Possible Ways to Avoid Binding Arbitration of Some Construction or Mechanics Lien Disputes in California

Many contracts today, particularly those with larger businesses, often require that disputes between parties to the contract be resolved by binding arbitration before a private arbitrator, rather than by a Judge or Jury in Court. (See related article).

Many parties include arbitration provisions in their contracts where the subjects of the disputes may be very technical in nature (e.g. construction, biotech, electronic technology), and could confound a jury

Very often and for a long time, construction industry contracts and subcontracts have contained arbitration provisions, as the issues in disputes are often technical, and therefore may not be suitable for a jury trial.

Other parties prefer arbitration to try to avoid large jury awards or the costs of litigation. Arbitrations are also usually private and closed to the public, unlike Court trials.

There can be advantages to binding arbitration in that the dispute often can finally be resolved somewhat sooner than in Court, as most pre-trial “discovery” procedures are limited, and the award is usually final and are usually non-appealable, even if there are evidentiary issues or legal errors in the award, unless your agreement or rules allow for some kind of appeal or Court review of the merits of the final award. (See related article).

Arbitration awards, however, can be sometimes overturned or modified by a Court if there was some procedural unfairness in the proceedings. Code Civil Proc. § 1286.2

Although it is often claimed that arbitration is cheaper than a court trial, because the sometimes costly pre-trial “discovery” procedures and appeal rights are more limited, the alleged cost advantages are often not as much as usually claimed.

If the amount in dispute is significant, the opposing sides will still need attorney to do what discovery, is available, file legal briefs, and examine witnesses etc.

And the possible “cost” or effect on the client of an erroneous - and likely unappealable - arbitration award should also be taken into account in deciding whether or not to submit to arbitration.

Although arbitration agreements or awards sometimes can be voided if the terms and procedures provided in the contract are procedurally or substantively “unconscionable” or unfair to one party (See, Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 117), an experienced attorney can avoid these faults when drafting the arbitration clause.

California law also creates a means or grounds to try to avoid being forced into arbitration under certain circumstances, as set forth in Code Civil Proc. § 1281.2, which provisions sometime come to play in construction or other disputes involving multiple parties.

One of the limited exceptions to the enforcement of contractual arbitration provisions is where "[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact." (Emphasis added). Code Civil Proc. § 1281.2(c).

“On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: . . .

(c) A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. . . . .”

Code Civ. Proc. § 1281.2. (Emphasis added).

“ Under section 1281.2(c), if a party to an arbitration agreement is also a party to related litigation with a third party that creates the risk of conflicting rulings on a common issue of law or fact, “the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.” (Ibid.) . . . California has taken the lead in fashioning a] legislative response to this problem, by giving courts authority to consolidate or stay arbitration proceedings … in order to minimize the potential for contradictory judgments.” (Volt, supra, 489 U.S. at p. 476, fn. 5.)” (Emphasis added).

Rodriguez v. American Technologies, Inc.(2006) 136 Cal. App. 4th 1110, 1117-1118

Thus, if there other parties to the same lawsuit or dispute that have not agreed to arbitrate with the other parties to the Court dispute, the Court may either delay or stay the order to arbitrate until the other disputes are resolved, deny arbitration completely, or order that only certain issues be arbitrated.

“If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies’.

““If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party as set forth under subdivision (c), the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.”(Emphasis added).

Code Civil Proc § 1281.2(c).

"This exception '[to the enforcement of arbitration agreements] "addresses the peculiar situation that arises when a controversy also affects claims by or against other parties not bound by the arbitration agreement."'" Laswell v. AG Seal Beach, LLC (2010) 189 Cal. App. 4th 1399, 1405, quoting Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 393.”

“The application of section 1281.2, subdivision (c), therefore turns on whether “there is a possibility of conflicting rulings on a common issue of law or fact” if respondents arbitrate their claims . . . and proceed with litigation as to nonarbitrable claims. ”(Emphasis added).

Metis Development LLC v. Bohacek (2011) 200 Cal.App.4th 679, 691.

““The exception thus does not apply when all defendants, including a nonsignatory to the arbitration agreement, have the right to enforce the arbitration provision against a signatory plaintiff."” ”

“California law does not require a court to stay judicial proceedings pending the completion of arbitration in all cases. Under section 1281.2(c), if a party to an arbitration agreement is also a party to related litigation with a third party that creates the risk of conflicting rulings on a common issue of law or fact, “the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.” (Ibid.)”(Emphasis added).

Rodriguez v. American Technologies, Inc. (2006) 136 Cal.App.4th 1110, 1117.

“ A party relying on section 1281.2(c) to oppose a motion to compel arbitration does not bear an evidentiary burden to establish a likelihood of success or make any other showing regarding the viability of the claims and issues that create the possibility of conflicting rulings. (Abaya, at pp. 1498–1499.) An evidentiary burden is unworkable under section 1281.2(c) because the question presented is whether a “ ‘possibility’ ” of conflicting rulings exists . . . and a motion to compel arbitration is typically brought before the parties have conducted discovery. Moreover, section 1281.2(c) prohibits a trial court from considering the merits of a party's claims when ruling on a motion to compel arbitration. (§ 1281.2(c); . . . .”

Acquire II, Ltd. v. Colton Real Estate Group (2013) 213 Cal.App.4th 959, 972.

Thus, for example, in a payment dispute between a general contractor and a subcontractor, where the subcontractor has also recorded a Mechanics Lien and filed a lien foreclosure lawsuit against the property owner, the general contractor’s motion to compel “arbitration” and stay all litigation with all parties could or should be denied because the Mechanics Lien claim against the property owner is not subject to arbitration, as there usually is no contract or arbitration agreement between the subcontractor and the project owner which includes an enforceable arbitration agreement between those two parties.

Mechanics Liens are mandated by the California Constitution, Article XIV, section 3.

A Mechanics' Lien is an involuntary encumbrance against the real property on which the claimant has furnished labor, services, equipment or material. Civil Code § 8400.

The Mechanics' Lien is frequently a subcontractor's sole remedy against an owner because a subcontractor generally has no privity of contract with the owner, and the lien may be imposed andenforced without a contractual relationship. See, Basic Modular Facilities, Inc. v. Ehsanipour (1999) 70 Cal.App.4th 1480, 1483-1484.

The amount owed on Mechanics Lien is defined by statute, in the alternative.

“(a) The lien is a direct lien for the lesser of the following amounts:
(1) The reasonable value of the work provided by the claimant. [OR]
(2) The price agreed to by the claimant and the person that contracted for the work.

(b) The lien is not limited in amount by the contract price for the work of improvement except as provided in Section 8600. . , .”(Emphasis added).

Civil Code § 8430.

Arbitration between a general contractor and subcontractor will not necessarily resolve the amount owned under the Mechanics Lien, as the standard for the amounts owed on a breach of subcontract claim, and the amounts owed on a mechanics lien under Section 8430 are different, and thus would not be decided in the arbitration between the contractor and subcontractor.

Property owners also would have a separate Due Process right to challenge the validity and amount of the Mechanics Lien against its property in Court, which it could not do in the arbitration if it is not a party to the arbitration agreement.

Therefore, there is a possibility of conflicting rulings between the arbitration proceedings on the subcontract and the Court trial on the mechanics lien amounts and foreclosure.

Further, arbitrators do not have the power to enforce Mechanics Liens against the owner’s property or order foreclosure on the lien and sale of the owner’s property to collect on the lien.

Only a Court can do that.

Thus, Mechanics Lien disputes between a contractor and subcontractor consequently often present circumstances where the Court should refuse to enforce arbitration agreements under Section 1281.2( c).