Construction Lien Foreclosures: Lien vs. Contract Claims

In the current economic climate, participants in construction projects more than ever need to ensure that all avenues of relief remain available to them. When a claimant has claims for a construction lien foreclosure as well as an underlying breach of contract, steps taken early in the process can be crucial in the availability of claims later.

Although a construction lien foreclosure and a breach of contract claim can arise from the same events, the two types of lawsuits are treated very differently by Oregon law. A foreclosure of a lien is an equitable action that is tried before a judge, while a suit for breach of contract is an action at law that may be tried by a jury.

This allows claimants to prosecute their claims in several different ways. First, the foreclosure and breach of contract claims can be brought simultaneously as separate claims, allowing the former to be tried before a judge and the latter before a jury. Alternatively, the lien foreclosure may be brought first, and if it fails, the claimant can fall back on the jury trial of its breach of contract claim. Whichever option is chosen, the preservation of both claims depends on steps taken at the outset of litigation.

Pleading claims separately

If a lien foreclosure claim and a breach of contract claim are pleaded separately, they must be brought in the same suit, or the claimant risks losing the later claim. Procedural rules of court prevent a claimant from bringing more than one lawsuit arising from the same set of facts if the later claim could have been brought in the first suit. Also, lien foreclosures often depend on an interpretation of the underlying contract, and if the claimant is not careful, this determination can be binding in a later trial.

This presents a choice for claimants who bring suits involving equitable and legal components, such as lien foreclosures and contract claims. Strategies for trial before a judge may differ considerably from those involving jury trials, but trying one first may risk precluding the other.

Oregon courts have given considerable leeway to claimants in this situation, allowing such claims to be tried simultaneously or one at a time (in the same lawsuit). When lien foreclosures and breach of contract claims are tried simultaneously before judge and jury, the judge's and jury's determinations are independent of each other. It does not matter if the judge and jury reach inconsistent or opposing conclusions. Interestingly, even if the claims are tried separately, the same rule applies.

The resolution of an issue decided by the judge has no effect on the determination of the very same issue decided later by the jury. This allows a claimant to pursue different strategies in each phase of the litigation without risking the loss of one of its claims.

However, this rule applies only when both claims are brought together in one suit. When brought in the same suit, the claims may be tried together or separately, but if a claimant attempts to foreclose a lien without filing its breach of contract claim at the same time, the situation is slightly different.

Falling back on a contract claim

A claimant who forecloses a lien without asserting the underlying breach of contract claim may still try the contract claim before a jury if the lien is disallowed. This is because Oregon law allows claimants whose lien is disallowed to "fall back" on the underlying contract claim. Often there are technical problems with a lien that may cause it to be unenforceable, even though the lien holder has a valid underlying claim.

In order to avoid a claimant losing a meritorious claim due to a technicality, the underlying breach of contract claim may be tried after foreclosure is denied, even if the breach of contract claim was not originally pleaded. This is because the contract claim is deemed to be "subsumed" within the lien foreclosure. However, because breach of contract is an action at law that is tried by a jury, the claimant must have made a demand for a jury trial before the commencement of the lien foreclosure trial or he has forfeited that right.

This demonstrates the importance of foresight when foreclosing a lien. Claimants are advised to either bring the underlying breach of contract claim in the same suit or demand a jury trial on all issues able to be tried. This way, a claimant whose lien is disallowed but who still has a valid contract claim may try that claim before a jury without being bound by the court's determinations in the first trial. Likewise, if the claimant fails to properly.

Originally published in The Daily Journal of Commerce, April 2010.