ALJDEC decisions subject to certification as final

06F-M2402-ROC · Registrar of Contractors · 2007-01-04

STATE OF ARIZONA IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: December 21, 2006.

APPEARANCES: >The Complainant appeared through David Ray Guill, its President and qualifying party, and also through Tammy Guill, an authorized employee. >The Respondent was represented by its attorney, Randal L. Stowell, Esq.

ADMINISTRATIVE LAW JUDGE: Robert I. Worth _____________________________________________________________________

Evidence and testimony were presented, and based upon the entire record, the following Findings of Fact, Conclusions of Law and Recommended Order are made.

FINDINGS OF FACT

1. Pursuant to a written subcontract agreement setting forth ongoing arrangements, Complainant was utilized as the selected drywall subcontractor on numerous residential new home projects being constructed by Respondent as the general contractor.

2. As the various homes were constructed and as the drywall phases of the contemplated work were completed, periodic invoices for such drywall work performed by Complainant were transmitted to Respondent for payment, the terms of which appeared to be that all such invoices delivered before the 20th day of any month would be paid by the 10th day of the following month.

3. In mid-December, 2005, the parties met on an identified jobsite to address reported texture problems throughout the residence of homeowners, already in occupancy, (herein called “the Guthrie residence”) who were unhappy with the results of Complainant’s prior texturing work, despite two previous attempts by Complainant to accomplish appropriate repair work. Although Complainant had communicated a willingness at the meeting to again return to the jobsite home several days later, Respondent elected to conclude arrangements with another licensed drywall specialty contractor for the performance of further remedial work that was apparently successful. This resort to a successor drywaller was attributable in large part to the insistence of the homeowners, Respondent’s customer, who not only were threatening Respondent with litigation but also evidently did not want to afford additional chances for Complainant to rectify the texture problems.

4. The results of the last drywall work by Complainant on the above- described Guthrie jobsite were shown to have been the subject of an inspection by a Registrar’s Inspector during a courtesy visit pursuant to the agency’s Building Confidence program. The Inspector did confirm the existence of deficiencies in Complainant’s prior work, even after several repair efforts. Under all the circumstances, Respondent’s resort to another specialty contractor cannot be held to have been inappropriate or otherwise unwarranted. The expenses incurred by Respondent to remedy the texture problems became one of numerous back-charges claimed by Respondent to have been properly deducted or withheld from monies payable to Complainant after presentation of invoices.

5. The underlying subcontract agreement did provide for the termination of the agreement by either party without cause upon 72 hours prior notice. In early or mid-January, 2006, after Respondent had announced a significant change in its requirements for minimum insurance coverage applicable to all of its subcontractors or their respective representatives, Complainant gave notice to Respondent that it would not undertake any more work on future projects for Respondent, thereby electing to terminate the parties’ subcontractual arrangements.

6. In addition to a specific contract provision enabling Respondent to hold back unpaid amounts until proper work completion and/or correction, an addendum to that subcontract agreement also provided for the right of Respondent after termination of the agreement to withhold from payments otherwise due an amount equal to $100.00 for each home worked on by Complainant, such amounts to be held for the full applicable warranty period on all such homes. The evidence further indicated that between 26 and 28 homes would fall under the addendum to the parties’ subcontract agreement, thereby justifying the withholding at the present time of the combined sum of between $2,600.00 and $2,800.

7. Credible documentary and testimonial evidence tended to indicate that the combined totals of the monies withheld against last two invoices presented by Complainant to Respondent in late December, 2005 and in late January, 2006 were in the aggregate amount of $9,129.75. More specifically, Respondent was shown to have withheld the sum of $3,357.50 against the first such invoice based upon the amount paid by Respondent to the successor drywall contractor on the Guthrie project discussed above.[1] The last such presented invoice was in the amount of $15,776.00, against which Respondent paid to Complainant an amount of approximately

$10,000.00, thereby resulting in a further withholding of $5,772.25, ostensibly for covering any and all future potential or actual costs of warranty work on homes completed by Complainant who had effectively terminated the parties’ ongoing construction arrangements. Included within the second withheld amount were sums of $500.00 and $150.00 identified as being attributable to certain back-charges for repair work on other jobsites. Although never expressly specified, the overall withheld amount may also have included the total sums allowed to be held back under the contractual addendum at the rate of $100.00 per home still under warranty.

