Smith v. Pinnamaneni – 4/28/2011

May 18, 2011

Arizona Court of Appeals Division One Holds That the Failure to Raise a Contractor’s Lack of Licensure as an Affirmative Defense Under A.R.S. § 32-1153 in Arbitration Constitutes a Waiver of That Defense.

In October 2007, Pioneer Family Investments, LLC (“Pioneer”), through its managing member Krishna Pinnamaneni (collectively with Pioneer, “Defendants”), entered into a contract with W Inc. for construction of a home.  The contract contained an arbitration clause stating that “[a]ny claim arising out of or related to the Contract . . . shall . . . be subject to arbitration.”  After a dispute arose regarding W Inc.’s work, W Inc. demanded arbitration against Pinnamaneni and Pioneer.  Approximately one week before the scheduled arbitration, Pinnamaneni discovered W Inc. did not have a contractor’s license when the contract was signed and for nearly the entire first year of construction.  W Inc. appeared at the scheduled arbitration hearing, but Pinnamaneni and Pioneer did not.  The arbitrator subsequently issued an award to W. Inc. against Defendants for $28,740 in damages and $9,190 in fees and expenses.  W Inc. applied to the superior court for confirmation of the award.  Defendants opposed confirmation, arguing that W Inc. had fraudulently entered into the contract without a contractor’s license as required under Arizona law.  After oral argument, the superior court confirmed the arbitration award and entered judgment against Defendants.  Defendants timely appealed.

On appeal, the Arizona Court of Appeals upheld confirmation of the arbitration award against Pioneer, concluding that Pioneer waived its defense that W Inc. was an unlicensed contractor.  In Arizona, a contractor may not “commence or maintain any action in any court of the state for collection of compensation for the performance of any act for which a license is required . . . without alleging and proving that the [contractor]] was a duly licensed contractor when the contract sued upon was entered into and when the alleged cause of action arose.”  A.R.S. § 32-1153.  Although older cases in Arizona treated contracts with unlicensed contractors as illegal and unenforceable, the Court of Appeals noted that more recent case law treats contracts with unlicensed contractors as voidable, meaning they are enforceable if certain conditions are met.  According to the Court of Appeals, the burden is on the opposing party to affirmatively raise the defense of lack of licensure and that party’s failure to do so constitutes a waiver.  In this case, Defendants knew of W Inc.’s unlicensed status before the arbitration hearing, yet chose not to participate in the arbitration rather than raise W Inc’s status as a defense and, in doing so, waived the affirmative defense.  The Court of Appeals rejected Defendants’ contention that the issue could only be raised in superior court, noting that (1) by agreeing to arbitrate, Defendants not only agreed to raise their defenses in arbitration but essentially agreed to limit their challenges to confirmation of the arbitration award to those enumerated in A.R.S. § 12-1512 and (2) adopting Defendants’ argument would defeat the objectives of arbitration.

The Court of Appeals, however, reversed confirmation of the award against Pinnamaneni, concluding that the superior court did not determine whether he was bound to arbitrate as required under Arizona law.  In Arizona, the general rule is that a party is bound to arbitrate only those disputes which it has contractually agreed to arbitrate.  Nonsignatories, however, can be required to arbitrate under certain circumstances.  In this case, the Court of Appeals concluded that Pinnamaneni was not a party to the arbitration agreement and that the superior court was therefore required to determine whether he could nevertheless be required to arbitrate.  Because nothing in the record demonstrates whether the superior court independently considered whether Pinnamaneni should be bound by the arbitration clause, the Court of Appeals remanded to the superior court to make that determination, noting that if the court finds Pinnamaneni was bound by the arbitration clause, the court should confirm the arbitration award against him personally. 

Judge Norris authored the opinion; Judges Gemmill and Orozco concurred.