California Construction Contracts, Subcontracts, Arbitration Agreements, & Mechanics Liens in California Law

Similarly, form and custom subcontracts also typically either incorporate the arbitration or dispute resolution provisions in the Prime Contract, or contain their own arbitration provisions, which may incorporate, be identical to, or which may differ somewhat from those in the Prime Contract.

It is State and Federal law that an arbitration award issued by arbitrators per an agreement providing for binding arbitration may be entered or confirmed as a Judgment between the parties to the arbitration agreement in Court, to the extent that they agreed that the disputes would be resolved in arbitration.

Thus the arbitration replaces a trial as to certain kinds of disputes.

But if a Contractor or Subcontractor has properly recorded Mechanics Liens on the Owner’s property for sums claimed to be owed to them, then what role - if any - does the arbitration proceeding and arbitrator’s award play in the enforcement of the Mechanics Lien? Or must there be a separate - and likely somewhat duplicative - trial in Court in order to obtain a judgment of foreclosure on the Mechanics Lien?

The answer to this question - at least in California and many other states - is still unclear.

What follows is an argument that the arbitrator’s award logically should determine the amount owed on the Mechanics Lien - at least in the case of Owner/General Contractor disputes - and that a trial would only be necessary to determine procedural issues such as whether the lien has been duly recorded, its priority and the like.

This is not yet currently the law in any State get, so far as we know.

The amount due under the lien is a factual issue under California Civil Code § 3123, as being either the reasonable value of the work, or the amount due on the Contract.

Section 3123 provides:

"(a) The liens provided for in this chapter shall be direct liens, and shall be for the reasonable value of the labor, services, equipment, or materials furnished or for the price agreed upon by the claimant and the person with whom he or she contracted, whichever is less. The lien shall not be limited in amount by the price stated in the contract as defined in Section 3088, n2 except as provided in Sections 3235 and 3236 n3 and in subdivision (c) of this section. (b) This section does not preclude the claimant from including in the lien any amount due for labor, services, equipment, or materials furnished based on a written modification of the contract or as a result of the rescission, abandonment, or breach of the contract. However, in the event of rescission, abandonment, or breach of contract, the amount of the lien may not exceed the reasonable value of the labor, services, equipment, and materials furnished by the claimant." (Emphasis added)

“Contract" means an agreement between an owner and any “original contractor” providing for the work of improvement or any part thereof. Civil Code § 3088.

The term "reasonable value" as used in Civil Code section 3123 means the proportion of the contract price reflecting the amount of progress made toward the completion of the work, less the amount already paid. University Casework Systems, Inc. v. Superior Court (1974) 41 Cal. App. 3d 263, 267.

“Extra work includes work not required by the contract, drawings or specifications, but work nonetheless performed by the contractor for which compensation is claimed. The written agreement describing the extra work and the agreed upon compensation is commonly referred to in the industry as a “change order.” Ernest W. Hahn, Inc. v. Nort-Cet Corp. (1973) 34 Cal. App. 3d 171, 172, 709. (change orders are provisions modifying original contract)

Atrial or similar evidentiary hearing thus would be necessary to resolve these issues in an orderly and fair manner consistent with the California Constitutional right to a lien and Procedural Due Process, whether the lien is for the net amount due on the contract or the reasonable value of the work performed by the Contractor (i.e. the proportion of the work completed), extra work, change orders, demobilization costs, and the like.

Many construction contracts and subcontracts contain an arbitration provision such as the following, which is from a version of AIA A201.:

“Any controversy or claim arising out of or related to this contract, or the breach thereof, shall be settled by arbitration . . . .” (Emphasis added)

A Mechanics Lien, at least in California Law, is thus obviously a claim or dispute which “arises out of or is related to [a] contract” between the parties, as Civil Code § 3123 makes evident.

Under California and Federal arbitration acts, where the agreement contains an arbitration clause, a presumption of arbitrability exists, and all “doubts should be resolved in favor of arbitration” of the issue. California Teamsters Public, Prof. etc. Union v. County of Solano (1991) 233 Cal.App.3d 800, 803-804 (Emphasis added); Service Employees Int’l Union v. City of Los Angeles (1994) 24 Cal.App.4th 136, 143.

And any ambiguity in the scope of the arbitration clause also must be resolved in favor of arbitration. Hayes Children Leasing v. NCR Corp. (1995) 37 Cal.App.4th 775, 788.

