ALJDEC

99F-P0264-ROC · Registrar of Contractors · 1999-11-19

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: November 4, 1999 at 1:30 p.m. APPEARANCES: Complainant appeared through its President, Todd Johnson; Respondent appeared through its Manager, John T. Welnick. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

The parties presented evidence and testimony on Complainant general contractor’s right to be compensated as a result of this administrative proceeding for supervising Respondent subcontractor’s corrective work at three houses and whether Respondent should be required to perform additional corrective work on the cabinets it installed in one of the houses. Based upon the entire record, the undersigned makes the following Findings of Fact, Conclusions of Law and Recommended Order. FINDINGS OF FACT Background The Registrar of Contractors issued License No. 116021, Class B- to Complainant, a corporation, on July 22, 1996. The Registrar issued License No. 118479, Class C-30 to Respondent, a corporation, on October 23, 1996. Complainant is the general contractor for a subdivision of new residential construction in Show Low. In July 1998, Complainant subcontracted to Respondent fabrication and installation of the kitchen and bathroom cabinets in three of the houses in the subdivision, located on Lots 68, 18, and 74. Complainant advised Respondent that the kitchen cabinets should have concealed hinges and the same layout as in the model home. The written subcontract did not require that the cabinets be installed by a certain date or require Respondent to pay liquidated damages, penalties, or a supervisory fee if it did not fully perform the contract in a timely manner. Respondent thereafter installed kitchen cabinets in the houses located on Lots 18, 68, and 74, but installed cabinets having visible hinges and the wrong layout. Although Respondent reordered and installed cabinets several times, it did not correct the problem to Complainant’s satisfaction. In addition, Respondent delivered but did not install a bathroom vanity at one of the houses, which subsequently was stolen from the jobsite. Complainant incurred $40.00 per day in late fees on the houses and had to pay a plumber to relocate the plumbing for the kitchens. Respondent refused to perform additional corrective work unless Complainant paid the $2,700.00 balance of the contract price and paid an additional amount for the bathroom vanity that had been stolen from the jobsite. Respondent also filed a lawsuit against Complainant for the balance of the contract price and filed a lien against the house on Lot 74. On April 19, 1999, Complainant made three complaints to the Registrar alleging that Respondent had not completed its subcontract in a timely manner, had installed cabinets that were different than what the parties’ contract required, had not installed the cabinets in a workmanlike or professional manner, had not corrected its unworkmanlike installation of the wrong cabinets, and had refused to replace the bathroom vanity it had allowed to be stolen from the house on Lot 74 (P99-0262 or 99F-P0262-ROC); that Respondent had installed cabinets that were different than what the parties’ contract required, had not installed the cabinets in a workmanlike or professional manner, and had not corrected its unworkmanlike installation of the wrong cabinets in the house on Lot 68 (P99-0263 or 99F- P0263-ROC); and that Respondent had not completed its subcontract in a timely manner, had installed cabinets that were different than what the parties’ contract required, had not installed the cabinets in a workmanlike or professional manner, and had not corrected its unworkmanlike installation of the wrong cabinets in the house on Lot 18 (P99-0264 or 99F- P0264-ROC). On June 7, 1999, on behalf of the Registrar, Inspector Bernie St. John talked to the parties, examined the contract documents, performed a jobsite inspection, and issued the following report in all three cases directing Respondent to install the cabinets that Complainant had requested: Cabinets supplied do not coincide with the cabinets installed in the models as requested by general contractor. Dimensions and hardware not consistent.

Correct by appropriate means. General contractor to have the necessary corollary work performed by properly licensed contractors handled by appropriate means.

