ALJDEC decisions subject to certification as final

03F-F0199-ROC · Registrar of Contractors · 2003-12-08

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: November 20, 2003. APPEARANCES: COMPLAINANT: by Hillary Gagnon, Esq., with Kathleen, Rakoci (president), Barry Smith (project manager), and Mark Easton (by subpoena). RESPONDENT: by Denise Troy, Esq., with Jo Ann Dean (vice-president).

ADMINISTRATIVE LAW JUDGE: Anthony Halas. _____________________________________________________________________ The hearing in this matter was convened to determine whether Respondent violated state law as alleged by Complainant and as cited by the Registrar of Contractors. Evidence and testimony were presented, and based on the entire record, the following Findings of Fact, Conclusions of Law, and Recommended Order are made: FINDINGS OF FACT

1. Complainant Russell A.C. Inc. (Russell A.C.) is a corporation doing business as a licensed mechanical and air conditioning contractor. Kathleen Rakoci (Rakoci) is president of the corporation. 2. Respondent Target General Inc. (Target General)[1] is a corporation which holds Arizona Contractor’s License No. 069786, Class B-01 (general commercial contractor), issued by the Registrar of Contractors (Registrar) on November 2, 1987. Jo Ann Dean (Dean) is vice-president of the corporation. 3. Complainant filed a complaint on May 27, 2003 alleging that Respondent, as general contractor, owed an amount due of $70,287.92 on an original contract amount of $2,084,713.00 for Complainant’s subcontract work on the Coconino Community College Learning Center project on Lone Tree Road in Flagstaff, Arizona. 4. When the matter was not resolved administratively and Complainant requested hearing, the Registrar issued CITATION AND COMPLAINT on July 23, 2003, charging Respondent with possible violations of A.R.S. §§ 32-1154.A.7 and A.11. On Respondent’s timely written answer denying the charged violations, the matter was set for hearing. 5. A. At hearing, Complainant was represented by counsel, who presented the testimony of Mark Easton (Easton, director of facilities for Coconino Community College) and Barry Smith (Smith, Complainant’s project manager). Complainant also submitted Exhibits 1, 2, and 3, which were marked, admitted, and duly considered. B. Respondent was represented by counsel, who presented the testimony of Ms. Dean, and submitted Exhibits A, B, C, D, E, and F, which were marked, admitted, and given due consideration. C. On the testimony and evidence of record, the following is found: 6. In June, 2000, Complainant Russell A.C. entered into two subcontracts with Respondent general contractor Target General as part of Respondent’s prime contract with the owner (Coconino Community College) for the construction of the Coconino Community College Learning Center project. One subcontract (Exhibit E, ‘SUBCONTRACT AGREEMENT’) required Complainant to provide the labor and materials to install the heating, ventilation, and air conditioning (HVAC) equipment to be supplied by Respondent under the other subcontract (Exhibit B, ‘PURCHASE AGREEMENT’). The initial price term for the labor and materials was $566,000.00; the initial price term for the equipment was $1,518,713.00; the total of the two (prior to any change orders) was $2,084,713.00. Both subcontracts include Standard Addenda dated June 23, 2000, and both incorporated the specifications and general conditions set out in the prime contract. (Exhibit C contains excerpts of the prime contract). 7. Complainant commenced work, and received partial payments from Respondent during the course of that work. Complainant and Respondent stipulate that a balance of $70,287.92 remains unpaid to Complainant relative to the two subcontracts. Complainant contends the amount is due and owing; Respondent contends that it is not.

