Thursday, February 25, 2010

Arbitration and Illinois Mechanics Lien Act Section 34 Demands - A Choice for Owners

The Second District Appellate Court of Illinois recently held that an owner by filing a demand under Section 34 of the Mechanics Lien Act (the Act) can be deemed to have waived a contractual right to compel arbitration.  The case is Illinois Concrete-I.C.I, Inc. v. Storefitters, Inc, No. 2-09-0854 (2nd Dist. 2010).  In Storefitters, the plaintiff contractor filed a mechanics lien claim alleging that the defendants had failed to pay it for its work.  The Defendants then served notice on the plaintiff pursuant to Section 34 of the Act, requiring the contractor to file suit to commence an action to enforce the lien within 30 days, or else forfeit the lien claim (the "Section 34 Demand").  The contractor filed suit as required, at which point the defendants filed a motion to compel arbitration pursuant to a mandatory arbitration clause in the parties' contract (it appears from the opinion that the contract language actually called for mediation followed by arbitration).  The trial court denied the motion, finding that the defendant had waived the right to compel arbitration by issuing the Section 34 Demand.

On appeal, the Second District Appellate court affirmed the trial court's decision.  The court noted that the mere filing of a mechanics lien claim (a "claim for lien") is not inconsistent with an arbitration requirement.  The defendants could have submitted the dispute to arbitration at that point.  By issuing the Section 34 Demand, the defendants were demanding that a suit be filed, and therefore "expressly chose a method outside the scope of the arbitration agreement."

In Storefitters, the defendants correctly pointed out that a Section 34 Demand may sometimes result in invalidating the lien and avoiding litigation if the lien claimant does not file suit within the required time.  The court did not disagree with this statement but found it unpersuasive as a reason to compel arbitration.

The result is that the owner, faced with a filed lien claim and having an arbitration agreement, must choose between enforcing the alternative dispute resolution procedures in the contract, or using its right to a Section 34 Demand under the Act to force the lien holder to file suit quickly to maintain the claim.

NOTE:  This does NOT mean that the CONTRACTOR in this situation could not have compelled arbitration if it wanted to.  For that situation, see La Hood v. Central Illinois Construction, Inc, 335 Ill. App. 3d 363 (2002), which was referenced in the Storefitters opinion.

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