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Arbitration is no Longer a Safe Haven for Unlicensed Contractors

Construction Law and Legal Update

California Business & Professions Code § 7031 (a) provides, in part, that “no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person.”

Translated, this means that if someone does work that by its nature is supposed to be done by a licensed contractor, that person had better have a contractor’s license or they are not entitled to payment.

In addition § 7031 (b) allows “a person who utilizes the services of an unlicensed contractor [to] bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”

Translated, if you hire someone to do work requiring a contractor’s license and they do the work but don’t have a contractor’s license, you can seek reimbursement of everything that you paid them.

A number of years ago California Courts severely restricted what things could be appealed from an arbitration decision.  Some unlicensed contractors took advantage of this and put arbitration clauses in their contracts, hoping that the arbitrator would ignore the law that unlicensed contractors cannot sue for payment, and/or can be compelled to disgorge (return) any funds actually received.  Just last week, the Second District Court of Appeal stopped that practice dead in its tracks.

In the case of Ahdout v. Hekmatjah (Jan. 25, 2013) 2013 WL 286265, the Court of Appeal held that the public policy underlying Business & Professions Code § 7031 was so strong that an arbitrator’s award that allowed the unlicensed contractor to collect and/or keep payment was subject to appellate review and could be overturned by the superior court.

The facts in Ahdout were a little more complicated that the normal owner – contractor issue but basically the parties arbitrated for 27 days, after which an award was issued by the arbitrators allowing one of the parties to keep compensation it received for contracting work despite the fact that it was not a licensed contractor.  The Court of Appeal, after discussing the contractor’s licensing law requirement and the general finality of arbitration awards, then went on to review the case under the “proposition that an arbitrator exceeds its powers within the meaning of Code of Civil Procedure section 1286.2 by issuing an award that violates a party’s statutory rights or an explicit legislative expression of public policy.”  In that context it noted that “courts may, indeed must, vacate an arbitrator’s award when it violates a party’s statutory rights or otherwise violates a well-defined public policy.”

Applying this analysis to Business & Professions Code § 7031, the Court of Appeals “conclude[d] that section 7031 constitutes an ‘explicit legislative expression of public policy,’ that if not enforced by an arbitrator, constitutes grounds for judicial review,” and therefore any arbitration award that refuses to apply that law is reviewable by the Superior Court.  In fact, the Court of Appeal held that the Superior Court has very broad powers in undertaking such a review and that it should act to uphold public policy and specifically to uphold Business & Professions Code § 7031.

The moral of the story here is that if you are doing contracting business in California, make sure you have a license for the entire time you are doing the work.  If you do not, regardless of whether you face a judge or an arbitrator, you are not going to get paid and you will have to give back any money you were paid.  Arbitration is no longer a possible safe haven for unlicensed contractors.

If you have questions about the subject of this article, or anything else relating to real estate law, please contact the Law Offices of Peter N. Brewer at (650) 327-2900, or visit our website at www.BrewerFirm.com.

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