Case Name: LOVING & EVANS (a Copartnership), Respondents, v. FRANK R. BLICK, Appellant
Court: Supreme Court of California
Jurisdiction: California
Decision Date: 1949-03-18
Citations: 33 Cal. 2d 603
Docket Number: L. A. No. 19884
Parties: LOVING & EVANS (a Copartnership), Respondents, v. FRANK R. BLICK, Appellant.
Judges: 
Reporter: California Reports
Volume: 33
Pages: 603–627

Head Matter:
[L. A. No. 19884.
In Bank.
Mar. 18, 1949.]
LOVING & EVANS (a Copartnership), Respondents, v. FRANK R. BLICK, Appellant.
Siemon, Maas & Siemon, Alfred Siemon, Walter L. Maas, Bennett Siemon and Walter L. Maas, Jr., for Appellant.
Burum, Woodruff & Young and Roland S. Woodruff for Respondents.
Loeb & Loeb and Herman F. Selvin, as Amici Curiae on behalf of Respondents.

Opinion:
SPENCE, J.
This case presents for consideration the propriety of a judgment entered upon an arbitration award in compensation of certain contractors for work performed and services rendered under a building contract. The legality of the award is challenged upon the ground that the contractors at all times in question had failed to comply with the state licensing requirements and were therefore not entitled to enforce their claim. An examination of the record shows this point to be well taken, for the award cannot be reconciled with the settled public policy of this state as expressed in our statutory law.
On February 8, 1945, Loving and Evans, a copartnership, respondents herein, entered into a written contract with Frank R. Blick, appellant herein, for the repair and remodeling of the latter's premises. The contract was on "a cost plus ten per cent (10%) basis," and it provided that any controversy arising between the parties should be submitted to arbitration. After the work was completed, appellant paid to respondents the sum of $13,555, but respondents claimed that a further amount was still due. To settle this point of dispute and in line with their previous understanding, the parties on August 24, 1945, entered into a separate "Agreement of Submission to Arbitration" of all their rights and obligations, under the provisions of sections 1280 to 1293, inclusive, of the Code of Civil Procedure. The agreement empowered the chosen arbitrator to hear the evidence, judge and determine the controversy, and "according to the legal right of the parties" render a "final award," which should "constitute a complete and final adjudication of all matters . . . submitted to arbitration" and "be in the same form" as a judgment in any civil action.
In accordance with the agreement, the following pleadings were submitted to the arbitrator: (1) respondents' petition setting forth their claim; and (2) appellant's answer wherein he denied the correctness of respondents' various charges and demands, and urged as a "separate and special defense" that respondents as contractors could not recover on the building contract in the absence of proof that they were duly li censed as required by article 2, chapter 9, division 3 of the Business and Professions Code.
On March 22, 1946, the arbitrator made his award declaring that "a dispute had arisen . in regard to the amount due" under the parties' building contract, and that they thereupon signed an agreement which "provided that the issues of said controversy should be joined by the submission of a petition . . . and an answer thereto" and that the arbitrator should determine "the matters submitted to arbitration" and that the "award should constitute a complete and final adjudication" of all matters submitted; that a hearing was had on "all of the issues involved"; and that "after consideration of the evidence introduced" he found in favor of the contractors in the sum of $5,739.87.
Thereafter, respondents served upon appellant and filed in the superior court an application for an order confirming the award of the arbitrator. Appellant appeared and objected to the award upon the ground that the arbitrator failed to "make a full and final determination óf the matters submitted" in that he gave no consideration to the special defense presented by appellant in his pleading of respondents' noncompliance with the state licensing provisions as a bar to their recovery on the contract. Accordingly, appellant served and filed his notice of motion to set aside the award, stating that it would be based upon the award, the agreement of submission, the petition for the award, and the answer to the petition—copies of all of which were attached thereto—and upon the objections to the award, the affidavit of the arbitrator, and the affidavit of appellant's counsel—copy of each of which was served therewith. The affidavit of the arbitrator recited the filing of the petition and answer, setting out the special affirmative defense; that in the course of the hearing of the matters before him, "it was stipulated by the parties . . . that it was true that at all times from the initial negotiations for the work to be performed by the Contractors for the Owner, one of the partners of the firm of Loving and Evans, to wit: J. P. Loving, held a contractor's license and held such license throughout the progress of the work and until the completion thereof," and that during all of said time "the other partner, H. D. Evans, did not have such a contractor's license" nor did "the firm of Loving and Evans, a partnership, hold or have issued to [it] a contractor's license under the provisions of the Business and Professions Code of the State of California"; that "the initial negotiations for the work eventually performed were conducted between J. P. Loving and Frank B. Blick, the Owner"; that "prior to February 9, 1945, H. D. Evans became a partner with J. P. Loving in the contracting business and thereafter the work . . . was carried on by . . . [the] partnership." The affidavit of appellant's counsel corroborated the affidavit of the arbitrator with reference to the stipulation therein mentioned.
