ALJDEC decisions subject to certification as final

2010A-308476771-ROC · Registrar of Contractors · 2011-08-26

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: June 22, 2011 (record held open to August 8, 2011)

APPEARANCES: Complainant appeared and was represented by attorney David Chami, Price Law Group, APC; Respondent was represented by attorney Joseph Kula, Law Offices of Joseph A. Kula, accompanied by corporate President and Qualifying Party Gary Carr.

WITNESSES: Jim Hennessy, ROC Inspector Laurie Payne Elena Noguero Michael Wippert Doug Ward

ADMINISTRATIVE LAW JUDGE: Eric A. Bryant _____________________________________________________________________

Complainant brings this action against Respondent claiming fraud and failure to perform in a workmanlike manner on the basis of Respondent’s post-storm, water-damage restoration work done at Complainant’s home. Complainant’s claim is based entirely on contract principles, including a claimed breach of an implied covenant of good faith and fair dealing. Complainant claims that Respondent had a professional duty to inform Complainant about potential sources of the water damage and that Respondent breached that professional duty and defrauded her by failing to inform her of potential causes of the damage. Respondent denies the allegations. This tribunal entered the complaint file received from the Registrar of Contractors into the record. The parties submitted Exhibits 1 through 6 by Complainant and Exhibits A through E by Respondent. Testimony from the witnesses listed above was presented. Based upon the entire record, the Administrative Law Judge makes the following Findings of Fact, Conclusions of Law, and Recommended Order finding no violation. FINDINGS OF FACT 1. Respondent is the holder of license B.092841-R, a general residential contracting license issued by the Registrar of Contractors (“ROC”). The license authorizes Respondent to operate as a general contractor for residential projects. Gary Carr is the Qualifying Party. 2. In July 2008, Complainant experienced water intrusion and damage to the interior of her home during a storm. Her insurance company had a water remediation contractor remove water from the home, dry the wet areas, and remove damaged portions of the home. Complainant then contacted Respondent to prepare an estimate for correction of the damage and replacement of any removed areas. 3. Respondent prepared an area-by-area and item-by-item estimate of the work proposed.[1] On August 28, 2008, Complainant accepted the proposal and entered into a contract with Respondent to perform the work. The contract states that Respondent will complete the work listed in the written estimate and specifically states “ROOF REPAIR NOT INCLUDED!”[2] 4. Respondent performed the work in October and November 2008. On March 23, 2009, after Complainant made the final payment, Complainant signed a Certificate of Completion of Repairs stating that all necessary repairs of damage resulting from water intrusion on July 11, 2008 had been completed in a workmanlike manner. 5. Complainant continued to have water intrusion and damage. After some investigation, she filed her ROC complaint against Respondent in October 2010, alleging that Respondent failed to find the actual source of the water intrusion and fix it, which resulted in her ongoing damages. 6. ROC Inspector Jim Hennessy inspected the property on November 19, 2010, and he issued a Corrective Work Order (“CWO”) listing 39 items that he inspected. He ordered corrective work for only two of those items (Addendum items 14 and 34). He testified that he found all the other items to be caused by a roof leak. He concluded that Respondent had not been responsible for repairing the roof under its contract with Complainant, so that the roof had not been within Respondent’s scope of work. Inspector Hennessy testified at the hearing that he also performed a prehearing jobsite inspector on June 13, 2011. He found that Respondent had corrected the two items for which he had ordered correction. 7. Complainant did not dispute Inspector Hennessy’s observations of the jobsite and therefore accepted his conclusion that the two items have been corrected. Instead, Complainant focused her case on her claims of fraud and unprofessional conduct. 8. Complainant testified that a roofing contractor named “Masters Restoration” inspected the roof just after the storm and that the roofing contractor stated that the only damage to the roof was a few loose roof tiles. Nothing else was done to the roof. 9. Mike Wippert, Respondent’s estimator who prepared the estimate for this job, testified about what he did and his interactions with Complainant during the estimating process and performance of the work. He confirmed that there was no intent for Respondent to work on the roof or deception about whether Respondent was going to do roof work. Respondent clearly informed Complainant about that. In addition, he confirmed that the two CWO items noted by Inspector Hennessy had been repaired. He also testified about the Certificate of Completion of Repairs (Exhibit 4) that Complainant signed in March 2009, stating that Complainant signed it. 10. Respondent called Doug Ward as a witness. Doug Ward is an Arizona licensed general contractor and a consultant hired by Respondent for this case. He reviewed documentation and spoke to Respondent’s employees to find out what had occurred. He determined that Respondent’s scope of work did not include forensic investigation to determine the cause of the water intrusion. He confirmed that the written contract between the parties specifically excluded roof repairs and that the estimate did not include work related to the roof. Based on his knowledge of the industry standards in Arizona, he stated that Respondent’s scope of work for this job was appropriate. He also testified that Respondent did not breach any industry standard by failing to go beyond the scope of the work in the written contract. 11. None of the three witnesses who are knowledgeable about the standards for workmanship in Arizona—Inspector Hennessy, Mike Wippert, and Doug Ward—testified that those standards required Respondent to inspect the roof or inform Complainant of the potential that the roof was the cause of the water intrusion.[3] Thus, the evidence does not establish that industry standards required Respondent to inspect the roof or inform Complainant of any suspicions about the roof that Respondent’s employees might have had. CONCLUSIONS OF LAW 1. The burden of proof at an administrative hearing is generally upon a complainant.[4] Further, the standard of proof at hearing is by preponderance of the evidence.[5] Therefore, Complainant bears the burden of showing, by a preponderance of the evidence, that Respondent has violated the statutes cited in the Citation and Complaint.[6] Complainant has not met that burden. 2. As noted above, only allegations of fraud and violation of workmanship standards are at issue. A.R.S. § 32-1154(A)(7) prohibits contractors from “[t]he doing of a fraudulent act by the licensee as a contractor resulting in another person being substantially injured.” The phrase “fraudulent act” has not been defined by the Arizona Legislature in the ROC statutes. At common law, fraud could be established through nine elements, as listed by the Arizona Supreme Court: In considering whether the evidence taken in its strongest light establishes actionable fraud, the plaintiffs must show a concurrence of nine elements, which are: "'(1) A representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) his consequent and proximate injury.'" [Citations omitted.][7]

