Saturday, February 19, 2011

Failure to satisfy conditions precedent in contract bar contractor's claim

Many construction contracts, including many of the American Institute of Architects or "AIA" contracts contain alternate dispute resolution procedures that require the parties to pursue an "initial decision maker", the architect and/or a mediator before they may proceed to arbitrate or litigate a dispute.  In MCC Development Corp. v. Daniel Perla, the Appellate Division dismissed a complaint and discharged a mechanic's lien where the contractor failed to comply with the conditions precedent in the contract. 

The particular provision at issue in the MCC case said that "[c]laims . . . shall be referred initially to the Architect for decision" and the "initial decision by the Architect shall be required as a condition precedent to mediation, arbitration or litigation of all Claims between the Contractor and Owner." Pursuant to paragraph 4.5.1, "[a]ny Claim arising out of or related to the Contract . . . shall, after initial decision by the Architect . . . be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings." This language, or similar language, is in many construction contracts.  Here, because the contractor failed to satisfy these conditions precedent the court found that the complaint and the mechanic's lien were improper.

While the result in this case is not surprising in general, the particular fact that the mechanic's lien was discharged for failure to comply with the conditions precedent is surprising.  I think, perhaps, the entire factual basis in the MCC case was not laid out.  If the time to file a mechanic's lien had expired by the time of the motion to dismiss, and if the lien that existed had expired by that time, then the decision makes sense and is in line with other appellate division decisions.  If, however, this case is saying that a mechanic's lien cannot be filed until the alternate dispute resolution conditions precedent have been satisfied then MCC is significant new law.  Most likely, MCC is not saying that the lien cannot be filed before satisfaction of the ADR conditions.  Public policy in the State of New York favors allowing a party to file a mechanic's lien to secure payment for its labors.  Because the mechanic's lien is so time sensitive, requiring a party to satisfy the numerous conditions precedent in some construction contracts before allowing the contractor to lien could result in being able to prevent a lien from getting filed simply by dragging out the ADR procedure as much as possible.  It is much more likely that MCC does not prohibit the filing of the lien but, rather, only prohibits enforcing the lien until the ADR procedures are satisfied. 

A party faced with an expiring mechanic's lien while ADR conditions precedent are pursued should either extend the lien as of right (if possible) or seek a court order allowing the extension.  The Court always has the power to extend the mechanic's lien upon cause shown and showing the court that you are in the process of pursuing the claim but contractual ADR provisions prevent you from enforcing the lien at the current time is almost certainly going to be considered by the court as sufficient cause to extend the lien.

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or

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