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Betts v. Compaction Plus, Inc.

California Court of Appeals, Fourth District, Second Division
Jul 22, 2008
E043258, E043739 (Cal. Ct. App. Jul. 22, 2008)

Opinion

NOT TO BE PUBLISHED

APPEAL from the Superior Court of Riverside County No. RIC 425166, Gloria Trask, Judge.

Gibbs, Giden, Locher & Turner, Michael I. Wayne, Victor F. Luke and Gary E. Scalabrini for Defendants and Appellants.

Hunt Ortmann Palffy Nieves Lubka Darling & Mah, Inc., Wahid E. Guirguis, Debi A. Ramos and John D. Darling for Plaintiffs and Respondents.


OPINION

Gaut, J.

1. Introduction

Defendants Compaction Plus, Inc. and Travelers Casualty & Surety Company (collectively CPI) appeal from a judgment in favor of plaintiffs (collectively Betts). Originally, an arbitrator decided that CPI had breached its subcontract with Betts, a general contractor, but also determined that Betts was unlicensed and therefore was barred from obtaining a recovery from CPI. The trial court found that Betts was actually properly licensed and directed the arbitration award be corrected to allow Betts to recover from CPI. We reject CPI’s challenge on appeal and hold the trial court could properly review and correct the arbitration award as it did here.

In their complaint, plaintiffs identify themselves as Heidi Betts and Kenneth Betts, doing business as Betts Construction and Electrical Services.

2. Factual and Procedural Background

In the complaint filed in February 2005 against CPI, Betts alleged that it was an entity operated by two individuals, Heidi Betts and Kenneth Betts, doing business under the fictitious name of Betts Construction and Electrical Services in compliance with the notice and publication requirements of Business and Professions Code section 17918. Betts also alleged it was a duly licensed general contractor. Betts, through Heidi Betts as an owner, had executed a prime contract with the Temecula Valley Unified School District for a public works project and executed a subcontract with CPI. The subcontract had a simple arbitration provision stating that any “dispute shall be subject to arbitration . . . in accordance with the Construction Industry Rules of the Judicial & Mediation Service, Inc. [JAMS] . . . .” Betts sued CPI for breach of contract and for recovery on its performance bond.

Unless otherwise stated, the statutory references are to Business and Professions Code.

In its general denial filed in March 2005, CPI asserted as an affirmative defense the existence of an agreement for binding arbitration and asked for a stay of the civil action. The general denial did not challenge Betts’s capacity to sue based on a failure to be licensed in accordance with section 7031.

In a separate complaint filed in June 2005, CPI sued Betts, identified as Kenneth Betts and Heidi Betts, individually and doing business as Betts Construction and Electrical Services. CPI alleged the execution of a written subcontract with Betts and did not assert its illegality.

The parties ultimately agreed to submit their dispute to the American Arbitration Association instead of JAMS. In January 2006, the parties entered into a judicially-approved stipulation to have the two actions consolidated and decided by binding arbitration: “All disputes between BETTS and CPI arising out of or related to the PROJECT . . . shall be submitted to and determined by the currently pending AAA arbitration.”

CPI first raised the issue about whether Betts was properly licensed in March 2006 in its opening arbitration brief. The arbitrator requested additional briefing, which the parties provided.

The arbitrator’s decision was as follows: “CPI entered into a contract with Heidi Betts on a public work of improvement to furnish grading services. Heidi Betts entered into a contract with the public body as general contractor. Ken Betts ran the job for BETTS. Ken and Heidi Betts have been married for many years and Ken Betts is and has been a licensed general contractor. Heidi Betts does not have a contractor’s license nor is there a partnership license between Ken and Heidi Betts. . .

“I find that CPI breached the contract by failing to render subcontracting services in a timely or efficient manner and by abandoning the project without justification leaving BETTS to complete the work of CPI and causing delay damages and other consequential damages to BETTS . . . . I believe that both liquidated damages which represent delay and actual damages would be awardable to BETTS in the sum of $621,081.00 . . . . I also would award costs and attorneys’ fees to BETTS. However, I believe I am barred from making any award to BETTS because of the failure of BETTS to have a contractor’s license.