COMPLAINANT'S POSITION 8. A. On December 3, 2002, Respondent submitted to the owner its APPLICATION AND CERTIFICATE FOR PAYMENT NO. 25 (Exhibit 1), certifying that the work done by all the various subcontractors covered by that application had been 100% completed (including Complainant’s HVAC work as item no. 15100), such that the current payment due under the prime contract was $322,924.91, which when paid would result in a zero balance to finish. B. The architect certified completion of the work, but in the lesser amount of $321,924.91, and the owner paid that amount to Respondent on December 12, 2002, leaving a $1000.00 balance to finish under the prime contract (but with an additional $95,000.00 more per an agreement on December 10, 2002 which resulted in Change Order No. 28). 9. A. Easton, as facilities director for the owner, testified to confirm that the HVAC system installed by Complainant had been in operation throughout the facility since December 27, 2001, when the faculty began moving in, although the facility itself was not yet complete and classes did not begin until January 16, 2003. He also stated that Complainant had completed all punchlist items, and was also attending to warranty work as necessary. B. Easton further confirmed that the owner continued to retain $1000.00 on the final pay application to keep the prime contract open relative to Change Order 28 (Exhibit 2) and payment of $95,000 to be made to Respondent, because the architect had not yet certified that all necessary “O & M” manuals and warranty documentation from the various subcontractors, including Complainant, had been provided as necessary for substantial completion. C. Easton explained that Change Order 28 was a negotiated compromise based on a meeting on December 10, 2002 between representatives of the owner, architect, and Respondent general contractor (others were present as well, but apparently no one for Complainant was invited to attend, or in attendance). During that meeting, the general contractor’s initial position was that the overall “date of substantial completion” – defined in the meeting summary as “the date for commencement of warranties and the general contractor’s two-year corrective period” (Exhibit 2) - should be January 16, 2002 (the date students began attending classes), while the architect’s position (on behalf of the owner) was that the date should be April 3, 2002, the date of final acceptance by the local authority. Pursuant to the change order, which resolved a number of issues, the owner, architect, and general contractor eventually agreed that the date of substantial completion would be April 3, 2002, and that the owner would pay Respondent an additional net of $95,000.00 relative to additions, deletions, and modifications to the prime contract. D. For that reason, Easton opined that the two year warranty period should run from April 3, 2002, the date of substantial completion, through April 2, 2004. 10. A. Smith, as Complainant’s project manager, stated that Complainant had no opportunity to be heard in determining the arbitrary April 3, 2002 date of substantial completion agreed to by Respondent and the owner and architect on December 10, 2002, and should not be bound by that date. B. Smith opined instead that the operative date to begin warranty coverage should be the date of start-up of Complainant’s equipment: December 28, 2001 – the date the equipment was placed in operation when the faculty moved in and students began registering. C. Smith stated that he had acted in good faith for Complainant by providing Respondent the HVAC labor warranty by letter on February 8, 2002 (Exhibit 3), indicating the warranty would be in effect through December 27, 2003 (or two years from start-up). He had heard nothing to the contrary until some 10 months later, when he received Respondent’s letter of December 12, 2002 (Exhibit 3) with the architect’s mark-up of his earlier letter to indicate the substantial completion date of April 3, 2002. D. Although he did not agree to a change in the equipment warranty period based on Respondent’s arbitrary date of substantial completion, Smith stated that he had communicated with several equipment manufacturers in an (unsuccessful) attempt to have them extend their warranties, and then again submitted the available HVAC and sheet metal warranty documentation (with the same December 27, 2003 warranty expiration date) to Respondent on March 12, 2003 (Exhibit A), which he thought the general contractor should have forwarded to the architect for approval. Since he had not heard otherwise from the owner or architect, he had presumed the manuals and warranty documentation had been accepted, although the $70,287.92 remained unpaid. E. Smith explained that he had calculated the warranty period to begin on December 28, 2001 because the subcontract documents provided that the warranty period ran from the date of start-up (Exhibit E, “Standard Addenda to Subcontract Agreement”, § 10.C (p. 5)). According to Smith, the practical basis for this was because the useful life of the HVAC and related equipment should be measured from the date the equipment was actually started up and placed in operation for the benefit of the owner, rather than from some arbitrary date picked by the owner and general contractor for substantial completion of the overall project. Such a substantial completion date could occur many months after start-up, but would still require a two year warranty from that date as if the equipment had just been turned on. F. Smith agreed that his company’s subcontract with Respondent incorporated the general conditions of the prime contract. Although he conceded that he had not reviewed the prime contract, he did not believe that the prime contract could or should alter what he considered to be the clear language of § 10.C of the addenda. 11. A. Complainant therefore generally contends that the entire balance of $70,287.92 is presently due and owing because its work has been certified by Respondent to be 100% complete and the equipment it installed has been in operation since start-up on December 28, 2001, and Respondent has been paid for all but $1000.00 of all subcontractors' work under the prime contract with the owner. B. Complainant contends that Respondent is improperly withholding payment due to a dispute about what date should be used to calculate the beginning of the two year warranty period on labor and equipment, and/or due to alleged non-receipt of O & M manuals and warranty documents. C. Complainant asserts that § 10.C of the Standard Addenda to Subcontract Agreement (Exhibit E) clearly defines “start-up” as the beginning date of the warranty period for the equipment. D. Complainant contends that, absent additional consideration, it need not extend the warranty period beyond two years from start-up date just to coincide with Respondent’s unilateral (relative to Complainant) decision to define April 3, 2002 as the date of substantial completion, which in any event would be contrary to § 9.8.1 of the prime contract general conditions (Exhibit D), which defined 'substantial completion' as the date when work was sufficiently complete so the owner could occupy or utilize the facility for its intended purpose. E. Complainant further contends that Respondent’s determination to withhold $70,287.92 is arbitrary and excessive relative to the possible warranty issues which may or may not arise in the few months at issue, and that in any event, Respondent would have recourse to other remedies for any damages incurred, including Complainant’s performance bond.

