Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County, No. BS123756, Soussan G. Bruguera, Judge.
Gibbs, Giden, Locher, Turner & Senet, Marion T. Hack and Victor F. Luke for Plaintiff and Appellant.
Ronald W. Beals, Chief Counsel, Linda Cohen Harrel, Deputy Chief Counsel, and Mark A. Berkebile for Defendant and Respondent.
MALLANO, P. J.
Plaintiff Lehigh, Inc., which does business as Lehigh Construction Company (Lehigh), a building contractor, entered into a construction contract with the California Department of Transportation (CalTrans) to widen an existing bridge along State Route 91 in Riverside County. The contract contained an arbitration provision in accordance with Public Contract Code sections 10240 through 10240.13.
After the project was completed, Lehigh initiated arbitration against CalTrans by filing a complaint with the Office of Administrative Hearings, alleging it was owed around $10 million for breach of contract. CalTrans filed a motion in the arbitration, seeking to dismiss the proceeding on the ground that Lehigh had not been properly licensed for purposes of Business and Professions Code section 7031, subdivision (a), which precludes an unlicensed contractor from any recovery unless it alleges it was a duly licensed contractor at all times during the performance of the contract. Lehigh countered that recovery was not barred because it had substantially complied with the licensing requirement under subdivision (e) of the statute.
Subdivision (a) provides: “Except as provided in subdivision (e), 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....”
Subdivision (e) states: “[T]he court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid.”
Here, the arbitrator conducted a two-day hearing on the licensing issue and concluded that Lehigh had not been properly licensed throughout the period of performance and had not substantially complied with the licensing requirement. He issued a 13-page award, explaining that Lehigh was barred from any recovery and awarded it nothing.
Lehigh filed a petition to vacate the award together with declarations and a transcript of the arbitration hearing. In support of the petition, Lehigh argued the trial court was required to conduct a de novo review of the licensing issue. CalTrans opposed the petition, contending that de novo review was improper, the award was supported by substantial evidence, and Lehigh’s violation of the licensing requirement, as determined by the arbitrator, warranted the denial of the petition to vacate. The trial court reviewed the arbitration award under the substantial evidence test and denied the petition. Judgment was entered accordingly. Lehigh appealed.
Because this arbitration involved whether Lehigh was properly licensed, and thus whether the parties’ contract was illegal and void, the trial court should have reviewed the licensing issue de novo. Under pertinent case law, when a party to an arbitral dispute raises a question concerning the validity of the parties’ contract, a court of law must independently decide whether the contract is valid. This result is separately mandated by statute, namely, section 1296 of the Code of Civil Procedure.
DISCUSSION
We review the trial court’s decision under a de novo standard. (See Lindenstadt v. Staff Builders, Inc. (1997) 55 Cal.App.4th 882, 892, fn. 7 (Lindenstadt).)
On appeal, Lehigh argues the trial court should have conducted a de novo review of the licensing issue, and the case should be reversed and remanded so the trial court may apply the proper standard of review. CalTrans seeks an unqualified affirmance. We agree with Lehigh. Under the applicable law, the arbitrator’s determination of the licensing issue is reviewed de novo by the trial court.
“California maintains a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution....’... Because of this important public policy, arbitration awards are generally subject to extremely narrow judicial review. Courts will not review the merits of the controversy, the validity of the arbitrator’s reasoning or the sufficiency of the evidence supporting the arbitrator’s award....
“Typically, an arbitrator’s errors of fact or law are not reviewable. ‘When parties contract to resolve their disputes by private arbitration, their agreement ordinarily contemplates that the arbitrator will have the power to decide any question of contract interpretation, historical fact or general law necessary, in the arbitrator’s understanding of the case, to reach a decision.... Inherent in that power is the possibility the arbitrator may err in deciding some aspect of the case. Arbitrators do not ordinarily exceed their contractually created powers simply by reaching an erroneous conclusion on a contested issue of law or fact, and arbitral awards may not ordinarily be vacated because of such error, for “‘[t]he arbitrator’s resolution of these issues is what the parties bargained for in the arbitration agreement.’”’” (Hoso Foods, Inc. v. Columbus Club, Inc. (2010) 190 Cal.App.4th 881, 887, citations omitted.)
