What is an arbitrator to do after concluding that the parties’ entire agreement — the same agreement that authorized the arbitration proceeding — is invalid? That is the question that the California Court of Appeal addressed this week. The California court ruled that the arbitrator was authorized to reach a decision on the merits of the construction dispute even after it concluded that the parties’ agreement was illegal, and therefore the arbitration award should be confirmed. Templo Calvario Spanish Assembly of God v. Gardner Constr. Corp., __ Cal. Rptr. 3d ___, 2011 WL 3586481 (Cal. Ct. App. Aug. 16, 2011).
The construction dispute in Templo Calvario was between a church and an unlicensed contractor. Although the contractor had initially balked at arbitrating the dispute (despite the contract’s arbitration clause), the opinion says that it later “agreed to submit the matter to arbitration.” The arbitrator applied California’s strict licensure statutes and ruled that the contractor had to disgorge all the money the church had paid the contractor. The church moved to confirm the award. The district court vacated the award, reasoning that the contractor’s unlicensed status voided the parties’ contract, including its arbitration provision, and “the arbitrator was without authority to render a decision.” The appellate court reversed, finding that under California law, contracts with unlicensed contractors are not “automatically illegal and void.” For example, if a contractor was licensed while it performed the work at issue, and had only been unlicensed when it signed the contract, that may not void the construction contract. [Based on the factual description, it seems the court could have confirmed the arbitration award on a less controversial basis. The court could have held that the contractor’s post-dispute agreement to arbitrate authorized the arbitrator to decide the issues, so that any invalidity of the parties’ original contract was immaterial.]
The arbitrator in Templo Calvario is not the first to have decided the merits of a dispute even after concluding that the entire contract was invalid. E.g., Elem Indian Colony of Pomo Indians v. Pacific Dev. Ptnrs. X, LLC, 2010 WL 2035331 (N.D. Cal. May 19, 2010); Ultimate Experience, USA v. Raging Waters Grp., 2005 WL 2995259 (Cal. Ct. App. Nov. 9, 2005). At least one court, however, has refused to confirm an award reached by an arbitrator who had already concluded the entire agreement was unenforceable. Niven v. G.F.B. Enterprises, LLC, 849 So. 2d 1093, 1094 (Fl. Ct. App. 2003). In it, the appellate court found “the trial court erred by confirming an arbitration award based on an agreement that never existed.” Id.
In short, the arbitrator and the parties should proceed with caution if the entire contract containing the arbitration agreement is declared invalid. No one wants to waste resources on an arbitration proceeding that a court may later determine was unauthorized.