Speaking of the interaction between Arbitration and Mechanics Lien law, one eminent authority on the subject of construction law has written:

“How does an arbitration award fit into this picture? An arbitrator might theoretically issue an award calling for the foreclosure of a claim of a mechanics' lien in favor of X against 0. But the pendency of arbitration proceedings does not support the recording of a notice of lis pendens. Thus, the award of an arbitrator would not prevent a bona fide purchaser from acquiring title superior to the claim of a mechanics' lien. Provisional court proceedings, then, are needed to make an award foreclosing a claim of a mechanics' lien effective. Such being the case, parties usually do not seek, nor do arbitrators grant, awards foreclosing mechanics' liens. In common practice: the claimant records a claim of mechanics' lien; the claimant demands arbitration; the claimant files an action to foreclose the mechanics' lien; the claimant records a notice of lis pendens; the claimant petitions the court to stay litigation pending arbitration; the award determines the balance due, to the claimant; the claimant petitions the court to dissolve the stay of litigation; the claimant petitions the court to confirm the award; the claimant proceeds to trial against third parties who may claim an interest in the property; and a final judgment of foreclosure determines the priority of the claim of mechanics' lien against all parties who claim an interest in the title to the real estate.”

“It may well be asked whether arbitration has a place in mechanics' lien litigation, because the arbitration proceeding merely adds one more step to legal proceedings that already are protracted and complex. As is usual in such affairs, the answer depends on circumstances.”

“In some cases (though such cases are rare), the only parties who claim an interest in the real estate are the claimant and the respondent (contractor versus owner). . . . .”

“In practice, at least where the only two parties involved in a dispute are a contractor/mechanics’ lien claimant and a project owner, the courts have had little difficulty in coordinating the requirements of the arbitration system with the procedures required for foreclosure of a mechanics’ lien. In some cases, it is the arbitrators who have decided on the validity of a mechanics’ lien claim and their decision have been approved by the courts; in other cases, the arbitrators have determine only the amount due from the owner to the mechanics’ lien claimant and left it to the courts to determine the validity of the mechanics’ lien and the procedure for foreclosure.”(Emphasis added)

J. Acret, Construction Arbitration Handbook (2nd Ed. 2007) § 4.3, Mechanics Liens.

Acret then references a number of out-of-state cases where courts have following this procedure, including CVN Group, Inc, v. Delgado (Tex. 2002) 95 S.W.3d 234, where the arbitrator’s resolution of issues as to both the amount and the procedural validity of the lien was affirmed and allowed to be enforced by the court.

It noted that “not one reported case in the United States has ever held that the validity of a mechanic's lien cannot be arbitrated between the parties to the arbitration agreement.” Ibid at 240.

Thus, the logical role for arbitration in a case where, as here, the dispute is only between the owner and a prime contractor over the validity of and the amount due on the lien, and whether based on the history of work on the job (i.e. when “Completion” under Civil Code § 3086 occurred) the lien was timely, would be that arbitration award issued by the arbitrators on such subjects becomes a judgement in the action once it is confirmed by the Superior Court, and is res judicata or binding on those issues in any subsequent court proceedings between the parties to determine the procedural validity of the Mechanics Lien.

The Court then would enter a judgment on the award, and order foreclosure on the lien for the amount of the arbitration award. Code Civil Proc. §1287.4.

While Civil Code § 3044 requires that a legal action must be filed in Court to “perfect” the Mechanics no later than 90 calender days after the lien was recorded, or it becomes invalid, that does not mean that the Court itself must decide all issues related to the lien enforcement action.

The California Arbitration Act , in Code Civil Proc. §1281.5, in fact appears to anticipate that these issues would normally be resolved by the arbitrator.

“(a) Any person who proceeds to record and enforce a claim of lien by commencement of an action pursuant to Title 15 (commencing with Section 3082) of Part 4 of Division 3 of the Civil Code, does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following:

(1) Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action.
(2) At the same time that the complaint is filed, the claimant files an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.
(b) Within 30 days after service of the summons and complaint, the claimant shall file and serve a motion and notice of motion pursuant to Section 1281.4 to stay the action pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien. The failure of a claimant to comply with this subdivision is a waiver of the claimant's right to compel arbitration.”