RESPONDENT'S POSITION 12. A. Ms. Dean, as vice-president for Respondent, testified to describe her role in negotiations and execution of the subcontracts with Complainant, as well as the prime contract with the owner. B. As justification for retaining $70,287.92 until Complainant had both provided the O & M manuals and warranty documentation and agreed to extend warranty coverage through April 2, 2004, Ms. Dean confirmed that her company had certified (Exhibit 1) to the owner that Complainant’s work was 100% complete, but she distinguished that “work” from the warranty and documentation issues relative to the equipment separately contracted for. She believed that withholding that amount was reasonable given the significant expense to repair or replace any such equipment which might fail between December 27, 2003 and April 2, 2004, the disputed warranty period, and because the owner was also withholding $95,000.00 from Respondent until receipt of the warranty documentation it considered essential to substantial completion. C. Ms. Dean also confirmed her understanding of the substance of the negotiations between Respondent and the owner and architect on December 3, 2002, which had resulted in execution of Change Order No. 28 to resolve a number of issues, one of which included Respondent’s agreement to recognize April 3, 2002 rather than January 16, 2002 as the date of substantial completion. She conceded that Complainant had no part in determining the terms of the change order, but contends that Complainant would still be bound by that modification of the prime contract, given that the subcontracts incorporated the prime contract. D. Ms. Dean stated that Respondent had not notified Complainant until December, 2002 of the warranty dispute because Respondent had not been notified until after November 5, 2002 that the architect had determined that the warranty provided by Complainant was incorrectly dated to run from December 28, 2001 rather than from April 3, 2002, the date of substantial completion (Exhibit F, Architectural Substantial Completion List, November 5, 2002, p. 12 of 19). 13. A. Respondent therefore generally contends that although Complainant’s work has been certified as 100% complete, the balance on the subcontract is not due until the time period of warranties regarding the equipment installed by Complainant is resolved. B. According to Respondent’s interpretation of the terms of the prime contract and subcontract documents, the substantial completion date determined by Change Order No. 28 to be April 3, 2002 should begin the two-year warranty period, and that based on § 9.8.1 of the Prime Contract (Exhibit C), which provided that even full use of the facility by the owner would not constitute substantial completion, and that a condition precedent for substantial completion included the final permit issued without conditions on April 3, 2002 rather than the temporary certificate of occupancy previously in effect. C. In addition, Respondent contends that Complainant has failed to provide O & M manuals and warranty documentation sufficient for approval by the project architect, such that the owner will not pay Respondent on the $95,000.00 change order, and will not consider the project accepted (and the warranty period to begin to run) prior to Respondent’s release from responsibility (§ 7.D of SUBCONTRACT AGREEMENT) and acceptance of the project by the owner (§ 10.N of the SUBCONTRACT AGREEMENT) (Exhibit E). D. Respondent also relies on § 7.F of the SUBCONTRACT AGREEMENT (Exhibit E), as the basis for Respondent’s right to withhold from any payments due Complainant “an amount sufficient in Contractor’s judgment to protect and indemnify.” Based on that language, Respondent contends that it is neither arbitrary nor unreasonable for Respondent to retain and withhold payment of $70,287.92 against possible equipment failure during the several months now lacking in warranty coverage, particularly given that the cost of the equipment constitutes about ¾ of the total of the two subcontracts, and any equipment failure during the period at issue could be very expensive for Respondent to repair or replace, absent warranty coverage.

APPLICABLE LAW

As relevant herein, A.R.S. § 32-1154.A provides the following: A. The holder of a license or any person listed on a license pursuant to this chapter shall not commit any of the following acts or omissions: … 7. The doing of a wrongful or fraudulent act by the licensee as a contractor resulting in another person being substantially injured. … 11. Failure by a licensee or agent or official of a licensee to pay monies in excess of seven hundred fifty dollars when due for materials or services rendered in connection with the licensee's operations as a contractor when the licensee has the capacity to pay or, if the licensee lacks the capacity to pay, when the licensee had received sufficient monies as payment for the particular construction work project or operation for which the services or materials were rendered or purchased.