8. The testimony was somewhat conflicting with respect to the circumstances of Complainant’s termination action and as to Complainant’s communicated intentions, if any, as to future post-termination performances of warranty work on the various completed projects. No valid reason is perceived to exist for the disbelief of either party’s version. In any event, Respondent was shown neither to have given Complainant any notice of subsequently reported deficiencies in its prior work nor to have given Complainant any opportunities to undertake and complete appropriate remedial measures. Instead, Respondent utilized the services of at least two other drywall contractors, and determined the monetary amounts that purportedly would represent appropriate back-charges against the admittedly unpaid balances of Complainant’s prior invoices.

9. Some portion of the separate back-charge amounts did appear to be suspiciously improper, or at least not conclusively traceable to drywall work performed by Complainant as opposed to work by successor drywallers or other trades. However, no adequate showing was made that Respondent was attempting to stockpile or manufacture back-charges as a form of retaliation for Complainant’s decision to terminate the relationship. It must also be recognized that, assuming the charges were for valid warranty repairs and refinishing work, a substantial portion of the incurred corrective costs for labor and materials would have generated an expense to

Complainant in the performance of such work if otherwise given notice and an opportunity to accomplish necessary repair work. Consequently, except for the profit and overhead element in all of the sums sought to be used as back-charges, Complainant would have experienced some extent of a reduction in the net amounts received against its invoices, even if paid in full by Respondent.

10. Certain work items performed by Complainant at the request of Respondent’s field representatives were claimed to constitute legitimate extra cost items. However, no written change orders for such additional work were issued despite several requests from Complainant. The parties’ applicable subcontract had provided that entitlement to receive payment for any or all added charge items must be based upon a written change order or purchase order. However, credible testimony was presented at the hearing with respect to a prior practice between these same parties outlining several instances in which verbally requested extra work would be performed without a prior written change order and subsequently would be ratified by the belated issuance of an ultimately paid change order or purchase order. In this case, a basis for an effective waiver by Respondent of the applicable contract provision was sufficiently established and the claim by Complainant relating to two small extra work items in the respective amounts of $140.00 and $100.00, or a total claim for $240.00, appeared to be valid extra work charges that were properly invoiced to Respondent.

11. The evidence also tended to reveal that in addition to the back- charge amount of $3,357.50 plus two other identified charges for $500.00 and $150.00, respectively, totaling approximately $4,000.00, additional claims by Respondent for back-charges resulting from drywall and related repair expenses subsequently incurred on several other of Complainant’s prior jobsite projects appeared to approach or exceed the sum of $2,000.00. When added to the legitimate withholding under the addendum of a minimum of $2,600.00, the total unpaid monies withheld from invoiced amounts, aggregating $9,129.75, as claimed hereunder, is potentially erased in whole

by the combined total of experienced or potential back-charge amounts or withholding, and it was recognized that a significantly long time period still remained during which warranty obligations would continue to be applicable.

12. In point of fact, Complainant is presently seeking payment in the sum of $6,461.75 which represents an adjusted balance after deducting both the combined addendum amount of $2,800.00 for 28 homes as well as an admittedly valid $108.00 back charge, and adding a total of $240.00 for the value of the added requested work that was performed prior to obtaining advance written change orders. It must also be noted that, unless partially or fully reduced legitimately by additional future expenses incurred by Complainant for remedial work that Complainant is unwilling or unable to promptly accomplish following communicated requests or demands, at least a significant portion of the total withheld amounts under the contractual addendum may well ultimately become due and payable from Respondent to Complainant as the respective warranty periods for the homes completed by Complainant expire.

13. There was little doubt that the respective positions of the parties, as presented at the scheduled hearing, confirm that the monetary amount claimed by Complainant to be past due and owing is subject to a dispute that existed and still exists between the parties. Nor can it be reasonably be inferred that the grounds for Respondent’s position in disputing its liability for tendering any portion of the claimed unpaid balance was arbitrary, unreasonable or asserted other than in good faith on the part of Respondent.

