Consolidate Residential NUB Arbitrations

March 3, 2012 | No Comments
Posted by Sean Regan

As most construction practitioners are aware, the New Jersey Construction Lien Law1 was amended effective Jan. 7, 2011. Prior to those amendments being signed into law by the governor, this author was part of an ad hoc committee organized by the New Jersey Builders Association to respond to the New Jersey Law Revision Commission’s request for comments from the industry. Some of this author’s comments about arbitration of residential notices of unpaid balance and right to file lien (NUB) claims were presented to the commission (N.J.S.A. 2A:44A-21 requires filing a pre-lien NUB and demand for arbitration). Some significant changes to the law were even made that address the issues raised.
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The revised statutes now have an entirely new provision that states, in part at N.J.S.A. 2A:44A-21b.(3):

All arbitrations of [NUBs] pertaining to
the same residential construction shall be
determined by the same arbitrator, whenever

This revision goes a long way toward eliminating the likelihood of inconsistent and contradictory arbitration decisions that existed under the original lien law in multi-family residential construction projects when multiple NUBs were filed. One example of the resulting conflicting decisions conveyed to the commission related to a 10-story, 100-unit high-rise along the Jersey shore. As the real estate market and sales slowed in 2006, then collapsed through 2008, the project failed. Without getting into economic theory or opinion, it appeared from the facts of the case that the sales price of the units dipped below the aggregate per unit price needed to clear the construction and development loans on the building. The general contractor did not get paid on several payment requests, and filed a NUB for an alleged balance due of $4 million for completed work. The alleged completed work was performed and provided by 13 different subcontractors. Each of the 13 subcontractors also filed a NUB. Thus, there were 14 NUBs filed over the same $4 million potential “lien pool.” The lien pool is established by statute.

Previously, N.J.S.A. 2A:44A-21, which still requires the filing of a NUB and mandatory arbitration on “residential construction” projects as a prerequisite to filing a lien, could and did lead to conflicting arbitration decisions. This occurred in the referenced case when the general contractor, and each subcontractor, filed a separate NUB and demand for arbitration.

In a high-rise condominium project there can be two, three, four, or a dozen separate arbitrations over the same lien pool. Before the 2011 amendments, each hearing would have a different arbitrator, and a different decision regarding the owner’s right to set-off or a bond pursuant to N.J.S.A. 2A:44A-21b.(5).

N.J.S.A. 2A:44A-21b.(5) states in pertinent part, if the

amount of any setoffs or counterclaims
presented in the arbitration cannot be determined
by the arbitrator in a liquidated amount,
the arbitrator, as a condition precedent to the
filing of the lien claim, shall order the lien
claimant to post a bond, letter of credit…or
such amount as the arbitrator shall determine
to be 110% of the approximate fair and reasonable
value of such setoffs or counterclaims…

In the high-rise example discussed here evidence was presented by the owner at the general contractor’s NUB arbitration that the work done by the 13 subcontractors had significant defects, and a set-off or bond was required for the owner’s counterclaims, pursuant to N.J.S.A. 2A:44A-21b.(5). The arbitrator found approximately $1.5 million of liquidated setoffs and counterclaims, and stated in his award that the general contractor was permitted to file a lien for the amount claimed, less the liquidated counterclaim amount of $1.5 million. Posting of a bond of $1.5 million was not awarded. The setoff was primarily awarded for defective windows, steel erection, and roof installation, which resulted in
continuous water leaks and mold problems in the building. Yet, when the window, steel and roof subcontractors’ NUBs were each arbitrated separately, the assigned arbitrator did not find in favor of the owner on the same presentation of evidence of defects and leaks.

In each of the 13 subcontractor NUB arbitrations the assigned arbitrator allowed a full lien for the amount claimed due by the subcontractor. With respect to the largest claim—that filed by the window subcontractor— the arbitrator was coincidentally the same one assigned for the general contractor’s arbitration. He refused to consolidate the window subcontractor’s NUB arbitration with the general contractor’s arbitration, and likely had no statutory authority to do so. Further, he allowed the entire window subcontractor’s lien.

The arbitrator’s reasoning, which this author still believes was flawed, was that the owner’s setoff claims were reduced from the general contractor’s lien claim. The true effect of the decision coupled with the full lien claims allowed for the steel and roof subcontractors in two separate arbitrations, was to add back on to the property and owner the very $1.5 million the arbitrator had set off against the general contractor, and never require a bond to protect the owner or other lien claimants.

Previously, there were few options to consider in circumstances where there were multiple NUBs filed on multi-family residential construction projects prior to the statutory amendment. The first option was to seek a consent from the general contractor and all subcontractors to engage in one arbitration. This was, however, not likely to occur. The second option was to assert to the arbitration administrator and the arbitrator that N.J.S.A. 2A:44A-21b.(7) required consolidation.

N.J.S.A. 2A:44A-21b.(7), which has not been substantially amended, was the only guidance in this regard, and simply stated that:

any other contractor, subcontractor or
supplier whose interests are affected by the filing
of a [NUB] shall be permitted to join in such
arbitration; but the arbitrator shall not determine
the rights or obligations of any such parties
except to the extent those rights or obligations
are affected by the lien claimant’s [NUB].

This provision was impotent in convincing the arbitration administrator, or the arbitrator to consolidate multiple NUB hearings, as it gave the arbitrator no actual authority to do so.

Now, N.J.S.A. 2A:44A-21b.(3) states, in pertinent part:

All arbitrations of [NUBs] pertaining to the
same residential construction shall be determined
by the same arbitrator, whenever possible. The
claimant, owner, or any other party may also
request consolidation in a single arbitration
proceeding of the claimant’s [NUB] with any
other [NUB] not yet arbitrated but lodged for
record by a potential lien claimant who name
was provided in accordance with section 37
of the P.L. 1993, c. 318 (C.2A:44A-37). The
request shall be made in the demand for arbitration
or, in the case of a request by a person
other than the claimant, by letter to the arbitrator
assigned to the arbitration or, if none has
been assigned, to the appropriate arbitration
administrator, within five days of when the
demand for arbitration is served. The arbitrator
shall grant or deny a request for a consolidated
arbitration proceeding at the arbitrator’s discretion.
(emphasis added.)

N.J.S.A. 2A:44A-21b.(5) was also amended to further require that the arbitrator “shall consider all determinations made by that arbitrator in any earlier arbitration proceeding pertaining to the same residential construction.”

The above new statutory provisions can eliminate inconsistent results by having the same arbitrator hear and determine all of the owner’s counterclaims for setoffs. More importantly, the amendments give the arbitrator the explicit authority he or she previously lacked to consolidated NUB hearings.

Although the requirements for consolidation of NUB arbitrations are now clearly set forth in the amended statutory  language of N.J.S.A. 2A:44A-21b.(3), in certain cases the discretion of the arbitrator to not grant the request for  consolidation may not be acceptable. In such cases, court intervention to force the consolidation might be justified. The New Jersey Alternative Dispute Resolution Act lends additional support in this regard at N.J.S.A. 2A:23A-3, and states in pertinent part:

…[w]henever the claims to be resolved in an alternative resolution proceeding may involve evidence, witnesses and testimony reasonably necessary to resolve issues and facts arising out of a related project or series of agreements, which are the subject of litigation in any court of this State, the court may authorize consolidation of the alternative resolution proceeding and the court proceedings to advance expeditious use of court time.

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