The Court also noted that a claim of fraud cannot be based on unkept promises: In order that a representation constitute actionable fraud, it must relate to either a past or existing fact. It cannot be predicated on unfulfilled promises, expressions of intention or statements concerning future events unless such were made with the present intention not to perform. [Citation omitted]. "Were the general rule otherwise, every breach of contract could be made the basis of an action in tort for fraud." [Citation omitted].

Arizona's Court of Appeals has pointed out:

"A primary reason given for the rule not permitting predication of fraud on promises which are not subsequently kept is that a promise to perform in the future is not a representation which can be shown to be true or false at the time it was made, and therefore, a person has no right to rely, in a legal sense, on a representation of a fact not in existence." [Citation omitted.][8]

Here, the evidence is clear that Respondent made no representation to Complainant regarding the roof other than that no roof work was included in the contract, which was a true statement. Because fraud requires a false statement, a claim of common law fraud is not sustainable on this record. 3. Complainant argues a claim of “constructive fraud.” Constructive fraud is a term denoting a type of fraud involving unintentional deception or misrepresentation,[9] as opposed to intentional fraud. All nine elements at common law are still required for a claim of constructive fraud.[10] Constructive (unintentional) fraud may only be found when the parties have a confidential or fiduciary relationship, not when they are dealing at arms length.[11] Here, the parties were dealing at arms length and, therefore, constructive fraud is not applicable. Complainant’s fraud claims fail. 4. Complainant also claims that Respondent breached its contract with Complainant by violating an implied covenant of good faith and fair dealing. This is a contract claim that is not proper for a regulatory forum and is better suited for civil court. Further, it does not appear that the claim fits within those provisions cited in the Citation and Complaint. 5. In any event, the evidence concerning the contractual dispute between the parties shows only a good faith contractual dispute between the parties that does not warrant finding a violation of the ROC licensing statutes. The Registrar of Contractors, acting through an administrative disciplinary hearing, is not empowered by law to adjudicate a breach of contract in the face of a good faith dispute on whether a breach has occurred. Until and unless any claimed breach is reduced to judgment by a civil court of competent jurisdiction, no violation by Respondent of licensing provisions can be supported. 6. Complainant also claims that Respondent breached a professional duty owed to her when it failed to inspect the roof and inform her that roof damage caused by the storm was a possible source of the water damage. The claim is essentially a negligence claim that could be brought in civil court, but Complainant has based it in this forum on Respondent’s duty as a licensee to perform work in a professional and workmanlike manner under A.R.S. § 32-1154(A(3) by way of A.A.C. R4-9-108(A). The claim is remarkably similar to a negligence claim that the Arizona Court of Appeals rejected in Diaz v. Phoenix Lubrication Service, Inc. dba Jiffy Lube, 224 Ariz. 335, 230 P.3d 718 (App. 2010). Because Complainant’s claim is similar, the Jiffy Lube case is instructive. 7. In the Jiffy Lube case, the plaintiff received an oil change from Jiffy Lube and soon afterward experienced an automobile rollover accident that plaintiff claimed was caused by a worn tread condition on the inside of his rear tires.