In disputes involving construction contractors, questions can arise as to whether an arbitration clause in a construction contract that allegedly violates the public policy of North Carolina is valid and enforceable? In other words, if a construction contract is signed by an unlicensed general contractor that is alleged to be in violation of Chapter 87 of the General Statutes, is the arbitration clause in the agreement likewise unenforceable?
Although North Carolina appellate courts have not addressed this precise issue, North Carolina adopted the Revised Uniform Arbitration Act in 2004 (“RUAA”). The RUAA, in turn, unlike its predecessor, is modeled after federal arbitration law. In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), the Supreme Court interpreting similar provisions of Federal Arbitration Act as the one at issue in RUAA, reaffirmed its holding that when a party challenges the validity of a contract as a whole, rather than its arbitration provisions specifically, the arbitration clause is enforceable and that this principle applied with equal force to cases when a party challenges arbitration claiming the underlying contract is illegal and void under a state’s public policy.
Following Buckeye, courts in other states that have addressed challenges to arbitration clauses in construction contracts allegedly signed by unlicensed contractors, enforced the arbitration clause notwithstanding. See, e.g., Paragon Ltd., Inc. v. Boles, 987 So. 2d 561, 568 (Ala. 2007) (citing Buckeye; arbitration clause contained in construction contract was valid and enforceable even though the contractor constructed the house without a license in violation of Alabama law”); Charles Boyd Const. Inc. v. Vacation Beach, Inc., 959 So. 2d 1227 (Fla. 5th DCA 2007) (citing Buckeye; whether unlicensed contractor’s construction contract contained an enforceable arbitration provision had to be determined in the first instance by arbitrator, not court; “the arbitration clause in the contract between Paragon and Boles is enforceable, and it is irrelevant whether Paragon’s actions render the contract as a whole void. That question is for the arbitrator to decide, not this Court.”).
A more recent article published by the Florida Bar Journal provides a good overview of the question whether courts or arbitrators should decide arbitrability in similar contexts. See Donal J. Spero, When Must a Dispute be Submitted to Arbitration? Vol. 88 No. 3 (March 2014).
Therefore, if faced with a challenge to the enforceability of an arbitration clause in an “illegal” construction contract, it would appear that North Carolina courts would uphold the parties’ agreement to arbitrate notwithstanding the purported invalidity of the underlying construction contract.