically this situation is handled by foreclosing on the lien (if necessary) and then immediately moving to stay the action to proceed to arbitration.  There is a careful balance between protecting and preserving the lien and waiving your right to arbitrate.  Second, be very careful about the language of documents that you submit to the Court.  In this case, the lienor insisted that keeping the surety bond in place was a key component of the agreement to discontinue and arbitrate.  But the Court points out in its decision that the actual document does not say that - anywhere.  If you want a document to say something, make sure it says it!

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC.  Kushnick Pallaci is a law firm that concentrates on construction law and has offices in Long Island and Buffalo.

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