Inspector St. John testified at the hearing that by “corollary work” he meant the cost of the plumber and other additional costs Respondent’s delay caused Complainant to incur. In Case No. P99-0262 (99F-P0262-ROC), Inspector St. John also included the following report and directive: “Countertops were left at jobsite without an authorized signature [and without Respondent] establishing if they were secure. Make appropriate replacement.” On July 8, 1999, Complainant requested a hearing in all three cases because Respondent had not completed the corrective work. On August 23, 1999, the Registrar issued a Citation and Complaint in all three cases that charged Respondent with violations of A.R.S. § 32- 1154.A.7, .23, and .3. Respondent answered the Citation and Complaint in all three cases, alleging that “[a]ll corrective work orders have been completed to homeowners’ and [Complainant’s] satisfaction.” A hearing was scheduled in due course. Evidence Presented at the Hearing The parties agreed that Complainant had paid Respondent and that Respondent had replaced at its own cost the stolen bathroom vanity and had paid Complainant for the cost of the plumber to make the changes occasioned by Respondent changing the layout of the three kitchens to comply with the Registrar’s directive. The parties also agreed that Respondent had replaced the kitchen cabinets and countertops by August 4, 1999 and that the repairs were acceptable to Complainant and the homeowners of the houses located on Lots 68 and 18. On Lot 74, the homeowner complained that a miter seam on the kitchen countertop that Respondent had replaced was uneven or too wide and trapped food particles. In addition, a repair that Respondent had made to the cultured marble vanity counter did not match the area that had not been repaired. Inspector St. John performed a prehearing jobsite inspection at Lot 74 on October 27, 1999 and, based on this inspection, issued the following report, which was admitted into evidence at the hearing: At the jobsite the homeowner showed those present a raised area in the laminated counter top of the right of the sink and at a degree cut angle. The top has less than a 1/16” elevation per lineal foot of surface. This meets the minimum workmanship standards as set forth by the Registrar of contractors.

The homeowner also had the above people observe the left hand corner of the cultured marble top of the vanity in the hall bath. It was observed that an area of approximately ½” long x ¼” wide had a discoloration in the finish. Slightly darker and not as glossy as the remaining top surface. Per minimum workmanship standards defects in cultured marble tops must be reported to the contractor within 10 days of occupancy or noted on the walk-thru. It is this inspector’s opinion that the time period has lapsed for the supplying contractor to be responsible for a repair or removal.

At the jobsite the general contractor added the following to the complaint and wished it to be heard at the hearing. The general contractor wishes to be reimbursed by the supply contractor for hours consumed in labor for his superintendent to supervise the work listed on the original “corrective work order”. This inspector stated that this is an issue that will have to be judged by the Office of Administrative Hearings law judge, that this is not an item of workmanship and can not be decided upon by this inspector. . . .

