March 25, 2019

Timothy Gordon: Arbitrator Decides Amount of Lien while Court Decides its Procedural Validity

In Sure-Shock Electric v. Diamond Lofts Venture (Colo. App. June 23, 2011), a division of the Court of Appeals held that, on confirmation of an arbitration award, the district court retains jurisdiction to decide the procedural validity of a mechanic’s lien even after the arbitration award confirms the claimant’s right to a lien under the mechanic’s lien statute.

The contract between Sure-Shock and Diamond Loft Venture (“DLV”) included an agreement to arbitrate any claim arising out of or related to the parties’ contract.  After Sure-Shock filed a lawsuit for breach of contract, unjust enrichment, and foreclosure of its mechanic’s lien, DLV moved to stay the proceedings and to compel arbitration, which was granted.

The arbitrator found in Sure-Shock’s favor, and made detailed findings of fact regarding the recording of the lien, the amount, and the date that it was recorded, and awarded Sure-Shock the principal amount of its claim plus interest at 12% (the interest rate found in the mechanic’s lien statute).  Upon motion, the district court confirmed the arbitration award, confirmed the amount of Sure-Shock’s lien, and ruled that Sure-Shock will be entitled to participate in the foreclosure of its lien.

DLV appealed, arguing that the district court did not have jurisdiction to determine the validity, amount, and enforceability of the lien.  DLV further argued that Sure-Shock failed to “affirmatively raise the argument that the lien was procedurally valid in arbitration” and was therefore barred from raising the issue.  The Court of Appeals did not agree.

The Court of Appeals notes that the amount of the lien was properly submitted to arbitration.  According to the Court, “we read the arbitrator’s award to conclude that Sure-Shock had established the right to a lien or claim under the mechanic’s lien statute.”  The Court of Appeals also notes in its opinion that “the arbitration award clearly noted the filing of the lien, the amount listed on the lien statement, and the date it was recorded . . . .”  Yet the Court of Appeals “assume[s] that Sure-Shock did not provide copies of the notice of intent and lien statement to the arbitrator” because it “ha[s] on appeal no record of the arbitration” and “because Sure-Shock does not dispute that the procedural validity issue was not arbitrated . . . .”

The Court of Appeals then went on to address “whether the procedural validity issue may be properly decided by the court as part of the foreclosure proceedings, or whether either [the parties were] required to raise it in arbitration under their agreement requiring all claims and disputes to be submitted to arbitration.”  The Court of Appeals ultimately held that the issue of procedural validity may be properly determined by the Court, but that it holds this power concurrently with the arbitrator.

We conclude that, here, the issue of procedural validity may be properly determined by the court. Given that only a court is vested with the authority to foreclose a mechanic’s lien, it may concurrently determine any procedural validity issues connected with that foreclosure even when the underlying contract includes a broad arbitration clause, at least where, as here, neither party raised the issue in arbitration.

Part of the Court’s reasoning is the fact that the in rem action to foreclose a mechanic’s lien will often involve additional parties beyond those involved in the arbitration.  And in the case at issue, there were additional owners who would be defendants to the foreclosure action who were not parties to the arbitration, and who may challenge the validity of the notice and filing of the lien.

Ed. Note: The Colorado Court of Appeals’ opinion in Sure-Shock Electric, Inc. v. Diamond Lofts Venture, LLC can be read here.

Timothy Gordon blogs at Holland & Hart’s Construction Law in Colorado and this post originally appeared here on June 23, 2011. Gordon is one of the managing editors for CBA-CLE’s Practitioner’s Guide to Colorado Construction Law. Click hereto read all posts by this author.Click here for more Construction Law Updates.
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