“A contractor’s license is and has been for some time in the name of Ken Betts. The general contract was undertaken in the name of Heidi Betts. Heidi Betts did the administration for projects at the BETTS’[s] offices and Ken Betts ran the project. Under these circumstances, the contracting party is either Heidi Betts who is unlicensed or Heidi and Ken Betts, a partnership, by implication. The partnership is also not licensed. The fact that they are husband and wife is of no avail. I know of no case law which would sanction a contractor’s license under this fact situation.”

The arbitrator explained that he would prefer to find in favor of Betts but believed he could not legally. He then concluded: “Since BETTS cannot make a claim for compensation without having been properly licensed under the contractor’s license law, I conclude that neither party is the prevailing party and therefore neither party is awarded damages, attorneys’ fees or costs.”

In July 2006, CPI filed a motion in the superior court to confirm the arbitrator’s award. (Code Civ. Proc., §§ 1285, 1285.6.)

Betts opposed CPI’s motion, arguing that only the superior court, not the arbitrator, could decide the legal enforceability of the subcontract and also arguing Betts was properly licensed. Betts also filed a separate motion to correct the arbitration award on the grounds the arbitrator had exceeded his powers and to have the award corrected in favor of Betts. (Code Civ. Proc., § 1286.6.) As part of its opposition and related motion, Betts submitted the declarations of Kenneth Betts and Heidi Betts and copies of Betts’s contractor’s license and of the fictitious business name statement. The Contractors State License Board first issued a license for “Betts Electric” in August 1988. The name of the business was changed in 1996 to “Betts Construction and Electrical Services.” The owner is identified as Kenneth Eugene Betts. In December 2001, Kenneth and Heidi Betts recorded a fictitious business name statement stating they were doing business individually as husband and wife using the name, Betts Construction and Electric.

Betts also submitted the declaration of Robert Berrigan, an attorney and a former licensing deputy for the Contractors State License Board. Berrigan stated that he had reviewed Betts’s license and determined it was properly licensed between 1988 and 1995 through 2005 and during the period of the contract between March 2004 and April 2005. In his opinion, Betts was not in violation of section 7031.

In November 2006, the trial court granted Betts’s motion to correct the arbitration award. (Code Civ. Proc., § 1286.6.) The court found Betts was properly licensed and the subcontract was legally enforceable. The court ordered Betts to recover damages of $621,081, attorney’s fees, and costs from CPI. The arbitrator subsequently made an additional award of $233,616.44 for attorneys’ fees, $42,896.07 for prejudgment interest, and fees and costs of $27,282.83.

Betts filed a motion to confirm the full arbitration award. CPI opposed the motion, submitting to the superior court in May 2007 for the first time the AAA’s Rules and Procedures. “Rule R-8. Jurisdiction” provides:

“(a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.

“(b) The arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part. Such an arbitration clause shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitrator that the contract is null and void shall not for that reason alone render invalid the arbitration clause.

“(c) A party must object to the jurisdiction of the arbitrator or to the arbitrability of a claim or counterclaim no later than the filing of the answering statement to the claim or counterclaim that gives rise to the objection. The arbitrator may rule on such objections as a preliminary matter or as part of a final award.” Betts objected to CPI introducing the AAA rules. In May 2007, the superior court granted Betts’s motion to confirm the full arbitration award and entered judgment. CPI appealed.

The superior court declined to consider the AAA rules or Betts’s objection to them but the AAA rules are part of the record on appeal. Therefore, CPI’s request for judicial notice, filed December 4, 2007, is moot.

Betts subsequently made a final motion for a post-arbitration award of attorney’s fees. The court granted the motion in the amount of $128,649.50. CPI appealed again.

Betts’s total recovery so far is more than $1 million.

3. Discussion

The Contractors’ State License Law exists to protect the public: “Protection of the public shall be the highest priority for the Contractors’ State License Board in exercising its licensing, regulatory, and disciplinary functions. Whenever the protection of the public is inconsistent with other interests sought to be promoted, the protection of the public shall be paramount.” (§ 7000.6.)

Section 7031, subdivision (a), provides a building contractor must be licensed by the state in order to sue for compensation: “[N]o 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, regardless of the merits of the cause of action brought by the person, . . .”