On May 13, 1946, the matter came on for hearing and was submitted for decision. In addition to the above documents and papers stating the positions of the parties, there was also before the court the affidavit of respondents' counsel. That affidavit admitted the making of the stipulation before the arbitrator with respect to the licensing status of respondents—that "at all times . . . J. P. Loving held a general contractor's license . . .; that the firm of Loving and Evans did not hold such a license until after the termination of [the] job; that H. D. Evans, individually, did not hold such license"—but declared that "the admission of such facts did not admit that said Contractors had not complied with the provisions of the Business and Professions Code . . ., nor admit that said provisions were applicable under the circumstances ."
On May 17, 1946, it was ordered that respondents' motion for an order confirming the award be granted and that appellant's motion to set aside the award be denied; and accordingly judgment for $5,739.87 was thereupon entered on the award. This appeal is taken from the two orders and the judgment. The county clerk certified the documents and papers aforementioned in accordance with rule 5 of the Buies on Appeal. (22 Cal.2d 1, 4-6.) Attached thereto is the certificate of the - trial judge certifying that the three affidavits above reviewed were "used and considered" by him at the hearing, and that they constituted "all of the evidentiary matter so used or considered."
There are two legal issues involved: (1) whether respondents, under the undisputed evidence, operated in violation of the law; and (2) if so, whether the award of the arbitrator and its approval by court order can be sustained.
The following provisions of the Business and Professions Code must be considered in determining the first question. Section 7028 states that "It is unlawful for any person to engage in the business or act in the capacity of a contractor within this State without having a license therefor, . . ." Section 7025 declares "person" to include "an individual, a firm, copartnership, ." Section 7026 defines "a contractor" as "any person . . . who in any capacity other than as the employee of another with wages as the sole compensation, undertakes to or offers to undertake to or purports to have the capacity to undertake to or submits a bid to, or does himself or by or through others, construct, alter, repair . or demolish any building . or other structure, project, development or improvement, or to do any part thereof, ." Section 7029 specifies that "It is unlawful for any two or more licensees, each of whom has been issued a license to engage separately in the business or to act separately in the capacity of a contractor within this State, to jointly submit a bid or otherwise act in the capacity of a contractor within this State without first having secured an additional license for acting in the capacity of such a joint venture or combination in accordance with the provisions of this chapter as provided for an individual, copartnership or corporation." And section 7031 provides that "No person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action in any court of this State for the collection of compensation for the performance of any act or contract for which a license is required by this chapter without alleging and proving that he was a duly licensed contractor at all times during the performance of such act or contract."
There can be no question but that this case presents a clear violation of the statutes regulating the contracting business. Thus, while respondent Loving at all times possessed an individual contractor's license, his respondent partner Evans did not, and the partnership, as such, failed to procure such a license. As appellant maintains, it 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" (Gatti v. Highland Park Builders, Inc., 27 Cal.2d 687, 689 [166 P.2d 265]; see, also, Haas v. Greenwald, 196 Cal. 236, 247 [237 P. 38, 59 A.L.R. 1493]; Wise v. Radis, 74 Cal.App. 765, 774-776 [242 P. 90]; Holm v. Bramwell, 20 Cal.App.2d 332, 335-337 [67 P.2d 114]; Phillips v. McIntosh, 51 Cal.App. 2d 340, 343 [124 P.2d 835]); and that "whenever the illegality appears, whether the evidence comes from one side or the other, the disclosure is fatal to the case. ' ' (Firpo v. Murphy, 72 Cal.App. 249, 253 [236 P. 968]; see, also, Chateau v. Singla, 114 Cal. 91, 94 [45 P. 1015, 55 Am.St.Rep. 63, 33 L.R.A. 750]; Moore v. Moore, 130 Cal. 110, 113 [62 P. 294, 80 Am.St.Rep. 78]; Levinson v. Boas, 150 Cal. 185, 193 [88 P. 825, 11 Ann. Cas. 661,12 L.R.A.N.S. 575].)
