There’s a New Sheriff in Town, Pilgrim

Sheriff badgeIf trial is the Wild West, then arbitration is no-holds barred cage fighting, where the only rule is that there are no rules. To be fair, there are rules in arbitration, but many of the rules that apply in civil litigation are non-existent in arbitration (i.e., no automatic right to discovery or depositions) or are mere suggestions not requirements (i.e., no requirement that rules of evidence be followed). The idea is to make arbitration less formal (and, by extension, less expensive and time consuming) than trial.

Another difference between trials and arbitrations is the ability of parties to appeal. In civil litigation, the right to appeal is automatic. In arbitration, as one court has stated, “[t]he scope of judicial review of arbitration awards is extremely narrow because of the public policy in favor of arbitration and according finality to arbitration awards” (emphasis added). Thus, “[a]n arbitrator’s decision generally is not reviewable for errors of law or fact” (emphasis added).

Since the only role of arbitrators (like judges) is to decide disputes of law (i.e., what law applies or what the law means) or fact (i.e., what happened or didn’t happen), and if, as the courts have stated, “[a]n arbitrator’s decision generally is not reviewable for errors of law or fact,” an arbitrator has extremely wide leeway indeed when rendering his or her decisions. However, in a recent case, the California Court of Appeals for the Second District has found that, at least when it comes to unlicensed contractor activities, the wide latitiude given to arbitrators may in fact not be so unfettered.

In Ahdout v. Hekmatjah, Case No. B236764 (January 25, 2013), the California Court of Appeals for the Second District held that, while “[a]n arbitrator’s decision generally is not reviewable for errors of law or fact” (emphasis added), there are exceptions to this general rule including an exception where “an arbitrator exceeds its powers . . . by issuing an award that violates a party’s statutory rights or ‘an explicit legislative expression of public policy.'” And because the California legislature has made an “explicit legislative expression of public policy” when it enacted Business and Professions Code section 7031, which provides for the disgorgement of monies received by unlicensed contractors, “the general prohibition of judicial review of arbitration awards does not apply,” explained the Court.

In Ahdout, Mouris Ahdout and Majid Hekmatjah formed a limited liability company (“LLC”) to develop a condominium project on adjoining property they owned. Hekmatjah, through a company he owned, Braum Investment & Development, Inc. (BIDI), was to construct the condominium project. BIDI, however, was not a licensed contractor. Disputes arose, and pursuant to an arbitration provision in the operating agreement for the LLC the parties arbitrated their disputes before a private arbitrator.

During the arbitration, although Hekmatjah admitted that BIDI did not have a contractor’s license and acknowledged that BIDI had installed drywall, doors, and waterproofing and had performed concrete work, Hekmatjah argued that Ahdout was aware that BIDI was not a licensed contractor and, that, in any event, most of the work was performed by licensed subcontractors. At the conclusion of the arbtration, the arbitrator denied Ahdout’s claim for disgorgement under Business and Professions Code section 7031 on the grounds that (brace yourselves . . .) Ahdout was aware that BIDI was to serve as the contractor, that BIDI did not engage in “work typically done by general contractors,” and that most of the work was done by others “virtually all of whom were licensed contractors.”

Ahdout, quite understandably, since the arbitrator’s decision conflicted with nearly every case decided under Business and Professions Code section 7031 petitioned the superior court to vacate the arbitrator’s decision. But the superior court denied Ahdout’s petition, on the ground that the superior court did not have the power to review the arbitrator’s decision for errors of fact or law. Ahdout then appealed to the Court of Appeals.

On appeal, the Court of Appeals for the Second District reversed the superior court. While noting that an arbitrator’s decision is generally not reviewable for errors of law or fact, the Court explained that there are exceptions to this general rule, and that one of those exceptions is where an arbitrator exceeds his or her powers by issuing a war contrary to an “explicit legislative expression of public policy.” The California legislature’s enactment of Business and Professions Code section 7031 was such an “explicit legislative expression of public policy,” explained the Court. “The purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services” and “Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed work” and “requiring disgorgement of compensation already paid to unlicensed contractors by persons utilitzing their services.”

As I mentioned in one of my recent posts, Business and Professions Code section 7031 provides for strict penalties against unlicensed contractors, and this most recent case shows that the legislative reach of Section 7031 will be extended and enforced by the courts even when it comes to arbitration decisions which have historically been subject to very limited judicial review. There’s a new sheriff in town folks (i.e., the courts) and they’re gonna enforce the state’s unlicensed contractor statute . . . even in arbitration.

3 Responses to “There’s a New Sheriff in Town, Pilgrim”

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