Code Civ Proc § 1281.5

While addressing waiver of arbitration, this provision thus essentially assumes that every “issue, question or dispute . . . relevant to the action to enforce the claim of lien” will be submitted to arbitration, and all other legal proceedings concerning those issues will be stayed pending the award of the arbitrators.

Likewise, where the parties have chosen to arbitrate their claims in their contract or by a post-contract submission agreement, the court must order arbitration of those claims, and loses power to exclude from arbitration or to pass on the merits of those same claims.

“If the court determines that a written agreement to arbitrate a controversy exists, an order to arbitrate such controversy may not be refused on the ground that the petitioner’s contentions lack substantive merit.”

Code Civil Proc. §1281.2( c).

For example, in determining whether to order a dispute to be arbitrated, a court may not consider contentions by a party that a contractor’s work was substandard or over-priced, or look into the good faith of the party seeking arbitration, or the like. A.D. Hoppe Co. v. Fred Katz Constr. Co.(1967) 249 Cal.App.2d 154, 159 -161; 3 Calif. Law Rev. Comm. Reports G-6, G37-G38.

Nor does the California Arbitration Act allow a court determination of the validity or amount of a mechanics lien as among those “provisional remedies” which a court may order while an arbitration proceeding is pending. Code Civil Proc. §1281.8.

No other judicial act or relief is available, absent an agreement by or conduct by the parties to withdraw from arbitration that portion of the controversy for which relief is sought in court. Titan/Value Equities Group v. Superior Court (1994) 29 Cal.App.4th 485, 488, 35 Cal.Rptr.2d 4; Davenport v. Blue Cross of California (1997) 52 Cal.App. 4th 435, 454 - 455, 60 Cal.Rptr.2d 641(failure to pursue arbitration diligently),

Furthermore, absent express limitations in the arbitration contract or agreement, arbitrators may enter an award granting the same relief a court may grant. Baker v. Sadick (1984) 162 Cal.App.3d 618, 628

Thus, issues as to the amounts due on the contract and the determination of the reasonable value of the work performed (and, thus, to the amount due on the lien under Civil Code § 3123), and the procedural validity of the lien - which are all “relevant to the action to enforce the claim of lien” - must be submitted to and resolved by the arbitrator, and not by this court, whose proceedings are stayed

An arbitration award is conclusive on matters of fact and law. Trollope v. Jeffries (1976) 55 Cal. App. 3d 816, 823.

Thus, the arbitrator’s decision on those issues should bind the Court and the parties as to the amounts owed on the Contract, and thus on the Mechanics Lien.

In the case of a subcontractor’s mechanics lien, where the subcontractor, contractor and property owner, all have agreed to some form of a binding arbitration agreement with another contracting party the Courts in California can consolidate - or the parties can all agree to combine - all those disputes into a single large arbitration proceeding, where all those dispute could be heard at the same time and be resolved by the same arbitrator(s).

In such a proceeding, the arbitrator thus can determine the amounts due on all the liens if the disputes are all in heard in a single arbitration proceeding by agreement of the parties or per a Court order.

Once the arbitrator determines the amounts owed on the liens and their validity, the Court then could enter judgment on the liens and order foreclosure on the property, with the net proceeds (after deducting any prior loans or liens) to be split proportionately among the mechanics lien holders.

Or at least, that is how this author believes the process might work.

ABOUT THE AUTHOR: George W. Wolff, Esq.
Mr. Wolff is "AV" rated by his peers under Martindale-Hubbell's Independent Lawyer Rating system, which evaluates lawyers and law firms in the US and Canada by asking attorneys. The firm is also listed in the Directory of Pre-eminent Attorneys in San Francisco, California.

Born Aurora, Illinois; admitted to bar, 1973, Illinois; 1977, U.S. Supreme Court; 1978, California; 1982, New York, U.S. District Court, Northern District of California, U.S. Court of Appeals, Ninth Circuit; 1983, Trial Bar, U.s. District Court, Northern District of Illinois. Education: Purdue University (B.S., in Civil Engineering, 1964); Stanford University (M.S., in Civil Engineering and Construction Management, 1965); University of California at Berkeley (M.B.A., in Finance and Real Estate, 1970); Northwestern University, School of Law, Chicago (1972-1973); University of California, Hastings College of the Law, San Francisco (J.D., 1973);Institute on International and Comparative Law, Paris, France (1981).

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.