In the superior court, the present case involved two issues. Was the arbitrator authorized to decide whether Betts was properly licensed and the subcontract legally enforceable? If not and the superior court was so empowered, was Betts properly licensed and was the subcontract legally enforceable? The superior court answered the first questions negatively and the second questions positively. The issue on appeal, as described by CPI, is limited: “All this Court must decide is whether the trial court was justified in correcting the Award under California Code of Civil Procedure § 1288.6(b). Put another way, did the arbitrator exceed his powers by determining that Betts was not properly licensed?”

We review the latter ruling, giving due deference to the superior court’s factual findings: “[To] the extent the trial court’s determination . . . turned on the resolution of conflicts in the evidence or on factual inferences to be drawn from the evidence, we consider the evidence in the light most favorable to the trial court’s ruling and review the trial court’s factual determinations under the substantial evidence standard. (Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 89.)” (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 892; Lindenstadt v. Staff Builders, Inc. (1997) 55 Cal.App.4th 882, 892, fn. 7; Ajida Technologies, Inc. v. Roos Instruments, Inc. (2001) 87 Cal.App.4th 534, 541-542; Reed v. Mutual Service Corp. (2003) 106 Cal.App.4th 1359, 1365; Malek v. Blue Cross of California (2004) 121 Cal.App.4th 44, 55-56; Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401, 408.) The superior court made a factual finding that Betts was properly licensed.

We independently decide the legal questions. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564; Lindenstadt v. Staff Builders, Inc., supra, 55 Cal.App.4th at p. 892, fn. 7; Ajida Technologies, Inc. v. Roos Instruments, Inc., supra, 87 Cal.App.4th at pp. 541-542; CPI Builders, Inc. v. Impco Technologies, Inc. (2001) 94 Cal.App.4th 1167, 1171-1172; Reed v. Mutual Service Corp., supra, 106 Cal.App.4th at p. 1365; Malek v. Blue Cross of California, supra, 121 Cal.App.4th at p. 55; Jones v. Humanscale Corp., supra, 130 Cal.App.4th at p. 408.)

We first observe that CPI delayed raising the licensure issue until the eve of the arbitration in March 2006 although litigation had commenced more than a year before in February 2005. Such delay would appear to violate AAA Rule R-8, subdivision (c), upon which CPI hopes to rely. Rule R-8 says a party “must” object to the jurisdiction of an arbitrator or the arbitrability of a claim at the first opportunity. Furthermore, in Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 31, our Supreme Court “held that if a party believes the entire contractual agreement or a provision for arbitration is illegal, it must oppose arbitration on this basis before participating in the process or forfeit the claim.” (Cummings v. Future Nissan (2005) 128 Cal.App.4th 321, 328.)

CPI did not oppose the arbitration on the grounds that the subcontract and its arbitration provisions were illegal and unenforceable because Betts was unlicensed. Instead, CPI participated in a six-day arbitration and, when the arbitrator ruled in favor of CPI on the licensure issue, sought to challenge the legality of the subcontract while upholding the validity of the arbitration—and by extension the subcontract providing for arbitration. Then, after the superior court corrected the arbitration award in November 2006 to favor Betts, six months later in May 2007, CPI introduced the AAA Rule R-8 concerning jurisdiction and arbitrability. CPI’s challenges to the validity of Betts’s contractor’s license continue to be persistent but belated and incline us to reject its appeal for reasons of waiver and forfeiture. Nevertheless, for the sake of judicial resolution and expediency, we proceed to address the merits of the primary issue concerning whether the arbitrator exceeded his powers. (Code Civ. Proc., § 1286.6.)

We acknowledge the general rule, as expressed in Moncharsh and often repeated in case law, that arbitrations are final and binding and an arbitrator’s error of fact or law cannot be corrected by the courts. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at pp. 10 and 28.) An exception to the general rule permits judicial review when the entire contract is unenforceable because a party is not licensed. (Lindenstadt v. Staff Builders, Inc., supra, 55 Cal.App.4th at p. 892, citing Moncharsh, supra, at pp. 31-32; see Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955, 960.) That is the present circumstance. Either Betts was licensed and could enforce its rights against CPI or Betts was unlicensed, making the subcontract illegal and unenforceable.