To overcome the force of these settled principles, respondents nnavailingly seek to align their status under the licensing regulations with that prevailing as a distinguishable consideration in Gatti v. Highland Park Builders, Inc., supra, 27 Cal.2d 687. There a judgment in favor of plaintiff contractors was affirmed although no license in the name of the partnership under which they had been operating had been issued to the two plaintiff contractors as such. But in the Gatti case these factors were material to its disposition: (1) At the time the contract was performed, both plaintiffs possessed contractor's licenses in their .own names as individuals; and (2) during the performance of the contract, a joint contractor's license was issued to plaintiffs and a third party not concerned in the action so that "Thereby any matters which might form the basis of legitimate inquiry by the licensing board as a condition precedent to the issuance of an additional partnership or joint venture license to plaintiffs, though involving a third party, were necessarily considered, and favorable action was taken thereon." (P. 689.) Accordingly, it was concluded at page 690 that plaintiff contractors had "substantially complied with the statutory requirements," for otherwise their legitimate claim would be defeated on a "technical ground, resting on an unnecessarily strict construction of the statutory provision for the additional joint contractor's license and denying any effect to the combination license in fact issued to plaintiffs and a third person as above recited, [and] the legislative scheme in relation to the licensing of contractors, intended 'for the safety and protection of the public,' would become an unwarranted shield for the avoidance of a just obligation." As was further said in the Gatti case at page 690, "similar considerations" with respect to a contractor's claim prevailed in Citizens State Bank v. Gentry, 20 Cal.App. 2d 415 [67 P.2d 364], and "justified the denial of [a] motion for a nonsuit, predicated on a rigid application of the licensing requirement," where the "contractor's license expired while the work was in progress but was renewed in the name of a corporation, organized by and bearing the contractor's name, and in which he was the dominant and controlling factor; and where the work was completed under the auspices of the corporation. ' ' But no comparable situation is presented here, for under the undisputed facts the contracting partner ship of Loving and Evans did not hold a license "until after the termination of [the] job" in question and though from "all times from the initial negotiations . . . throughout the progress of the work and until the completion thereof," respondent Loving "held a contractor's license," his partner, respondent Evans, during all of said times "did not have such a contractor's license." Thus, it is apparent that the licensing regulations enacted "for the safety and protection of the public," by prohibiting inexperienced persons from engaging in contracting work, were at no time here material permitted to function in determining the qualifications of respondent Evans therefor. Such disregard of the public policy underlying the state's licensing requirements cannot be correlated with the rationale governing the Gatti and Gentry cases, and it renders the entire transaction between respondents and appellant "illegal and void," for completion of the contract "necessarily would involve the performance of illegal acts." (Wise v. Radis, supra, 74 Cal.App. 765, 776.)
There now remains the question of the premise of appellant's objection to the enforcement of the award in favor of respondents. It must be conceded at the outset that ordinarily with respect to arbitration proceedings "the merits of the controversy between the parties are not subject to judicial review" (Pacific Vegetable Oil Corp. v. C. S. T., Ltd., 29 Cal. 2d 228, 233 [174 P.2d 441]) and that "arbitrators are not bound by strict adherence to legal procedure and to the rules on the admission of evidence expected in judicial trials." (Ibid., p. 241.) But, as will hereinafter appear, 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 provisions of section 1288 of the Code of Civil Procedure, which recites the grounds upon which the trial court "must make an order vacating the award." Section (d) thereof specifies that the award must be vacated "where the arbitra tors 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. (Hanes v. Coffee, 212 Cal. 777, 779-780 [300 P. 963]; Friedlander v. Stanley Productions, Inc., 24 Cal.App.2d 677, 680 [76 P.2d 145]; Stetson v. Orland Oil Syndicate, Ltd., 42 Cal.App.2d 139, 143 [108 P.2d 463]; Johnson v. Atkins, 53 Cal.App.2d 430, 434-435 [127 P.2d 1027]; Abraham Lehr, Inc. v. Cortez, 57 Cal.App.2d 973, 976-977 [135 P.2d 684].) 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 or in a proceeding "for an order confirming" or "vacating an award" under sections 1287 and 1288 of said code. If it is presented in a proceeding under said section 1282 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 said section 1287 or 1288 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.
