California: Do Not Waive Goodbye to Arbitration

California: Do Not Waive Goodbye to Arbitration

A June 6, 2018 California Appeals Court decision in Von Becelaere Ventures, LLC v. James Zenovic (24 Cal.App.5th 243) held a contractor waives the right to arbitrate a “construction dispute under the terms of the contract by failing to request a stay of a mechanic’s lien pending the outcome of arbitration.”  In that case, Von Beccelaere Ventures, LLC (“VBV”) entered into a contract with James Zenovic Construction (“Zenovic”) for construction of a single-family home located in Laguna Beach, California.  The construction contract contained an arbitration agreement which stated, “If any dispute arises concerning this Contract or the interpretation thereof, or concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a ‘Construction Dispute’), such Construction Dispute will be settled by binding arbitration.”

A dispute arose between the parties and Zenovic recorded a mechanic’s lien in Orange County Superior Court against VBV asserting VBV owed $449,126.96 for work performed at the subject property.  VBV filed a construction defect complaint in San Diego County Superior Court alleging Zenovic breached the contract by failing to perform the work, failing to hire licensed subcontractors, failing to comply with license and insurance requirements, failing to supervise the work, failing to manage expenses, failing to provide accounting, and improperly categorizing work as “extra” which should have been covered under the scope of the contract.  After being served with VBV’s complaint, Zenovic filed a complaint in Orange County Superior Court alleging causes of action for breach of contract, reasonable value, account stated, foreclosure on mechanic’s lien, and breach of covenant of good faith and fair dealing.  Zenovic then filed a motion to compel arbitration in the action filed by VBV in San Diego Superior Court.  Zenovic’s motion to compel alleged VBV’s entire complaint was subject to the arbitration agreement because the allegations contained in the complaint qualified as a “Construction Dispute” as defined by the arbitration agreement.

The parties stipulated to consolidate the actions and have the matters moved to San Diego Superior Court.  The trial court denied Zenovic’s motion to compel arbitration and held Zenovic waived the right to compel arbitration by failing to comply with California Code of Civil Procedure section 1281.5(a). Section 1281.5(a) states:

[a]ny person who proceeds to record and enforce a claim of lien by commencement of an action pursuant to Chapter 4…does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following:  (1) includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after served of the summons and complaint for an order to stay further proceeding in the action.  (2) At the same time that the complaint is filed, the claimant files an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

Zenovic appealed.

The Appeals Court held the purpose of the statute is to allow a contractor to utilize the statutory mechanic’s lien process while preserving the contractual right to arbitrate disputes which may arise under an arbitration agreement.  The purpose of Code of Civil Procedure section 1281.5 is to “hold the mechanics lien process in abeyance ‘pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.’” 24 Cal.App.5th 243, 249 citing CCP 128.5(a)(2),(b).

“The sole effect of filing the application for a stay under section 1281.5 is to preclude a finding of waiver of the right to arbitrate because of the filing of a complaint to enforce the mechanic’s lien.”  (Id. citing Kaneko Ford Design v. Citipark, Inc. (1988) 2020 Cal.App.3d 1220, 1226-1227.)  The Appeals Court reiterated the decision in Kaneko which held the failure to file an application to stay and obtaining a stay order within a reasonable time waives the right to arbitration.  (Id. at 1228-1229)

Here, the Court of Appeals held Zenovic did not file the action to enforce the mechanics lien until after VBV filed the complaint.  Zenovic’s motion to compel arbitration conceded VBV’s causes of action qualified as arbitrable construction disputes, but failed to include an allegation in the complaint stating he did not intend to waive any right to arbitration and intended to seek a stay in the complaint filed.  Zenovic’s failure to seek a stay and obtain an order waived his right to arbitrate the “construction dispute” under the terms of the contract.

Takeaway

A contractor who files an action to enforce a mechanic’s lien, but does not at the same time request the action be stayed pending arbitration, waives any right to arbitration.

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