RLI Ins. Co. v. Nat’l Constr. & Dev., Inc. – 10/28/2024
Arizona Court of Appeals, Division Two holds that a surety who issues a lien discharge bond is not bound by an arbitration agreement between the principal and lien claimant.
This case arose after RLI Insurance Company issued a statutory lien discharge bond for a property owner who had contracted with National Construction & Development, Inc. (NCD) for building remodeling. The construction contract between the owner and NCD contained a mandatory arbitration clause. NCD filed a lien claim against the property owner under A.R.S. § 33-993 and initiated arbitration pursuant to their contract. After the arbitration proceeding began, the property owner secured a statutory discharge of lien bond from RLI with the property owner as its principal, pursuant to A.R.S § 33-1004. After the lien discharge bond was recorded, NCD attempted to join RLI as a defendant party to the arbitration. RLI filed a complaint seeking (1) declaratory relief that NCD had failed to perfect its lien against the property and (2) a determination under A.R.S. § 12-3007(B) that RLI was not bound by the arbitration agreement. The superior court dismissed, finding RLI was bound by the arbitration clause and thus that the court lacked jurisdiction over the mechanic’s lien dispute.
The Arizona Court of Appeals vacated and remanded, directing the superior court to enter an order that RLI is not bound to arbitration and to proceed with RLI’s complaint for declaratory relief on the validity of the lien.
The Court explained that materialman’s lien rights are a security mechanism defined by statute that are distinct from contractual obligations. The lien attaches to property rather than being a personal or contractual obligation, and a lien may exist without any contract at all. Additionally, A.R.S. § 33-1008(A) supports finding a distinct separation between the lien right and a construction contract, because a materialman’s lien right may not be impaired by a non-party to the lien without express written consent. The statutory scheme does not bind RLI to obligations arising under a construction contract between the bond’s principal and a lien claimant.
The Court also found that RLI was not bound to NCD’s arbitration clause by any common law exceptions. Common law exceptions for binding non-signatories to arbitration did not apply because RLI’s obligations arose from statute and the bond agreement, not the construction contract, and RLI received no benefit from the arbitration agreement.
Judge Brearcliffe authored the opinion, in which Judge Sklar and Vice Chief Judge Eppich concurred.
Posted by: Molly Walker