Many construction contracts now contain arbitration clauses. Arbitration can be an effective dispute resolution process, but how the clauses operate in practice can raise challenges. This is especially true when intertwined with mediation requirements and mechanic liens under state law. The scenario below illustrates how the seeming conflicts could be resolved.
Assume a contractor under an AIA A101-2007 general contract filed a mechanic lien. That contract form incorporates the AIA General Conditions document A201-2007 with its dispute resolution terms. Now, the contractor’s lien foreclosure deadline arrives. The contractor starts its foreclosure action in the state court as the law requires. Minn. Stat 514.10. But what about the mediation and arbitration provisions of the AIA contract? Doesn’t Section 15.3.1 of the A201 General Conditions say that mediation is a “condition precedent to binding dispute resolution?”
There is a simple procedural answer defined by common practice. The parties agree to a basic level of cooperation and stipulate to a court order to stay-not dismiss- the foreclosure pending the mediation and possible arbitration. The district court retains jurisdiction to hear remaining legal issues if the arbitrator issues an award for the contractor. See eg Bruner & O’Connor on Construction Law; Arbitration Section 21:169.
Since the lien needed to be foreclosed, however, it is also possible that the parties are at odds and simply cannot agree to the stay. The owner wants to have the foreclosure dismissed instead. A dismissal after the one-year lien deadline passes would destroy the lien claim and significantly disarm the contractor in their dispute. Minnesota does not have a clear precedent on point, so now what?
We can identify two significant questions. Is arbitration an appropriate process in the foreclosure of a mechanic lien in the first place? The answer seems to be yes according to the Bruner & O’Connor treatise with legal issues and final order for sale reserved to the court.
If the parties have made mediation a condition precedent to that arbitration what does that mean for the contractor’s lien foreclosure/arbitration?
The Minnesota Supreme Court arguably “got it right” in the case of Hilltop Construction Inc v Lou Park Apartments 324 N.W.2d 236 (Minn. 1982) albeit in a roundabout way. The end result was a Supreme Court stay of the district court action-and not a dismissal. But the Hilltop case does not appear to involve the condition precedent language of the A201. Some additional authority would be helpful.
First of all, the terms of the A201 General Conditions do recognize that mechanic lien claims may present a special case among Claims. Section 15.2.8 of the A201 General Conditions provides that if a claim relates to or is the subject of a mechanic lien, the party asserting such Claim may proceed in accordance with applicable law to comply with the lien notice of filing deadlines. Arguably those “deadlines” would include the deadline to foreclose. General Conditions Section 15.3.2 under Mediation also recognizes the concept of a stay to facilitate the mediation.
We might look also to Section 3 of the Federal Arbitration Act for some additional guidance. Section 3 provides that “if any suit or proceeding be brought in any courts of the United States upon any issue referable to arbitration . . . the court . . . shall on application. . . stay the trial of the action until such arbitration has been had.” 9 USC 3. The Federal Arbitration Act applies to matters involving interstate commerce so it can apply to our scenario. For virtually all commercial construction the materials, and often the contractors, come from anywhere in the country via interstate commerce. This can even be true for residential construction. Case law supports the application of the Federal Arbitration Act in state courts and the Act supersedes inconsistent state law.
The enforcement of the contract’s mediation condition precedent seems to conflict with the state law requirements for foreclosing a lien within strict deadlines, so at least one court has found a more direct workaround which honors all three requirements of mediation before arbitration; arbitration of all arbitral issues, and completion of the lien foreclosure through the state courts. In Brasfield & Gorrie, LLC v Soho Partners, LLC 35 So 3d 601 (Ala 2009) a stay order in the state court action in favor of the arbitration process provided the opportunity to mediate leaving the question of the lien claimant’s compliance with the mediation condition precedent to the arbitrator and the technical validity of the lien to the courts. This too would seem to “get it right.” Such a result squares with the Minnesota Supreme Court result in Hilltop, and it provides a possible model for future mechanic lien mediation and arbitrations.