Trial Court Must Conduct De Novo Review To Determine Whether Licensing Statute Requires Disgorgement of Compensation By Unlicensed Contractor
Our next case addresses an important exception to the general rule that an arbitrator’s award cannot be vacated because of an error of fact or law: the “public policy exception.”
The setting is a condominium project that suffered numerous construction setbacks, took six years to complete, and received a Certificate of Occupancy on January 29, 2008 – bad timing. That left Plaintiff Ahdout and Defendant Hekmatjah, the members of a company formed to develop the project, arbitrating their dispute over the accounting for distributions. Ahdout was unhappy with the arbitrator’s award. He appealed from a judgment entered following the superior court’s denial of his petition to vacate the arbitration award and from the court’s order confirming the award. Ahdout v. Hekmatjah, Case No. B236764 (2nd Dist. Div. 4 January 25, 2013) (Willhite, J., author) (published).
The fly in the ointment was Bus. & Prof. Code section 7031(b), permitting an action for disgorgement of compensation from an unlicensed contractor. Both the person who provides construction services himself and one who does so through others qualifies as a contractor. Ahdout claimed that Hekmatjah had provided construction services through an unlicensed general contractor. Ahdout’s and Hekmatjah’s agreement for distribution of profits provided that Hekmatjah’s capital account would be credited more than Ahdout’s account for construction costs. However, Ahdout opposed such a credit, based on Hekmatjah’s involvement in the alleged use of an unlicensed contractor.
Hekmatjah’s argument was simple: even if the arbitrator’s decision contained errors of fact or law, the trial court properly deferred to the trial court. Though Hekmatjah correctly stated the general rule, there is an important “public policy exception,” and that was the hook upon which the Court of Appeal hung its opinion:
“We find that Ahdout’s claims under section 7031 fall within the ‘public policy’ exception to the general prohibition of judicial review of arbitration awards, because 7031 constitutes a clear-cut and explicit legislative expression of public policy mandating the disgorgement of compensation received by an unlicensed contractor. Thus, the trial court erred in deferring to the arbitrator’s finding that section 7031 does not apply. We remand the matter to the trial court to conduct a de novo review.”
The Court rejected Ahdout’s other argument that the arbitrator exceeded his powers by enforcing an illegal contract, because the illegality in the instant case did not infect the entire contract.
Blog Bonus: The arbitral forum in this case was a “Bais Din” or “Beth Din” (“house of judgment”), a Jewish rabbinical court.