Arbitration Provision in Construction Contract Not Void Simply Because Contractor Was Unlicensed at the Time it Entered into Contract

Void StampWith state and federal courts increasingly backlogged with cases, contracting parties are more frequently including alternative dispute resolution (“ADR”) provisions in their contracts as a way to avoid the delays and costs associated with traditional litigation.  These include provisions requiring that parties first attempt to mediate their disputes before resorting to litigation or requiring that parties arbitrate their disputes before a private arbitrator selected and paid for by the parties.In a recent case, Templo Calvario Spanish Assembly of God v. Gardner Construction Corporation, F060838 (September 13, 2011), the California Court of Appeals for the Fifth District took a look at the intersection between California’s contractor licensing statues and contractual ADR provisions.

In Templo, Gardner Construction Corporation (“Gardner”) entered into a contract with Templo Calvario Spanish Assembly of God (“Templo”) to construct a church in Santa Ana, California.  A dispute arose, and the parties arbitrated their dispute pursuant to an arbitration provision contained in the contract.  During the arbitration, the arbitrator found that Gardner did not hold a valid contractor’s license, and ordered that Gardner disgorge the entire $160,213 Templo had paid to Gardner.  Thereafter, Templo petitioned the superior court to confirm the arbitration award, and Gardner cross-petitioned the superior court to vacate the arbitration award on the ground that because it had been found by the arbitrator to be an unlicensed contractor, that the underlying contract was void including the arbitration provision contained in the contract, and that because there was no valid arbitration provision the arbitrator was therefore without authority to render an award in favor of Templo.  The superior court agreed and vacated the arbitration award.

On appeal, the Fifth District Court of Appeals disagreed.  Drawing parallels with an earlier California Supreme Court decision – MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc., 36 Cal.4th 412 (2005), in which the Supreme Court held that Business and Professions Code section 7031(a), which bars an unlicensed contractor from suing to collect money for work performed, does not bar a contractor who was unlicensed at the time he entered into a contract from suing so long as the contractor was licensed at the time he performed the work – the Court of Appeals held that as was the case in MW Erectors, simply because Gardener was unlicensed at the time it entered into the contract with Templo, did not render the contract and its arbitration provision void.

In addition, the Court of Appeal noted that because Gardner was also not licensed at the time that it performed work under the contract, that while Templo could enforce the arbitration provision, Gardner could not.  The Court of Appeal also suggested that its decision was limited to situations involving private works of improvements, not public works of improvements, because California Business and Professions Code section 7028.15(e) “expressly provides that ‘[a]ny contract awarded [by a public agency] . . . to [ ] a contractor who is not licensed pursuant to this chapter is void.’” (emphasis in original).

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