In Loving & Evans v. Blick (1949) 33 Cal.2d 603 (Loving & Evans), however, the court recognized an exception to the ordinary rules. The court held that an arbitration award is subject to independent review for legal error where one of the parties contends that the parties’ entire contract is illegal and void. In Loving & Evans “a dispute arose on a construction project between the property owner and the contractors over the amount due the contractors. Pursuant to a provision in the parties’ contract, the matter was submitted to binding arbitration. The property owner argued that the contractors were not entitled to any recovery because they were not properly licensed. (See Bus. & Prof. Code, [§ 7031].) The arbitrator implicitly rejected that argument and rendered an award in favor of the contractors.... The contractors then petitioned the superior court to confirm the award. The property owner opposed confirmation on the ground that the contractors had not been licensed, and the parties’ contract was therefore illegal and unenforceable.... The trial court rejected that argument and confirmed the award. The Supreme Court reversed, holding that the trial court should have independently determined whether the parties’ contract was illegal.” (Lindenstadt, supra, 55 Cal.App.4th at pp. 889–890, citations & fn. omitted.)
The Supreme Court explained: “[I]t has been repeatedly declared in this state that ‘a contract made contrary to the terms of a law designed for the protection of the public and prescribing a penalty for the violation thereof is illegal and void, and no action may be brought to enforce such contract’... and that ‘whenever the illegality appears, whether the evidence comes from one side or the other, the disclosure is fatal to the case.’” (Loving & Evans, supra, 33 Cal.2d at p. 607, citations omitted, italics added.)
“[O]rdinarily with respect to arbitration proceedings ‘the merits of the controversy between the parties are not subject to judicial review, ’... [and] ‘arbitrators are not bound by strict adherence to legal procedure and to the rules on the admission of evidence expected in judicial trials.’... But... the rules which give finality to the arbitrator’s determination of ordinary questions of fact or of law are inapplicable where the issue of illegality of the entire transaction is raised in a proceeding for the enforcement of the arbitrator’s award. When so raised, the issue is one for judicial determination upon the evidence presented to the trial court, and any preliminary determination of legality by the arbitrator, whether in the nature of a determination of a pure question of law or a mixed question of fact and law, should not be held to be binding upon the trial court.
“The foregoing conclusion is entirely in harmony with the provision of section 1288 of the Code of Civil Procedure [(now section 1286.2)], which recites the grounds upon which the trial court ‘must make an order vacating the award.’ [Subdivision] (d) thereof [(now section 1286.2, subdivision (a)(4))] specifies that the award must be vacated ‘where the arbitrators exceeded their powers....’ It seems clear that the power of the arbitrator to determine the rights of the parties is dependent upon the existence of a valid contract under which such rights might arise.... In the absence of a valid contract no such rights can arise and no power can be conferred upon the arbitrator to determine such nonexistent rights. The question of the validity of the basic contract being essentially a judicial question, it remains such whether it is presented in a proceeding ‘for an order directing... arbitration’ under section 1282 of the Code of Civil Procedure [(now section 1281.2)] or in a proceeding ‘for an order confirming’ or ‘vacating an award’ under sections 1287 and 1288 of said code [(now sections 1285, 1286, and 1286.2)]. If it is presented in a proceeding under... section [1281.2] and it appears to the court from the uncontradicted evidence that the contract is illegal, the court should deny the petition ‘for an order directing the parties to proceed to arbitration.’ If it is presented in a proceeding under... [sections 1285, 1286, or 1286.2] and similar uncontradicted evidence is offered, the court should deny confirmation and should vacate any award granting relief under the illegal contract upon the ground that the arbitrator exceeded his powers in making such award.” (Loving & Evans, supra, 33 Cal.2d at pp. 609–610, citations omitted, italics added.)
“[W]hen a party seeks to use the processes of the courts to obtain confirmation of an arbitrator’s award, and an issue is raised concerning the alleged illegality of the contract upon which the award is based, the trial court is the tribunal which must determine such issue of illegality upon the evidence presented to it. If this were not the rule, courts would be compelled to stultify themselves by lending their aid to the enforcement of contracts which have been declared by statute to be illegal and void. A party seeking confirmation cannot be permitted to rely upon the arbitrator’s conclusion of legality for the reason that paramount considerations of public policy require that this vital issue be committed to the court’s determination whenever judicial aid is sought.” (Loving & Evans, supra, 33 Cal.2d at p. 614, italics added.) Thus, regardless of which party prevails before the arbitrator — whether the contract is found legal or illegal — and regardless of which party — the claimant or the defendant — files a postarbitration petition to confirm or vacate, the trial court determines the legality issue de novo.
