California Construction Contracts and Arbitration

California Construction Contracts and ArbitrationIt’s a general piece of common wisdom that decisions rendered by a legally-empowered arbitrator are absolute and absolutely binding.  The entire point of a binding arbitration clause, after all, is that it is binding.  If the decisions of arbitrators were easily overturned in the courts, it would render the entire process moot.

In general, the supremacy of properly-invoked arbitration decisions is firm and unassailable.  However, under California law there are two general situations where an arbitration decision can be reversed or invalidated.  In the first, a decision rendered by an arbitrator can be invalidated if the decision is based on an illegal contract, regardless of whether the arbitrator or the parties involved were aware of the contract’s illegality.

The second situation allowing for the invalidation of an arbitrator’s decision or award is if that decision ‘violates an explicit expression of public policy.’  This is a more diffused situation requiring a deeper understanding of the underlying law.  A good example of this is a case where an unlicensed contractor is paid for acting as a general contractor, which is prohibited under California law; a contractor must have a Class B License to build a commercial building.  In a situation where a contractor without a Class B License is paid to perform construction, they are compelled by law to return all fees.  If a dispute is brought to arbitration and the arbitrator decides instead that the contractor can retain all fees despite a lack of license, this decision can – and most probably would be – invalidated by a judge if the case were brought into the courts.

It is often mistakenly assumed that if an unlicensed contractor is paid for construction work in violation of the law, the entire contract between the parties is deemed illegal, also invalidating any decision rendered by the arbitrator, but this is often not the case.  Simply paying an unlicensed contractor – even with full knowledge of their unlicensed (and therefore illegal) condition is generally not regarded as infecting the contract as a whole, and thus the contract is not deemed illegal.  This is therefore not a valid reason to reverse an arbitrator’s decision.  In the previous example, if the arbitrator had decided to return all fees from the unlicensed contractor this decision would likely have been upheld and the argument of an illegal contract would not have carried the day.

A thorough knowledge of the laws governing both construction and arbitration is essential to have an effective outcome.  When seeking an arbitration or mediation professional, make sure to vet their experience in both.

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