Pegasus Renovation Co., a painting and drywall subcontractor, backed out of two projects for which it submitted the lowest subcontract bid and refused to perform on a third project even though it already had entered into a subcontract with the general contractor. Each of the three general contractors, which had relied to its detriment on the bids by Pegasus, lodged complaints with the Arkansas Contractors Licensing Board. In all three cases, Pegasus had said its refusal was "non-negotiable" and would "accept no calls" on its decision.

After reviewing the complaints, the Contractors Licensing Board held a hearing and determined that Pegasus' conduct violated Arkansas Code Annotated §17-25-308, which permits the revocation of a contractor's license if the contractor is found to have engaged in "misconduct in the conduct of the contractor's business." Pegasus' license was revoked.

Pegasus challenged this decision before the Saline County Circuit Court, arguing the term "misconduct" in the statute was unconstitutionally vague. The Circuit Court held that any analysis of alleged misconduct by a contractor must involve a determination of how the misconduct impacted the public health and safety. The matter was remanded to the board to determine whether Pegasus' actions had implicated public health and safety.

Rather than rehear the matter, the board appealed to the Arkansas Supreme Court for a determination of whether its revocation of Pegasus' license had been proper.

The Supreme Court first defined the term misconduct. Referring to Blacks' Law Dictionary, the court held that misconduct is "a dereliction of duty; unlawful or improper behavior." The court then determined that the board's decision to revoke Pegasus' license was supported by substantial evidence and that Pegasus indeed had engaged in misconduct under Arkansas contractor licensing laws. It found that Pegasus offered no defensible reason for its refusal to perform.

The court held that Pegasus' decision to back out of its bids (and its contract) was justification for revocation of its contractor's license because the board is bound to protect not only the public at large (as Pegasus had argued) but also the general contractors that rely on subcontractor bids. It noted that Pegasus' failure to perform caused each of the general contractors to incur extra costs for replacement subcontractors.

Further, the court held that a subcontractor's failure to honor its bids/contracts also affects other projects of the subcontractor, the general contractor, other subcontractors and even the project owner. Based on the "domino effect" of Pegasus' failure to honor its bids/contract, the court held that the Contractors Licensing Board was justified in determining that Pegasus' actions rose to the level of misconduct and were adequate justification for revocation of Pegasus' license. Arkansas Contractors Licensing Board v. Pegasus Renovation Co., 347 Ark. 320, 64 S.W.3d 241 (2001).

For more information about the issues covered in this report, please contact Aaron R. Gruber in our San Francisco office at 415-848-4958 or at grubera@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.

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