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Schadrack v. K.P. Burke Builder, LLC

407 N.J. Super. 153, 970 A.2d 368 (App. Div. 2009)

CONSTRUCTION LIENS; ARBITRATION — The arbitration provision in the statute covering Construction Liens on residential properties allows an arbitrator some discretion to override the law’s strict compliance provisions, such as allowing the arbitrator to accept supplemental filings of documents.

A homeowner contracted with a builder for the construction of a new house. The builder then hired a subcontractor to do the electrical and HVAC work. When the builder and subcontractor experienced difficulties in getting paid, they each filed a Notice of Unpaid Balance (NUB) with the county clerk as required by the Construction Lien Law (CLL). The builder filed its NUB first, but did not include a demand for arbitration in its filing and did not serve the NUB on the homeowner as required by the CLL. A week later, the subcontractor filed its NUB, along with a demand for arbitration. The homeowner challenged the validity of both NUBs during the arbitration proceeding. With respect to the subcontractor’s NUB, the homeowner claimed that the demand for arbitration was not valid because it was not accompanied by supporting documentation and because the paperwork did not list the complete entity name for the builder. After the subcontractor received the homeowner’s objections, it filed a supplemental document which included copies of the relevant contract documents. The arbitrator ruled in favor of the subcontractor, finding that the subcontractor was entitled to file a lien claim.

The homeowner filed an order to show cause with the lower court, challenging the arbitrator’s decision. It argued that the subcontractor’s arbitration demand violated the CLL because the subcontractor was required to submit documentation in support of its claim together with the arbitration demand, and not as a supplemental filing one week later. Further, the homeowner argued that the arbitrator should not have permitted late filing of the supporting documents. The lower court found that the arbitrator’s decision to allow the supplemental filing of documents was not governed by the CLL’s strict compliance provisions, but rather by the American Arbitration Association (AAA) rules which grant the arbitrator some discretion. The lower court also found that the subcontractor’s error in identifying the builder by its complete name was inconsequential since the parties knew that it referred to the actual builder.

With respect to the builder’s NUB, after the builder initially filed it without a demand for arbitration, the builder filed an amended NUB that included a demand. The arbitrator found in favor of the builder and the builder filed a lien claim with the county clerk. The homeowner then filed an order to show cause seeking to invalidate the arbitration award on the basis of the builder’s failure to include an arbitration demand with the filing of its initial NUB. The homeowner claimed that, as the result of the builder’s failure to include the demand for arbitration in its initial NUB, the arbitration actually took place after the thirty-day time period specified in the CLL. The lower court found that, after balancing the equities, upheld the builder’s arbitration decision. It found that, at most, the homeowner suffered only modest harm by the late filing, as opposed to the unjust result that would result if the builder’s lien claim were forfeited.

The homeowner appealed, but the Appellate Division affirmed. With respect to the subcontractor’s claim, the Court rejected the homeowner’s argument that the arbitrator should not have permitted the late filing of supporting documentation by the subcontractor. It noted that the CLL requires a lien claimant to serve a demand for arbitration and fulfill all of the AAA requirements to institute an expedited proceeding. The AAA rules for an expedited proceeding required the subcontractor to submit, with its demand, copies of all supporting documents only if the subcontractor did not request an oral hearing. The Court found that since the subcontractor requested an oral hearing, it was not obligated to submit its supporting documentation with its arbitration demand; it could do so later. The Court also noted that even if the subcontractor was required to supply the documentation at the time of filing of its arbitration demand, the AAA rules gave the arbitrator discretion to accept amendments to the demand, which included the right to accept supplemental documentation. With respect to the builder’s claim, the Court rejected the homeowner’s claim that the builder had forfeited its lien claim by not filing a demand for arbitration timely. The Court noted that under Section 7 of the CLL, the service of a lien claim outside of the prescribed time will not preclude the lien’s enforceability absent proof, by a preponderance of the evidence, that the later service materially prejudiced the homeowner. In this case, the Court found that the homeowner was aware of the builder’s claim when it filed the original NUB, so there was no surprise when the builder filed a second NUB and filed an arbitration demand. The Court also rejected the homeowner’s argument that the arbitration was invalid because it did not take place within the thirty-day period prescribed under the CLL. The Court noted that the parties did not have unilateral control over the AAA calendar, and that it was reasonable for the AAA to make appropriate adjustments in its scheduling. Further, it found that the additional time needed to complete the proceedings was not unfair to the parties.

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