Unlicensed Contractors Can Agree to Binding Arbitration
Generally, an unlicensed contractor may not collect compensation for construction work. However, will a court enforce an arbitration award involving an unlicensed contractor where arbitration was voluntarily agreed to by all parties?
However, results will likely be unfavorable to the unlicensed contractor.
Generally, an unlicensed contractor may not collect compensation for construction work. (Business and Professions Code Section 7031, subdivision (a).) However, will a court enforce an arbitration award involving an unlicensed contractor derived from binding arbitration where arbitration was voluntarily agreed to by all parties?
In the recent California case of Templo Calvario Spanish Assembly of God v. Gardner Construction Corporation et al. (August 18, 2011) 2011 DJDAR 12434, the reviewing court revisited the California Supreme Court case of MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co. Inc. (2005) 36 Cal.4th 412. The purpose of the review was to determine how extensive the litigation bar is to unlicensed contractors who sue for collection, or who are sued for disgorgement of payments made by a consumer to an unlicensed contractor. Should the litigation bar be extended to a dispute involving an unlicensed contractor and its customer when the parties agreed to arbitrate the dispute (under an arbitration provision in the contract), rather than pursue litigation in superior court?
In 2008, Templo Calvario Spanish Assembly of God (Templo) and respondent Gardner Construction Corporation (Gardner) entered into a contact for Gardner to construct a church. The parties had a dispute and Templo petitioned for arbitration. Before the petition was ruled upon, the parties agreed to submit the matter to binding arbitration under the terms of an arbitration provision in the contract. Because Gardner was unlicensed, the arbitrator ruled that Gardner must disgorge the entire $160,213 Templo had paid to Gardner.
Following the arbitration award, Templo petitioned the Superior Court to confirm the arbitration award. Gardner filed a petition to vacate the arbitration award. The Superior Court denied Templo’s petition and granted Gardner’s petition to vacate the arbitration award.
The Superior Court ruled that since the contract was illegal and void because Gardner was an unlicensed contractor (under Business and Professions Code section 7031), the arbitration provision in the contract was also void. The Superior Court further ruled that since the arbitration provision fails, the arbitrator was without authority to render a decision. Templo appealed.
On appeal, the reviewing court concluded that the Superior Court erred and should have confirmed the arbitration award in favor of Templo. MW Erectors was a nonarbitration action, where one subcontractor (essentially the contractor) brought a civil action against another subcontractor (essentially the consumer).
The reviewing court concluded that there was no compelling need to find that the Contractors State License Law mandates that a consumer cannot proceed to arbitrate its dispute with a contractor simply because the contractor was unlicensed at the time of signing the construction contract. The court reasoned that public policy favors arbitration of this type of dispute when the parties voluntarily agree to arbitration.
The reviewing court further held that an arbitration decision is final and conclusive because the parties have agreed that it be so. By ensuring that an arbitrator’s decision is final and binding, courts simply assure that the parties receive the benefit of their bargain.
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