Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

The idea behind Section 34: owners and others can clear mechanics liens off of their property in a short amount of time.  The owner can tell the mechanics lien claimant: you've got 30 days to fish or cut bait.  At the same time, it gives mechanics lien claimants time to gear-up, get to the courthouse, and sue to foreclose their mechanics liens. 

The owner in this case decided to use Section 34, probably hoping that the contractor wouldn't pick up the gauntlet within 30 days.  But the contractor did pick up the gauntlet, went to the McHenry County courthouse, and filed a complaint to foreclose their mechanics lien.  By the way, the old McHenry County courthouse, made famous as the backdrop for Bill Murray in the movie Groundhog Day, sits on the main square in Woodstock, Illinois.

The owner responded by asking the judge to divert the case to arbitration as provided in the contract.  The contractor opposed arbitration, arguing to the judge that by serving a Section 34 demand, the owner backed the contractor into a corner and compelled them to sue.  By doing so, the owner waived whatever right they might have had to arbitrate their disputes instead of taking them to court.

Hearing the case, Judge Michael T. Caldwell agreed with the contractor and denied the owner's request to send the dispute to arbitration.  The owner appealed.

Decision on Appeal

On appeal, the owner offered six arguments for why their demand on the contractor to sue to foreclosure or lose their lien shouldn't be considered a waiver of the owner's right to require arbitration.  The judges hearing the appeal agreed with none of the six.  Instead, they said something like this:

The key issue is whether the owner, by filing their demand, acted in a manner inconsistent with their right to seek arbitration. We hold that they did. Following such a demand, a mechanics lien claimant must sue to foreclose within 30 days or lose their lien.  Nothing compelled the owner to make this demand.  They could have simply sought arbitration. The demand was not responsive to any action that the contractor took.  Judge Caldwell properly determined that owner, by making their Section 34 demand, waived their right to compel arbitration and we affirm his decision.

By imposing a Hobson's choice on the contractor - take this to court or lose your lien forever - the owner should have expected their disputes would wind up in court.   And that's enough to waive the owner's right to insist on arbitrating those disputes.

How Does This Affect You?

• Owners: If you're an owner beware!  That goes for anyone else with an interest in a piece of property encumbered by a mechanics lien too.  At least in the counties within the Second Appellate District, serving a Section 34 demand is considered your waiver of a mandatory arbitration provision that may be in your contract.  You might consider a Section 34 demand to clear up title to your property before selling or refinancing.   But you should talk with a lawyer first.  A Section 34 demand is something a lawyer should be preparing for you anyway.  Before they start is the time to have that talk.  After this case, you need to add to the agenda for your talk:
  • Whether your contract requires arbitration
  • The pros and cons of arbitrating
  • Whether a Section 34 demand will waive your right to arbitrate

• Mechanics Lien Holders:
  • If you get a Section 34 demand, recognize that you're now under a strict deadline.  That deadline is short.  You must rapidly decide to sue to foreclose your mechanics lien or lose that lien.  Don't wait!  The consequences of delay for you are catastrophic.  Get a copy of the Section 34 demand to a lawyer and talk to them about what you should do
  • If you sue and your contract includes a mandatory arbitration provision, you may be able to derail the Section 34 demand sender's later attempt to force your dispute into arbitration.  But that may, or may not, be the best move for you.  There's advantages and disadvantages to arbitrating your dispute.  Each case is unique depending on what your contract says, what's at stake, who's involved (now and possibly later too), where you and the project are located, and a lot of other factors.  Whether you have the right to derail arbitration, and whether it's the right thing to do, is another thing to talk with a lawyer about 
• Everyone: Regardless of which side you're on, you really need to think about how a Section 34 demand could affect not just the immediate relationship, but others too.  There's hardly a construction dispute that involves only two sides.  They may start out with only two, but others (e.g., subcontractors, architects) usually get drawn in too.
  The others often also have mandatory arbitration provisions in their contracts as well.  Frequently the arbitration provisions in each affected contract will allow consolidation of the multiple, bilateral, arbitration proceedings into one, multilateral, arbitration proceeding.  They often permit joining new parties to an ongoing arbitration too.  Section 15.4.4 (PDF ) of the American Institute of Architects A201 General Conditions (2007) is a prime example.
  Ideally, consolidating arbitration proceedings and joining each affected party gets everyone involved in the same room with the same people deciding disputes among them.  Usually that's better than hearing and deciding their disputes in different places.  Different decisions in different places can lead to contradictory and unfair results.
  A Section 34 demand, or derailing arbitration in its wake, could ensure that similar and interrelated disputes get heard and decided in different places.  They can take what had been a dispute otherwise headed to arbitration and send it to court instead.  Meanwhile the other disputes still go to arbitration somewhere else.
  So before you send a Section 34 demand, or decide to resist arbitration after suing in response to one, consider and talk with a lawyer about:
  • Who else could get involved?
  • Who else may you have claims against?
  • Who else may have claims against you?
  • Do you want these claims decided separately, or together?