The trial court, not the arbitrator, possessed the authority to decide the issue of the legal enforceability of the subcontract by Betts. (Green v. Mt. Diablo Hospital Dist. (1989) 207 Cal.App.3d 63, 66; Hotels Nevada, LLC v. Bridge Bank, LLC (2005) 130 Cal.App.4th 1431, 1436-1437.) This is the rule even where the question had already been submitted to and decided by the arbitrator: “‘[T]he trial court is the tribunal which must determine such issue of illegality upon the evidence presented to it’ (Loving & Evans [v. Blick (1949) 33 Cal.2d 603, 614], and ‘. . . any preliminary determination of legality by the arbitrator . . . [is] not . . . binding upon the trial court’ (id. at p. 609).” (Lindenstadt v. Staff Builders, Inc., supra, 55 Cal.App.4th at p. 892.) In seeking to confirm the arbitration award, CPI could not rely on the arbitrator’s conclusions about the validity of Betts’s license and the subcontract’s enforceability because to do so it would violate public policy. (Lindenstadt, supra, at pp. 892-893, citing Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 316, fn. 2.) Instead, the trial court, not the arbitrator, properly determined whether Betts was licensed under the Contractors’ State License Law, making the subcontract enforceable, and whether the arbitration award should be confirmed subject to correction. (Lindenstadt, supra, at p. 893, Code Civ. Proc., § 1286.6.)

Based on the foregoing, we are not persuaded by CPI’s assertion that Betts agreed the arbitrator would make the final decision about whether Betts was licensed and the subcontract unenforceable or that Betts waived its right for a judicial determination on this issue. The public policy favoring arbitration does not outweigh the legislative and judicial requirements that a court decide the legal enforceability of a contract as a whole. The status of Betts’s license, if contested, should have been decided as a preliminary issue by the superior court. (Moncharsh v. Heily & Blasé, supra, 3 Cal.4th at pp. 31-32.) Even if it was decided by the arbitrator, it was still subject to review by the superior court. (Lindenstadt v. Staff Builders, Inc., supra, 55 Cal.App.4th at pp. 892-893.) Therefore, CPI cannot rely on cases involving an arbitrator’s decision about the partial illegality of a contract. (Jones v. Humanscale Corp., supra, 130 Cal.App.4th at pp. 408-411; J.C. Gury Co. v. Nippon Carbide Industries (USA) Inc. (2007) 152 Cal.App.4th 1300, 1305-1306.) The error committed by the arbitrator was that of exceeding his powers, not that of making an error of fact or law. In correcting the arbitration award, the trial court properly acted according to Code of Civil Procedure section 1286.6.

As a final point, we reject CPI’s independent argument that the one-page AAA form “Submission to Dispute Resolution” for binding arbitration constituted an alternative agreement empowering the arbitrator to decide the issue of whether Betts was licensed. Nothing on the face of that document and nothing in the record relating to the execution of the brief submission form supports CPI’s contention in this respect. The AAA rules upon which CPI now seeks to rely were not submitted to the superior court until many months after the order was made correcting the arbitration award when it was too late for the trial court to consider them. Notwithstanding CPI’s delay in introducing the AAA rules as previously mentioned, CPI violated Rule R-8 by not initially seeking a resolution of the preliminary issues of whether Betts was licensed and the enforceability of the subcontract in its answer to Betts’s complaint, in its own separate complaint, or before proceeding with the lengthy arbitration. In contrast, as already noted, the record of the arbitration and of the judicial proceedings does not establish that Betts agreed to forego its opportunity for a judicial determination of the legal enforceability of the subcontract.

4. Disposition

We affirm the judgment. Betts, the prevailing party, shall recover its fees and costs on appeal.

We concur: Hollenhorst, Acting P. J., King, J.


Summaries of

Betts v. Compaction Plus, Inc.

California Court of Appeals, Fourth District, Second Division
Jul 22, 2008
E043258, E043739 (Cal. Ct. App. Jul. 22, 2008)
Case details for

Betts v. Compaction Plus, Inc.

Case Details

Full title:HEIDI BETTS et al., Plaintiffs and Respondents, v. COMPACTION PLUS, INC…

Court:California Court of Appeals, Fourth District, Second Division

Date published: Jul 22, 2008

Citations

E043258, E043739 (Cal. Ct. App. Jul. 22, 2008)