Inspector St. John testified at the hearing consistently with this report. Respondent submitted into evidence documents signed by all three homeowners indicating that all punchlist repairs had been completed to their satisfaction, including one signed on August 4, 1999 by Paul Wenzel, the owner of the house located on Lot 74. Inspector St. John admitted on cross-examination that he had not measured the seam in the laminate kitchen countertop but instead based his opinion that the change in elevation was less than 1/16” on a visual inspection and his experience in construction. Respondent admitted that, as a favor to the homeowner, it made the repair to the cultured marble on the bathroom vanity on August 4, 1999. Respondent’s employee Larry Myers, Jr. testified that, when he met with the homeowner and Complainant on August 17, 1999, nothing was said about the repair to the cultured marble. Complainant refused to dismiss its complaints, however, because it felt that it was entitled to supervisory fees. Inspector St. John testified that, in his recollection, no one had notified him of a problem with the cultured marble, although the parties informed him they had not resolved their dispute with respect to the plumbing costs, which Respondent paid before the hearing, and the supervisory fees, which it did not pay. The Citation and Complaint issued by the Registrar advised Respondent that, if it were found in violation of any contracting law, its prior disciplinary record of final Registrar of Contractors’ orders might be considered in mitigation or aggravation. Accordingly, notice is taken of official records of the Registrar of Contractors, which reveal that, if the Registrar accepts this recommended decision, it will be the only final agency order against Respondent on the Registrar’s current record. Therefore, Respondent’s prior record is deemed to be excellent and, thus, is viewed as a matter in mitigation for any disciplinary penalties to be imposed as a direct result of this case. CONCLUSIONS OF LAW In this administrative proceeding, Complainant bears the burden of proof and must establish statutory violations by a preponderance of the evidence. See A.A.C. R2-19-119; see also Culpepper v. State, 187 Ariz. 431, 438, 930 P.2d 508, 515 (App. 1996). “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.” Morris K. Udall, Arizona Law of Evidence § 5 (1960). A preponderance of the evidence is “evidence which is of greater weight or more convincing than 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 at page 1064 (6th ed. 1990). The evidence establishes that, on June 7, 1999, when Inspector St. John performed his first jobsite inspection, Respondent was in violation of A.R.S. § 32-1154.A.7[1] and .3.[2] By the time of hearing, Respondent had corrected its previously unacceptable installation of cabinets in a professional and workmanlike manner and reimbursed Complainant for the costs of the plumber and the stolen bathroom vanity. The evidence therefore does not establish that, at the time of the hearing, Respondent remained in violation of A.R.S. § 32- 1154.A.7 and .3 or violated A.R.S. § 32-1154.A.23[3] with respect to these items. A preponderance of the evidence also does not establish that the alleged inadequacy of Respondent’s repair of the cultured marble was called to its attention within 10 days of the repair having been made. See Minimum Workmanship Standards for Licensed Contractors at 4 (October 1998). The legislature has empowered the Registrar to resolve contractual disputes between licensed contractors if such resolution in ancillary to his regulatory mission. See J.W. Hancock Enterprises, Inc. v. Arizona State Registrar of Contractors, 142 Ariz. 400, 406, 690 P.2d 119, 125 (Ct. App. 1984). The Registrar also may penalize a contractor’s license by ordering payment of restitution if corrective work is impossible or no longer warranted. See Sunpower of Arizona v. Arizona Registrar of Contractors, 166 Ariz. 437, 441, 803 P.2d 430, 434 (Ct. App. 1990). The undersigned has not found a decision addressing a contractor’s right to supervisory fees or the limits of restitution in a regulatory proceeding published by a court in Arizona or California, on whose statutes the Arizona legislature based A.R.S. § 32-1154. Restitution in a regulatory context is similar to the criminal context, where a defendant may be sentenced to pay her victim restitution consisting of any economic loss caused by the defendant’s conduct. Cf. A.R.S. § 13-603.C and 13-804.A. “‘Economic loss’ means any loss incurred by a person as a result of the commission of an offense. . . . Economic loss does not include . . . consequential damages.” A.R.S. § 13-105.11. As noted by the Arizona Court of Appeals, the concepts of “economic loss” and “consequential damages” in these criminal statutes were borrowed from civil common law: “Consequential damages” is a term of art which the legislature obviously intended to transplant from the civil law into the criminal restitution context. Therefore, in attempting to define “consequential damages” as that term is used in A.R.S. section 13-105(11), we borrow definitions from the civil arena. Consequential damages have been defined as follows:

Consequential damages are such as are not produced without the concurrence of some other event attributable to the same origin or cause; such damage, loss, or injury as does not flow directly and immediately from the action of the party, but only from the consequences or results of such act. The term may include damage which is so remote as not to be actionable.

C.J.S., Damages, § 2 at 617. This court has expressly adopted this definition of consequential damages for purposes of restitution by stating that a defendant cannot be ordered to pay for losses that “do not flow” directly from the criminal activity. State v. Wideman, 165 Ariz. 364, 368-69, 798 P.2d 1373, 1377-1378 (App. 1990); State v. Pearce, 156 Ariz. 287, 289, 751 P.2d 603, 605 (App. 1988).

