Monday, January 28, 2013
Court of Appeal Holds:
Arbitrator Ruling on Unlicensed Contractor Issue Subject to Review
By JACKIE FUCHS, Staff Writer
An arbitrator’s ruling in favor of an allegedly unlicensed contractor was subject to judicial review, this district’s Court of Appeal said yesterday.
Div. Four held that Business and Professions Code Sec. 7031(b) constitutes “a clear-cut and explicit legislative expression of public policy” mandating the disgorgement of compensation paid to unlicensed contractors and, accordingly, Los Angeles Superior Court Judge Barbara Scheper erred in deferring to the arbitrator’s finding that Sec. 7031 did not apply.
Mouris Ahdout and Majid Hekmatjah, who also uses the name Michael Braum, according to the complaint, were the sole members of 9315 Alcott, LLC, a limited liability company they formed for the purpose of developing a condominium project. Braum was designated as manager of the company, with the power to direct, manage and control its affairs.
Ahdout and Braum entered into a written agreement for operation of the company, which provided, in part, that Braum would engage Braum Investment & Development, Inc., a general contractor owned by Braum, to construct the project and oversee the company. Disputes between the parties were to be submitted to binding arbitration.
After six years of delays, the project was finally completed. Ahdout was unhappy with construction delays and cost overruns as well as the quality of the condominiums and Braum’s decision to rent the units, which had been intended for sale, until the real estate market rebounded.
Ahdout submitted 24 claims against Braum and BIDI to binding arbitration before the Rabbinical Council of California. Two were at issue on appeal, both resting on Ahbout’s allegation that BIDI was not licensed, and was thus required to disgorge all compensation for its services pursuant Sec. 7031(b).
The arbitrators ruled in favor of Braum and BIDI, finding that neither of them engaged in any work typically done by general contractors, and that the contracting work was done by licensed contractors that entered into direct agreement with BIDI.
Ahdout brought a petition in superior court to vacate the arbitration award on the ground that the arbitrators exceeded their authority by allowing Braum and BIDI to keep compensation they received for contracting work on the project despite being unlicensed.
Scheper denied Ahdout’s motion and granted the defendants’ petition to confirm the award, concluding that she did not have the power to review the arbitrators’ decision for errors of fact or law. She found that the only possible exception permitting judicial review was dependent on the agreement being an illegal construction contract, but concluded that since it was not a construction contract but an operating agreement for the company, the exception did not apply.
On appeal, the panel noted that the scope of judicial review of arbitration awards is extremely narrow because of the strong public policy in favor of arbitration and according finality to arbitration awards.
Justice Thomas L. Willhite Jr., writing for the panel, explained that one of the few ways in which an arbitrator exceeds its powers is by enforcing an illegal contract, such as the one that was at issue in Loving & Evans v. Blick (1949) 33 Cal.2d 603. In that case, the California Supreme Court found that the entire transaction between an unlicensed contractor and a homeowner was illegal and void, and held that a claim arising out of an illegal transaction is not a proper subject matter for submission to arbitration.
That case was distinguishable from the alleged illegality in the case between Ahdout and Braum/BIDI, however, because the agreement as a whole was not a construction contract between the Company and BIDI. The unlicensed status of BIDI was pertinent only with respect to the provision obligating the company to enter into a separate agreement with BIDI to act as the general contractor.
Without an explicit legislative expression of public policy, Willhite wrote, courts should be reluctant to invalidate an arbitrator’s award on the ground that a contract is illegal, because the Legislature has expressed its strong support for private arbitration and an arbitral award should ordinarily stand immune from judicial scrutiny.
Courts may, however—and indeed must—Willhite said, vacate an arbitrator’s award when it violates a party’s statutory rights or otherwise violates a well-defined public policy.
The Contractors’ State License Law, comprised of Business and Professions Code Sec. 7000 and succeeding sections, sets forth such a policy, the panel held. Subdivision (a) shields parties who utilize the services of an unlicensed contractor from lawsuits by that contractor seeking to collect payment for unlicensed work, while subdivision (b) provides that parties who hire an unlicensed contractor are entitled to reimbursement for compensation received by such a contractor even if they knew the contractor was unlicensed.
Given Sec. 7031’s explicit legislative expression of public policy regarding unlicensed contractors, the general prohibition of judicial review of arbitration awards does not apply, Willhite concluded.
The panel remanded the case to the trial court for a de novo review of all of the admissible evidence submitted to it regardless of whether that evidence was before the arbitrator, so that Scheper could independently decide whether BIDI functioned as a general contractor whose actions fell within the scope of Sec. 7031.
Presiding Justice Norman Epstein and Justice Steven Suzukawa concurred in the opinion.
The case is Ahdout v. Hekmatjah; 13 S.O.S. 393
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