Section 1281 of the Code of Civil Procedure, providing for submission to arbitration of ' any controversy . . . which arises out of a contract, ' ' does not contemplate that the parties may provide for the arbitration of controversies arising out of contracts which are expressly declared by law to be illegal and against the public policy of the state. So it is generally held that ' a claim arising out of an illegal transaction is not a proper subject matter for submission to arbitration, and that an award springing out of an illegal contract, which no court can enforce, cannot stand on any higher ground than the contract itself." (6 C.J.S., § 12, p. 160.) Aptly illustrative of this well-settled principle is the fairly recent case of Smith v. Gladney, 128 Tex. 354 [98 S.W.2d 351], where a dispute arose between the parties as a result of trading in "futures" upon the Chicago Board of Trade. The matter was submitted to arbitration. When suit was brought upon the award and it was affirmed "on the theory that [it] was final," the appellate court, in reversing the judgment, said at pages 351-352 [98 S.W.2d] : "It appears to be almost universally recognized that a claim arising out of an illegal transaction, such as a speculation in futures, is not a legitimate subject of arbitration, and an award based thereon is void and unenforceable in courts of the country. Tandy v. Elmore-Cooper Livestock Commission Co., 113 Mo.App. 409 [87 S.W. 614, 618]; Benton v. Singleton, 114 Ga. 548 [40 S.E. 811, 58 L.R.A. 181]; Lum v. Fauntleroy, 80 Miss. 757 [32 So. 290, 92 Am.St.Rep. 620]; Hall v. Kimmer, 61 Mich. 269 [28 N.W. 96, 1 Am.St.Rep. 575]; Polk v. Cleveland Railway Co., 20 Ohio App. 317 [151 N.E. 808].... A claim that cannot be made the basis of a suit cannot be made the basis of an arbitration. The mere submission of an illegal matter to arbitrators and reducing it to an award does not purge it of its illegality." (See, also, In re Gale, 176 Misc. 277 [27 N.Y.S.2d 18, 21-23].)
In ruling here upon the propriety of the arbitrator's decision, the trial court had before it and considered the affidavits of the arbitrator, of counsel for appellant, and of counsel for respondents showing the invalidity of the contract stemming from respondent partners' failure to comply with the state licensing requirements and the partnership's consequent lack of authority to bring or maintain an action or proceeding for the enforcement of the award. (Pleaters & Stitchers Assn. v. Davis, 140 Cal.App. 403, 406 [35 P.2d 401].) Such affidavits were neither denied nor controverted; they were admitted without objection; no question is raised concerning their competency to show the illegality of the transaction; and being entirely in accord on the facts establishing the invalidity of the contract, the court was required to accept as true the facts therein stated. (Giannopulos v. Pappas, 80 Utah 442 [15 P.2d 353, 355].)
Since an unlawful transaction cannot be given legal vitality by the arbitration process, there is obviously no force to respondents' argument that they are in a distinguishable position because they allegedly are not bringing "an action in any court" on their claim, within the meaning of section 7031 of the Business and Professions Code, but are only seeking judicial confirmation of an arbitration award, and therefore their noncompliance with the statutory licensing regulations would not preclude their right to enforce a recovery. But as was said in Tandy v. Elmore-Cooper Live Stock Commission Co., 113 Mo.App. 409 [87 S.W. 614], at page 618 [87 S.W.] : "The laws in support of a general public policy and in enforcement of public morality cannot be set aside by arbitration, and neither will persons with a claim forbidden by the laws be permitted to enforce it through the transforming process of arbitration." (See, also, Smith v. Gladney, supra, [Tex.] 98 S.W.2d 351, 352.) To hold otherwise would be tantamount to giving judicial approval to acts which are declared unlawful by statute. (Wise v. Radis, supra, 74 Cal.App. 765, 775776; Massie v. Dudley, 173 Va. 42 [3 S.E.2d 176, 180-181]; In re Gale, supra, 27 N.Y.S.2d 18, 21-23.)
Similar considerations were involved in the case of Holm v. Bramwell, supra, 20 Cal.App.2d 332, relative to the enforcement of a mechanic's lien, which, like the arbitration process, is listed in our code as a "special proceeding" (Code Civ. Proc., § 23) as distinguished from an "action" (Code Civ. Proc., §22) in the division of judicial remedies (Code Civ. Proc., Part III, § 1180-1208; § 1280-1293). In the cited case plaintiff, a licensed building contractor, undertook certain construction work on defendant's lots. In so doing, plaintiff contracted with an unlicensed subcontractor for the furnish! ing of certain materials and the performance of certain labor, for which plaintiff paid an agreed sum. Upon the completion of plaintiff's undertaking, defendant paid him in part but "refused to pay . . . the balance on the theory that he had awarded certain contracts for materials and labor to an unlicensed subcontractor, which was contrary to law and invalid. . . . plaintiff then brought . . . suit to establish a mechanic's lien on the property and to sell it to satisfy the unpaid balance." (P. 333.) The court found in favor of plaintiff in every respect except as to the amount that he paid the unlicensed subcontractor, which item was disallowed because "founded on an illegal contract which [plaintiff] had made . . . contrary to law" and so "void." (P. 334.) Holding that the trial court had "properly disallowed" the mentioned item and had "properly refused to vest a lien upon the [defendant's] property for the payment of that sum," the appellate court continued at page 334 as follows: "Mechanics' liens are creatures of statute and therefore dependent upon at least substantial compliance with the law. . . . This is . a suit to recover money paid pursuant to an illegal contract with a subcontractor which is void. A mechanic's lien may not be founded on an illegal contract procured contrary to law. ' ' Thereupon, after quoting the various sections of the Contractors' License Law relative to the licensing requirements and compliance therewith as a condition prerequisite to the maintenance of an "action . . . for the collection of compensation," the appellate court stated at page 336: "It has been repeatedly held that a party to an illegal contract may not rest his cause, or recover judgment based upon such void agreement." Accordingly, the moneys advanced to the unlicensed subcontractor were "not recoverable" by plaintiff in Ms suit against defendant.