Consequential damages are often contrasted with “actual damages,” defined as “damages in satisfaction of, or in recompense for, loss or injury sustained; such compensation of damages for any injury follow from the nature and character of the act, and will put the injured party in the position which he was in before he was injured.” 25 C.J.S., Damages; Arizona Copper Co., Ltd. v. Burciaga, 20 Ariz. 85, 177 P. 29 (1918); State v. Griswold, 8 Ariz. App. 361, 364, 446 P.2d 467, 470 (1968). Also see U.S. Fidelity and Guaranty Co. v. Davis, 3 Ariz. App. 259, 263, 413 P.2d 590, 594 (1966), quoting C.J.S. with approval.

“Economic loss” as defined at A.R.S. section 13-105(11), and as used in A.R.S. section 13-603(C), is the functional equivalent of “actual damages” as the latter term has previously been characterized in our appellate decisions. Pursuant to the definitions quoted above, the determination that losses are actual losses rather than consequential damages will rest on a causal connection between the criminal conduct and the claimed loss. Our restitution statute directs the court to utilize a “but for” analysis when ordering restitution. A.R.S. § 13- 105(11). We have previously couched this analysis in terms of “direct result.” Wideman, 165 Ariz. at 369, 798 P.2d at 1378.

The courts of several other states, construing restitution statutes similar or identical to our own, have acknowledged that a causal connection is critical in assessing damages subject to a restitution order. . . . A review of the various decisions shows that the courts usually arrive at the “direct result” determination by employing a “foreseeability” or “natural consequence” analysis similar to the causation determination in civil cases.

State v. Morris, 173 Ariz. 14, 17, 839 P.2d 434, 437 (Ct. App. 1992) (footnote and some citations omitted). The parties’ contract does not include provisions for supervisory fees. Complainant presumably factored into its contract with the owner of the subdivision (or into the price of the houses if it owns and is developing the subdivision) the cost of supervising subcontractors, which presumably also included supervision of at least a few subcontractors’ repairs and corrective work. The additional cost of supervising the corrective action Respondent took to comply with the Registrar’s directive cannot be separated from the general costs of supervision, which presumably Complainant recovered through its contracts with the property owner or persons who purchased the houses. Therefore, the claimed supervisory costs are more in the nature of consequential damages, which are not proper restitution, rather that costs that are a foreseeable economic loss directly caused by Respondent’s contracting law violations. Therefore, although Complainant may seek and recover supervisory fees as consequential damages in a breach-of-contract claim made in a court of general civil jurisdiction, these fees do not constitute restitution that may be awarded in this administrative regulatory proceeding. Finally, because Respondent has corrected in a professional and workmanlike manner all workmanship that was previously found to be deficient, no further penalties are appropriate. However, because Respondent’s delay in correcting deficiencies should not be condoned, the fact of this administrative complaint should be maintained on the Registrar’s current record. RECOMMENDED ORDER It is therefore recommended that the Registrar close Case Nos. P99- 0262, P99-0263, and P99-0264 against Respondent’s License No. 118479, Class C-30. Done this day, November 19, 1999.

______________________________________ Diane Mihalsky Administrative Law Judge

Original transmitted by mail this ____ day of November, 1999, to:

Registrar of Contractors Mr. Michael P. Goldwater, Director 800 West Washington, 6th Floor Phoenix, AZ 85007 ATTN: Joyce Armijo

By ___________________________

----------------------- [1] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[t]he doing of a wrongful or fraudulent act by the licensee as a contractor resulting in another person being substantially injured.”

[2] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[v]iolation of any rule adopted by the registrar.” The rule violated here was A.A.C. R4-9-108, which requires that “[a]ll work shall be performed in a professional and workmanlike manner” and that “[a]ll work shall be performed in accordance with any applicable building codes and professional industry standards.”

[3] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[f]ailure to take appropriate corrective action to comply with this chapter or with rules adopted pursuant to this chapter without valid justification within a reasonable period of time after receiving written directive from the registrar.” The statutory subsection further provides that “[a] license shall not be revoked or suspended nor shall any other penalty be imposed for violation of this paragraph until after a hearing has been held pursuant to the provisions of this article.”

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