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Contractor Wins in Arbitration Only to Lose Before the Superior Court on Section 7031 Claim


If you’re a regularly reader of the California Construction Law Blog you’re aware of Business and Professions Code section 7031 which courts have variously described as “harsh[ ],” “draconian” and “unjust,” but, importantly, nevertheless valid. We haven’t seen many cases applying Section 7031 in an arbitration setting, however, until now.


In Vascos Excavation Group LLC v. Gold, 87 Cal.App.5th 842 (2022), a contractor who prevailed on a payment claim in arbitration, had its victory snatched from its fingertips by the Superior Court which found that the arbitrator had exceeded her authority because the contractor was subject to Section 7031.


The Vascos Case


in 2019, Vascos Excavation Group LLC entered into a construction contract with Robert Gold to perform excavation, grading and concrete work at his property in Pacific Palisades, California. A payment dispute arose and Vascos recorded and later filed suit to foreclose on a mechanics lien. In response, Gold filed a petition to compel arbitration pursuant to an arbitration provision contained in the construction contract. Vascos filed a notice of non-opposition to the petition and the court entered an order compelling the parties to arbitration.


The arbitration provision provided for arbitration before the American Arbitration Association pursuant to the AAA’s Construction Arbitration Rules. A four-day hearing was later held. After both parties rested, Gold argued that Vascos was barred from seeking compensation as an unlicensed contractor under Section 7031. The arbitrator re-opened the hearing for limited purpose of giving Vascos an opportunity to prove it held a valid contractor’s license.

Vascos filed a certified copy of its contractor’s license from the Contractors State License board showing that one John Matthew Welch was the responsible managing employee (RME) for the company. Vascos also filed a declaration by Victor Montes, the project manager onto project, which attached two videos showing Welch at the construction site on June 29 and August 10, 2020.


After the arbitration was officially closed, the arbitrator issued an award finding that Vascos was entitled to recover $111,440.29 from Gold. In the award, the arbitrator found: “The evidence of Mr. Welch’s participation was his attendance at the job site on at least one occasion, and that he worked remotely from his home in his capacity as RME. Working remotely would allow Mr. Welch to make administrative decisions. For this reason, the challenge to his RME status is over ruled.”


Gold later filed a petition to vacate the arbitration award on the ground that the arbitrator had exceed her authority. Gold’s argument was that the arbitrator’s authority was premised on the arbitration provision contained in the parties’ construction contract, but that because Welch was a sham RME, that Vascos was an unlicensed contractor, and the arbitration provision was therefore contained in an void construction contract. Vascos opposed the petition and asked that the trial court confirm the arbitration award.


The trial court, finding that Vascos had failed to meets its burden of proving that Welch was a bond fide RME, vacated the arbitration award.


Vascos appealed.


The Appeal


At this point you may be asking yourself “what the heck happened?” Didn’t the arbitrator find that Vascos had satisfied its burden of proving that it was a licensed contractor? Why is the superior court second guessing the arbitrator? And aren’t arbitration decisions generally not reviewable for errors of fact or law? Well, read on.


On appeal, the 2nd District Court of Appeal explained that “generally, an arbitration is final” and that “the scope of judicial review of arbitration awards is extremely narrow because of the strong public policy in favor of arbitration and according finality to arbitration awards.” However, explained the Court of Appeal, 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” and “an agreement to arbitrate is invalid and unenforceable if it is made as part of a contract that is invalid and unenforceable because it violates public policy.”


“Whether a contract is entirely illegal, and therefore unenforceable, is an issue ‘for judicial determination upon the evidence presented to the trial court,” explained the Court of Appeal, “and any preliminary determination of the legality by the arbitrator . . . should not be held to be binding upon the trial court.” In short, each reviewing court conducts its own de novo review, although the Courts of Appeal will look at the evidence presented to trial court, not the arbitrator.


On appeal, Vascos argued that by producing a certified copy of its contractor’s license from the CSLB that it had satisfied its burden of proof and that the burden then shifted to Gold to prove that Welch was a sham RME. Not so held the Court of Appeal. While production of a certified copy of a contractor’s license is “necessary” to prove valid licensure, it is “insufficient if the point is controverted,” and where a claim is made that an RME is a sham, “[t]he contractor has the burden of proof on the issue of whether it has a bona fide RME.”

And here, held the Court of Appeal, Vascos did not meet its burden. In fact, what the Court of Appeal said the Vascos failed to do, is embarrassingly simple:

  • An RME, explained the Court of Appeal, must be a “permanent” employee working no less than “32 hours per week, or 80 percent of the total hours per week that the company’s business was in operation.”

  • The videos, explained the Court of Appeal, while it showed Welch at the project site, did not show that Welch was a permanent employee or that he was working no loess than 32 hours per week or 80% of the total weekly working hours of Vascos.

  • “The burden on Vascos was not high,” explained the Court of Appeal, and it likely could have met that burden with a “five sentence declaration . . . yet [Vascos] failed to meet it.”

  • Moreover, explained the Court of Appeal, there are sound public policy reasons for placing the burden on the contractor who has access to payroll records, timesheets and other employees who can testify to the activities of the RME.

Vascos’ final argument on appeal was an “I gotcha,” and I think may say more about the case, than anything. When Gold filed his petition to vacate the arbitration award, he asked for an order “permitting limited discovery to determine the existence of documents proving full-time employment of John Matthew Welch from June to November 2019, including: (a) payroll records with cancelled checks; (b) worker’s compensation employee reports; and (c) payroll tax returns” and for an evidentiary hearing with live witness testimony.


Vascos objected to permitting discovery and holding an evidentiary hearing, arguing that “Gold’s request for what would effectively be a new court trial on the issue of licensure is unsupported and unsupportable”, that the trial court’s authority was at most to conduct “a de novo review of the available evidence to the trial court at the time of review”, and that Gold was seeking an inappropriate “fishing expedition” that “is clearly not supported by law.”


Having lost before the trial court, Vascos argued on appeal that trial court “erred in not setting an evidentiary hearing”, and the Court of Appeal was not sympathetic. “Vascos,” held the Court of Appeal, “forfeited on appeal any argument that the trial court should have conducted an evidentiary hearing because it did not ask for one in the trial court. To the contrary, Vascos successfully opposed such a hearing.” Ouch.


Conclusion


There are a number of lessons to be learned here. First, an arbitrator’s award, while generally immune from attack, can be challenged if proper licensure is in dispute, the argument being that the arbitrator has no authority to hear the case if the contract with the arbitration provision is void to begin with. Second, when proper licensure is in dispute, the trial court conducts a de novo review, meaning that you better bring your guns even if you already won before the arbitrator. And, finally, while the burden of proving proper licensure is on the contractor, satisfying that burden is not difficult, although its may involve more than simply producing a certified copy of your contractor’s license.

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