14. The Registrar of Contractors is not statutorily empowered to adjudicate and award money damages for contractual breaches which must be more appropriately recovered, if at all, by initiating and pursuing available remedies before a civil court of competent jurisdiction. In point of fact, and mindful of the perhaps questionable propriety of some amounts and the nature of several expense items utilized by

Respondent as offsets or back-charges, the totality of the evidence tended to indicate that the costs incurred by Respondent to complete the drywall warranty obligations of Complainant on the various projects by rectifying problems that were subsequently experienced in the previously performed work may well have already been nearly equal to and may potentially prove to be slightly in excess of the total amount of admittedly unpaid invoices from Complainant.

15. Based upon the demonstrated bona fide dispute as to the monetary amount claimed unpaid, past due and owing to Complainant by Respondent, the instant claim filed with the Registrar must be viewed as not constituting a “liquidated” sum which would be an essential element to be proven by Complainant in order to support any finding that Respondent has failed to pay monies when due or has committed an otherwise wrongful act within the purview of the State’s contracting laws. In the event that the basis for Respondent’s dispute is ultimately determined to be without merit and a final judgment for all or even part of the $6,461.75 (exclusive of the sums subject to legitimate withholding under the contract’s addendum) claimed payable hereunder is obtained in favor of Complainant and is not promptly satisfied by Respondent, another separate disciplinary complaint may properly be filed with the Registrar of Contractors.

16. Under all the circumstances, it is determined that the Registrar of Contractors is not the proper forum in which to litigate either the propriety, the amount of Complainant’s claim or the validity of Respondent’s defenses and counterclaims. Moreover, the civil forum is fully empowered and capable to determine collateral issues affecting the quantum of any and all provable damages by resorting to a joint, shared or comparative fault analysis when assessing the extent, if any, of entitlements and/or offsets as between the respective parties.

17. The above Findings of Fact, which may also be properly treated as constituting Conclusions of Law, are not intended to and do not constitute a

determination as to the validity or the amount of Complainant’s claim under the subcontractual arrangements nor as to possibly legitimate defenses, set- off amounts or counterclaims assertable by Respondent. These determinations must be made by the civil tribunal as part of an appropriate civil action commenced and pursued by either party. Stated alternatively, nothing in decision is intended to preclude Complainant from fully pursuing its claim in a civil forum or from using its underlying claim by way of a defense to any interposed counterclaim or set-off. On the contrary, the termination of this portion of the administrative proceeding shall be expressly without prejudice to the rights of the respective parties to assert and pursue available civil remedies based upon potential or actual rights to recover monies claimed payable or to utilize legitimate credits due for contract breaches, unpaid contract balances, legitimate set-offs, justifiable back- charges or potential counterclaims. These determinations must properly be made by a civil court, which tribunal would be the more appropriate forum for the resolution of this bona fide monetary dispute.

CONCLUSIONS OF LAW

1. The evidence of record failed to sufficiently establish that Respondent has violated the provisions of A.R.S. §32-1154(A) (7) or (11), as charged in the issued Citation.

RECOMMENDED ORDER

In view of the foregoing, it is recommended that the entire Citation and Complaint in Case Number M06-2402 be dismissed, such dismissal action to be expressly without prejudice to the rights of the named parties to continue to assert and to pursue their respective claims, counterclaims, defenses or set-offs in another, more appropriate forum.

In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be forty (40) days from the date of that certification.

Dated: December 5, 2006. OFFICE OF ADMINISTRATIVE HEARINGS

______________________________________ Robert I. Worth Administrative Law Judge

Original transmitted on _____________________

by: _____________________________ , to:

Fidelis V. Garcia, Acting Director Registrar of Contractors Legal Department 800 West Washington Street (6th Floor) Phoenix, AZ 85007

----------------------- [1] The withheld amount of $3,357.50 appeared from the documentary evidence to be a sum equal to 85% of the actual higher invoice ($3,950.00) from the successor drywaller.

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826