So here an analogous situation is presented where respondents are seeking to invoke the jurisdiction of the court to establish their award as a "judgment" having "the same force and effect, in all respects, as . a judgment in an action." (Code Civ. Proe., § 1292.) No more than a mechanic's lien should an arbitration award "founded on an illegal contract procured contrary to law" be enforced through a court proceeding. Whether applying to the court for recovery on his compensation claim either at the outset through the institution of a suit or later in fulfillment of the arbitration process, the contractor seeking judicial aid in the enforcement of his alleged rights should be required to comply with the specifications of the law "designed for the protection of the public." (Firpo v. Murphy, supra, 72 Cal.App. 249, 253.) In this general sense, respondents' application for judicial confirmation of the arbitrator's award is an "action . . . for the collection of compensation" within the purport of section 7031 of the Business and Professions Code, as that section expresses the public policy of this state. (Franklin and Roberts v. Goldstone Agency, this day decided, post, p. 628 [204 P.2d 37]; see, also, In re Vanguard Films, Inc., 188 Misc. 796 [67 N.Y.S.2d 893, 896]; Application of Levys, 73 N.Y.S. 2d 801, 802; Tugee Laces, Inc. v. Mary Muffet, Inc., 73 N.Y.S. 2d 803; also Waterbury Blank-Book Mfg. Co. v. Hurlburt, 73 Conn. 715 [49 A. 198,199].)
In conclusion, it appears appropriate to make reference to certain claims made by respondents, and also to make further comment upon the state of the record on this appeal. Respondents set forth in their briefs and petition for hearing certain alleged facts as the basis for the claim that they had substantially complied with the licensing requirements. Their statement of these matters is prefaced by the remark "Although the record does not reflect the following facts and they are recited here merely for example, the facts concerning the license of respondents are as follows: ." Appellant not only disputes the correctness of the facts stated by respondents but likewise contends that it is improper for respondents to attempt to bring before this court alleged facts which do not appear in the record on appeal. We are of the opinion that this contention of appellant must be sustained. Under the authorities above cited it seems clear that when 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.
Turning to the record, it appears that the only evidence before the trial court showed without contradiction that the contract upon which the award was based was illegal and void because of respondents' failure to comply with the licensing requirements. According to the application for confirmation and according to the award, which was attached as an exhibit, the contract upon which the award was based was a contract made on February 8, 1945, between "Loving and Evans, a copartnership, Contractors," and "Frank R. Blick, Owner." All the evidence before the trial court, including the affidavit of counsel for respondents, showed that "the firm of Loving and Evans did not hold such a [contractor's] license" and that "H. D. Evans, individually, did not hold such [contractor's] license" either at the time of the making of the contract or at any time while the work was in progress. No evidence purporting to show any attempted compliance with the licensing requirements at any time was offered to the trial court. This appeal is not in the nature of a so-called judgment roll appeal, and the rules governing the latter can have no application here. The transcript contains the several affidavits submitted to the trial court, and the certificate of the trial judge certifies that said affidavits were "used and considered by me" and that "said affidavits constitute all of the evidentiary matter so used or considered by me in the hearings of said motions [motion for order confirming award of the arbitrator and motion to set aside award of arbitrator]. ' ' Under these circumstances, this appeal must be determined upon the facts appearing in the record on appeal, and it follows from what has been said that the trial court erred in confirming the award. It is unnecessary here to enter into the realm of conjecture by discussing the effect, if any, of the disputed facts which are set forth in the briefs but which do not appear in the record. Upon reversal, respondents may present to the trial court any matters which they may claim will show a substantial compliance with the licensing requirements so as to avoid the charge of illegality with respect to the contract in question.
The judgment and orders subject of this appeal are, and each of them is, reversed, and the cause is remanded for further proceedings not inconsistent with the views herein expressed.
Gibson, C. J., and Traynor, J., concurred.