[12] Plaintiff sued Jiffy Lube claiming negligence for failure to inspect the tire treads and warn plaintiff of their condition. Jiffy Lube filed for summary judgment and prevailed when the court found that Jiffy Lube did not owe a legal duty to plaintiff to inspect the treads. Plaintiff had claimed that the duty existed as a result of the contractual relationship of the parties and as part of a professional duty based on industry standards. As noted, both of those arguments were rejected by the court. 8. As to the first argument, that the contractual relationship created a duty to inspect the treads, the court found that the contract did not call for a tread inspection and that, therefore, such inspection was outside the scope of Jiffy Lube’s contractual duty.[13] Because it was outside the scope of the contract, no duty was owed for tread inspection.[14] Second, the court rejected plaintiff’s argument that industry standards created a duty by noting that industry standards address whether there has been a breach of duty, not whether one exists.[15] Thus, a duty to conform to industry standards must exist independent of the mere fact that one is engaged in business in an industry. Since plaintiff did not point to an independent source for the duty he claimed, the second argument was rejected.[16] 9. Here, Complainant’s claim that her contractual relationship with Respondent created a duty for Respondent to go beyond the scope of the written agreement must also fail. Complainant’s duty to Respondent was limited to the scope of the agreement, which did not include roof inspection. In addition, Complainant did not present any evidence showing that professional or industry standards required Respondent to go beyond the scope of a written contract. In fact, the evidence shows the opposite. 10. Complainant’s claims of fraud and failure to meet workmanship standards fail. Complainant has shown no violation of the provisions cited in the Citation and Complaint. This matter should be dismissed. RECOMMENDED ORDER Based on the foregoing, it is hereby recommended that Citation and Complaint 2010-[number redacted] against Respondent Exclusive Restoration, Inc. be dismissed.

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 40 days from the date of that certification.

Done this day, August 26, 2011.

/s/ Eric A. Bryant Administrative Law Judge

Transmitted electronically to:

William A. Mundell, Director Registrar of Contractors ----------------------- [1] Exhibit 2. [2] Exhibits 1 and 3 (emphasis in original). [3] The evidence on this record is insufficient to show that storm damage to the roof was the cause of the water intrusion. [4] Utah Construction Company v. Berg et al, 68 Ariz. 285, 205 P.2d 367 (1949). [5] Smith v. Arizona Dept. of Transportation, 146 Ariz. 430, 706 P.2d 756 (App. 1985). [6] Culpepper v. State, 187 Ariz. 431, 437, 930 P.2d 508, 514 (Ct. App. 1996). [7] Staheli v. Kauffman, 122 Ariz. 380, 383, 595 P.2d 172, 175 (1979); see also Echols v. Beauty Built Homes, Inc., 132 Ariz. 498, 500, 647 P.2d 629, 631 (1982). [8] Id. [9] Black’s Law Dictionary 686 (8th ed. 2004). [10] Rhoads v. Harvey Publications, Inc., 145 Ariz. 142, 146, 700 P.2d 840, 844 (App. 1984). [11] Id. at 148, 700 P.2d at 842. [12] 224 Ariz. at 337, 230 P.3d at 720. [13] Id. at 339-40, 230 P.3d at 722-23. [14] Id. at 340, 230 P.3d at 723. [15] Id. at 341, 230 P.3d at 724. [16] Id. at 341-42, 230 P.3d at 724-25. A third argument based on public policy was also made and rejected. Id. at 340-41, 230 P.3d at 723-24.

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