CONCLUSIONS OF LAW

1. The Registrar of Contractors has jurisdiction over this matter, pursuant to A.R.S. § 32-1101, et. seq., which authorizes the Registrar to impose sanctions to discipline licenses for proven violations of A.R.S. § 32-1154. 2. To warrant such sanctions by the Registrar, Complainant Russell A.C. must demonstrate by a preponderance of the evidence that Respondent Target General violated either or both of the statutory sections cited. Proof by a “preponderance” means that “the evidence is sufficient to persuade the finder of fact that the proposition is more likely true than not.” In re: Arnold and Baker Farms, 177 B.R. 648 (9th Cir. BAP (Ariz.) 1994. See also Culpepper v. State of Arizona, 187 Ariz. 431, 930 P.2d 508 (App. 1996). It is “evidence which is of greater weight or more convincing than the evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.” Black’s Law Dictionary 1182 (Rev. 6th ed. 1990). 3. The Arizona legislature has not authorized either the Office of Administrative Hearings or the Registrar of Contractors to adjudicate or award money damages, which must be recovered, if at all, through a civil court action.[2] The Registrar may resolve contractual disputes if such resolution is ancillary to its regulatory mission and may penalize a contractor’s license by ordering payment of restitution if a proven statutory violation cannot be remedied by corrective work.[3] However, if the evidence at hearing shows that the dispute between the parties is primarily monetary, that the only relief that Complainant seeks is payment of money, and that other factors indicate that an award of restitution is not appropriate or available, it is appropriate that the presiding Administrative Law Judge recommend that the Registrar dismiss the matter. 4. This is so when, as here, the alleged contracting law violation is incidental to what is first and foremost a contractual dispute whether retention is permissible, and from what point in time an equipment warranty should run (with each party alleging breach of contract by the other, based on differing interpretations of different sections of the contract documents). Resolution of such dispute by means of contract interpretation and then an award of damages is the usual and preferred relief available in a court of competent civil jurisdiction. 5. However, such relief is not available in this forum, which as an administrative disciplinary proceeding has authority only to determine if a licensed contractor has violated the state's contracting laws, and if so, the discipline to be imposed for such violation. 6. In this instance, on close consideration of the testimonial and documentary record, the undersigned finds and concludes that the weight of the evidence demonstrates significant but good faith disagreement relative to interpretation of contract language defining the terms necessary to determine the warranty period, and to determine whether Respondent can retain and withhold funds otherwise payable to Complainant. 7. Given such bona fide dispute, the undersigned deems the evidence insufficient to sustain the burden held by Complainant Russell A.C. to prove a violation of A.R.S. § 32-1154.A.11 (failure to pay) by Respondent Target General. 8. Therefore, unless and until any claimed debt or obligation owed Complainant by Respondent arising from the subcontracts is reduced to judgment by a civil court of competent jurisdiction, no determination can be made that Respondent has violated the provisions of A.R.S. § 32- 1154.A.11, nor does the evidence demonstrate an independent violation of A.R.S. § 32-1154.A.7 (wrongful act). 9. For that reason, this complaint should be dismissed without prejudice, subject to timely re-filing should there be a civil court judgment entered relative to the disputed meaning of the subcontracts relative to the warranty period, and retention.

RECOMMENDED ORDER

On the basis of the foregoing, IT IS RECOMMENDED that the Citation in Case No. F03-F0199, and the Complaint upon which it is based, be dismissed without prejudice. Done this day, December 8, 2003.

______________________________________ Anthony Halas Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2003, to:

Israel G. Torres, Director Registrar of Contractors ATTN: Jennifer Brown 800 West Washington, 6th Floor Phoenix, AZ 85007

By ___________________________

----------------------- [1] The licensing records maintained by the Registrar of Contractors indicate that the company’s name was changed on November 3, 2003 to ‘Core Construction Services of Arizona Inc.’ [2] See J.W. Hancock Enterprises, Inc. v. Arizona State Registrar of Contractors, 142 Ariz. 400, 406, 690 P.2d 119, 125 (Ct. App. 1984).

[3] See A.R.S. § 32-1156.01; Sunpower of Arizona v. Arizona Registrar of Contractors, 166 Ariz. 437, 441, 803 P.2d 430, 434 (Ct. App. 1990).

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