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Pitfalls in Arbitration and Construction Lien Enforcement

Construction lien remedies are cumulative to other remedies under the contract, including the right of a contractor, subcontractor, material man, laborer or design professional to demand arbitration where permitted by the terms of the written agreement. In that connection, New York State Lien Law ยง 35 is explicit in stating that the filing of a notice of lien shall not be a waiver of any right of arbitration. However, care must be taken in proceedings by the lien claimant to insure that there is no waiver of the arbitration agreement, or of requirements under the Lien Law.

In order to avoid a waiver of the arbitration agreement, it is recommended that a complaint in foreclosure include an allegation that the filing of the lawsuit is not intended to be a waiver of the right to arbitration under the parties' contract. The lien claimant should also seek a stay of the action pending arbitration no later than service of the answer. Any further activity in the foreclosure action could be construed by the court as a waiver of the remedy of arbitration under the parties' contract.

It is well established that the amount found to be due the lien claimant by the arbitrator is conclusive in any action to foreclose on the lien. However, the validity of the lien, and whether the amount found due the lien claimant is chargeable against any lien bond, are matters beyond the power of the arbitrator to determine. These issues can only be determined in the lien foreclosure action itself, once the stay has been lifted by the court.

Finally, a lien claimant should also investigate whether any payment bond has been issued in connection with the construction project. If the answer is in the affirmative, there will be requirements that must be fulfilled concerning notice, and the commencement of any action under the payment bond. The failure to address these obligations will most likely result in the waiver of this additional remedy available to the lien claimant.

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