In Lindenstadt, supra, 55 Cal.App.4th 882, we applied Loving & Evans where the plaintiff sought to recover finder’s fees from the defendant in connection with several acquisitions. The matter was submitted to arbitration in accordance with an arbitration provision in the parties’ contract. In the arbitration, the defendant argued that the plaintiff was not entitled to any recovery because he had acted as a broker, not a finder, and lacked a broker’s license. The arbitrator found that the plaintiff was entitled to finder’s fees on two transactions but not on two others where it had acted as a broker. The plaintiff filed a petition to confirm the award. The defendant opposed confirmation and argued that the trial court had to review the licensing issue de novo. The trial court declined to review the licensing issue independently on the ground that the arbitrator had already decided it. The award was confirmed. On appeal, we reversed and, relying on Loving & Evans, supra, 33 Cal.2d 603, remanded the case so the trial court could review the licensing issue de novo.
In All Points Traders, Inc. v. Barrington Associates (1989) 211 Cal.App.3d 723 (All Points Traders), “an investment banking firm (Barrington) agreed to assist a company (All Points) in finding an investor to purchase its stock. After the sale of All Points’ stock, Barrington initiated binding arbitration pursuant to the parties’ written agreement, seeking payment of a commission. All Points argued in the arbitration that, because Barrington did not possess a real estate broker’s license, it was not entitled to any compensation.... The arbitrator found in favor of Barrington and awarded it a commission. The superior court confirmed the award. The Court of Appeal reversed, concluding that Barrington needed a real estate broker’s license to assist All Points in the sale of its stock.... Absent the license, the parties’ agreement was illegal under the Real Estate Law, and the arbitration award could not be based on such an agreement.... As the Court of Appeal stated: ‘Inherent in the arbitration award granting Barrington a commission for its involvement in the sale of All Points is the finding that the underlying contract was legal and enforceable. However, the issue of illegality is one for judicial determination upon the evidence presented to the trial court, and the arbitrator’s finding, whether in the nature of a determination of a pure question of law or a mixed question of fact and law, is not binding on the trial court.’” (Lindenstadt, supra, 55 Cal.App.4th at pp. 891–892, citations omitted, italics added.)
“More recently, in Moncharsh v. Heily & Blase [(1992)] 3 Cal.4th 1, the Supreme Court reaffirmed the principles established in Loving & Evans and approved the decision in All Points Traders.... As the Moncharsh court pointed out, ‘Both Loving & Evans... and All Points Traders... permitted judicial review of an arbitrator’s ruling where a party claimed the entire contract or transaction was illegal.’... The high court further stated: ‘Although we recognized the general rule [in Loving & Evans] that the merits of a dispute before an arbitrator are not subject to judicial review, “the rules which give finality to the arbitrator’s determination of ordinary questions of fact or of law are inapplicable where the issue of illegality of the entire transaction is raised in a proceeding for the enforcement of the arbitrator’s award.”’” (Lindenstadt, supra, 55 Cal.App.4th at p. 892, citations omitted.)
Here, CalTrans contends that the Loving & Evans–All Points Traders–Lindenstadt trilogy does not apply because CalTrans did not use the term “illegal” or “void” in the arbitration; it merely argued that Lehigh’s lack of a license during performance barred any recovery. But, regardless of CalTran’s terminology, under Loving & Evans, All Points Traders, and Lindenstadt, the contract between Lehigh and CalTrans was illegal and void if Lehigh performed any portion of the contract without a license and did not substantially comply with the licensing requirement. (See, e.g., Loving & Evans, supra, 33 Cal.2d at pp. 607, 610–611, 614; accord, MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 435–436; Bus. & Prof. Code, § 7031, subds. (a), (e).)
