Public Policy Bars Enforcement of Arbitration Provision Relating to Amount of Mechanics Lien

On February 1, 2021, Justice Ostrager of the New York County Commercial Division issued a decision in Flowcon, Inc. v. Andiva LLC, 2021 NY Slip Op. 30294(U), refusing to enforce an arbitration provision regarding the amount of a mechanics lien, explaining:

[T]he issues before the Court are (1) whether the Court or an arbitrator must determine the amount of the Lien and (2) which, if any, of Andiva’s counterclaims must be heard by the Court and which, if any, may only be heard by an arbitrator pursuant to the parties’ Agreement.

Although plaintiff commenced this action, which was necessary to extend the Lien, it is plaintiff’s position that an arbitrator must determine the amount of the Lien and must hear all of Andiva’s counterclaims and the third-party Complaint. Plaintiff relies on Article 9.2 of the Agreement, which provides that any claim not resolved by mediation shall be resolved by arbitration. The Agreement broadly defines a claim as a demand or assertion by any of the parties seeking, as a matter of right, payment of money, or other relief with respect to the terms of the Contract. The term Claim also includes other disputes and matters in question between Andiva and Flower Construction arising out of or relating to the Contract.

Plaintiff also argues that under the Agreement, questions of arbitrability are reserved for the arbitrator based on the express inclusion of AAA rules in the Agreement. While questions of arbitrability are typically for the Court to determine, the Appellate Division has held that where the parties expressly include the AAA rules in the contract – which say that the arbitrator determines arbitrability – the
arbitrator may determine the proper scope of the arbitration.

In support of its argument to stay this action in favor arbitration, plaintiff cites three cases in which an action to foreclose a mechanic’s lien was stayed in favor of arbitration.

In contrast, Andiva’s position is that because the lien foreclosure cause of action must be heard by the Court, any claims that are inextricably intertwined with the lien foreclosure claim must also be heard by this Court. Andiva argues that all of its Counterclaims are inextricably intertwined with the lien foreclosure claim, including Andiva’s alleged exaggeration of its lien counterclaim, because they relate to the proper amount of the Lien, and therefore must be heard by the Court. Andiva also argues that the third-party Complaint must be heard by the Court because John Flower is not a signatory to any arbitration agreement.

In support of its argument that the arbitration should be dismissed in favor of this action, Andiva cites First Department and New York Court of Appeals precedent holding that arbitration agreements are unenforceable where substantive rights, embodied by statute, express a strong public policy which must be judicially enforced.

Hence, where jurisdiction over a particular type of dispute is statutorily bestowed exclusively upon the courts, where judicial, as opposed to arbitral, enforcement of particular rights and prohibitions is mandated by public policy, an agreement to arbitrate will not be given effect by the courts. Otherwise, where no such conflict with law or public policy exists, the courts will enforce the parties’ contractual decision to submit their disputes to arbitration. Moreover, while a specifically enumerated restriction upon arbitral authority will be upheld by the courts, no such limitation upon either factual or legal dispute resolution will be inferred from a broadly worded contractual provision expressly calling for the arbitration of all disputes arising out of the parties’ contract.

Andiva argues that here, the legislature has directed that claims for willful exaggeration of mechanics’ liens must be resolved by a court of law in connection with a trial of a mechanics’ lien enforcement action. Thus, Andiva’s eighth counterclaim for willful exaggeration of the Lien must be heard in Court. Andiva further argues that all of the counterclaims seeking recovery of the deposit, as well as the ninth counterclaim for slander of title and the tenth counterclaim for Lien Law Trust Fund Violations, directly relate to whether or not the Lien is exaggerated (leaving only counterclaims six and seven for breach of contract as arguably arbitrable).

Andiva argues that deposit counterclaims (1- 5) are related to the amount of lien because Flower Construction claimed that Andiva owed it $113,329.78 on June 22, 2020 and then filed a lien for $691,789.33 less than a month later. The difference between these two amounts is the deposit. Thus, the resolution of the issues concerning the deposit (as well as the propriety of the claim for retainage) will necessarily impact the final determination of the proper value of the Lien, if any, which is a determination that must be made by this Court, by law. Andiva also argues that any resolution of those issues in the Arbitration would usurp this Court’s sole statutory authority to determine the willful exaggeration claim and that this would prejudice Andiva because any such finding by an arbitrator may have preclusive res judicata and/or collateral estoppel effect on this Court with respect to the willful exaggeration claim. Under the unusual circumstances in this action, the Court must balance the parties’ freedom to agree to arbitrate against the parties’ statutory right to have a lien foreclosure action and, in turn, a willful exaggeration of lien counterclaim adjudicated by this Court. While plaintiff cited instances where an arbitrator was permitted to determine the amount of the lien (but not the foreclosure action), the Court notes that none of those cases are binding on this Court. The Court is persuaded – based on the present record – that defendant’s counterclaims all relate to the value of the Lien and therefore must be heard in this Court, rather than arbitrated. However, the Court notes that it is difficult at this early to stage to discern whether Andiva’s counterclaims all truly relate to the willful exaggeration of the lien counterclaim.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.