In addition, CalTrans argues that Lehigh waived de novo review of the arbitrator’s award by submitting its claim to arbitration in the first place. Not so. That situation existed in Loving & Evans, All Points Traders, and Lindenstadt, but the courts nevertheless required de novo review in the postarbitration proceedings. Indeed, cases interpreting Loving & Evans have held that the plaintiff’s lack of a license is a defense to be raised by the defendant before the trial court at the earliest possible point, lest the issue be waived. (See, e.g., Moncharsh v. Heily & Blase, supra, 3 Cal.4th at pp. 29–31 (Moncharsh); Bayscene Resident Negotiators v. Bayscene Mobilehome Park (1993) 15 Cal.App.4th 119, 129; Reed v. Mutual Service Corp. (2003) 106 Cal.App.4th 1359, 1372–1373 & fn. 12, disapproved on another point in Haworth v. Superior Court (2010) 50 Cal.4th 372, 382, fn. 6; Cummings v. Future Nissan (2005) 128 Cal.App.4th 321, 328–330 & fn. 6; Pearson Dental Supplies, Inc. v. Superior Court (2010) 48 Cal.4th 665, 681.)
Thus, under Loving & Evans, the trial court should have reviewed the arbitration award de novo to determine whether the contractor’s license requirement, including the substantial compliance doctrine, had been satisfied.
An alternative ground also requires de novo review: The arbitration in this case was mandated by statute. As the parties’ contract recited: “Article 7.1... of Chapter 1, Division 2 of the Public Contract Code provides for the resolution of contract claims by arbitration.
“Claims (demands for monetary compensation or damages) arising under or related to performance of the contract shall be resolved by arbitration unless the Department and the Contractor agree in writing, after the claim has arisen, to waive arbitration and to have the claim litigated in a court of competent jurisdiction. Arbitration shall be pursuant to Public Contract Code Sections 10240–10240.13, inclusive, and applicable regulations (see Subchapter 3 [Sections 301–382, inclusive] [(now chapter 4, sections 1300–1393)] of Chapter 2 of Title 1 of the California Code of Regulations). The arbitration decision shall be decided under and in accordance with the law of this State, supported by substantial evidence and, in writing, contain the basis for the decision, findings of fact, and conclusions of law.”
Section 10240 of the Public Contract Code states: “The remedy for the resolution of claims arising under contracts made [with a state agency] shall be arbitration pursuant to this chapter.” Although “[n]othing in... article [7.1] shall be construed as preventing the parties to the contract, after the claim has arisen, from mutually agreeing in writing to waive the provisions of this article and to have the claim litigated in a court of competent jurisdiction” (Pub. Contract Code, § 10240.10), no such waiver was executed in this case.
Under the California Arbitration Act (Code Civ. Proc., §§ 1280–1294.2), which generally applies to arbitrations conducted under the Public Contract Code (see Pub. Contract Code, §§ 10240.11–10240.12), “[t]he parties to a construction contract with a public agency may expressly agree in writing that in any arbitration to resolve a dispute relating to the contract, the arbitrator’s award shall be supported by law and substantial evidence. If the agreement so provides, a court shall, subject to Section 1286.4, vacate the award if after review of the award it determines either that the award is not supported by substantial evidence or that it is based on an error of law.” (Code Civ. Proc., § 1296, italics added.)
In Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, the court held that parties to a contract may provide for de novo review of legal error: “If the parties constrain the arbitrators’ authority by requiring a dispute to be decided according to the rule of law, and make plain their intention that the award is reviewable for legal error, the general rule of limited review has been displaced by the parties’ agreement. Their expectation is not that the result of the arbitration will be final and conclusive, but rather that it will be reviewed on the merits at the request of either party.” (Id. at p. 1355; see generally Gravillis v. Coldwell Banker Residential Brokerage Co. (2010) 182 Cal.App.4th 503, 511–518.) The court commented more than once that, in contrast to the traditional nonreviewability of an arbitration award on the merits, section 1296 of the Code of Civil Procedure authorizes independent review of public contract arbitration awards involving construction projects. (See Cable Connection, at pp. 1353, fn. 14, 1357, 1360, 1362; see also Moncharsh, supra, 3 Cal.4th at pp. 25–26.)
In accordance with Code of Civil Procedure section 1296, the contract in this case stated that “the arbitration decision shall be decided under and in accordance with the law of this State [and] supported by substantial evidence.” Thus, the trial court was required to review factual findings for substantial evidence and to review legal conclusions independently. It should have reviewed the licensing issue de novo.
DISPOSITION
The order is reversed, and, on remand, the trial court shall independently review the arbitration award for legal error. Appellant is entitled to costs on appeal.
We concur: ROTHSCHILD, J.CHANEY, J.