### TEXA S C OU R T OF A PPEAL S, THIR D DIST R ICT , AT AU STIN

NO. 03-0 4 -00 782 -CV

Jo r dan P av ing Co r por at ion , A ppe lla nt

v. Texas Depart m ent of Transp ortat ion , Appellee

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 345TH JUDICIAL DISTRICT NO. GN40207 4 , HO NORAB LE DARLENE BY RNE , JUDGE PRESIDI NG

M E M O R

A N D U M O P I N I O N This appea l arises f

rom a dispute over

a hig hway

construction contr act be tween J ordan PavingCorporation and the Texas Depar tment of T ransportation (the “De partment” ). See Tex. Transp. Code Ann. § 201.112 (West Supp. 2008). J ordan Pa v i n g fi led an a dminist rative complaint, which the De partm en t d enied, a nd a hea ring was subseque ntly

held bef

ore a n administrative law judge at the State Offic e of Administrative Hea ring s (SOAH). In the ag ency ’s final orde r, the e x ecutive dir ector reje cted se vera l o f t h e AL J ’s proposed f indings of f

act a nd
c o n c l u s i o n s o f l aw an d s u b s t i tu t e d h i s o w n f

i n d i n g s an d c o n c l u s i o n s . Jo r d a n P a v i n g f

i le d s uitin district court see king judicia l review
. See id. § 201.112(d)

. The district cour t affir med the Depa rtment’s final or der, a

nd this appeal followe d. For the re asons set for

th below, we r ever se the district c ourt’s judgme nt a ffirming the Depa rtment’s order and rema

nd this c ause to the D epar tment for f urther pr ocee dings c onsistent with thi s opinion.At the SOAH he ar ing, Jordan Paving amende d the amount of its claim to $525,735.96, 1 inc lud inga

re fu nd of the liq uid a te d dama g e s a sse sse d by the De pa rtme nt, and

dis mis se d it s c la im fo r atto rn e y s’ fe e s and

c os ts. 2 F ACTUAL AND P ROCEDURAL BACK GR OUND O n Ja n u a r y 1 4 , 1 9 9 9 , Jo r d a

n P a v i n g e nte re d in to a

hig hw ay c on str uc tio n c on tr a c t w ith the De pa rtme nt to p e rf

or m r e ha bil itatio n, pavin g , a

nd re la te d c on str

uc tio n w or

k o n a pp ro xima te ly seven miles of U .S. Hig hway 70 in Hale County
. The c ontrac t price f or the proje ct, which include d te ari ngup and rem ov inga sp ha lt a nd c on c re te in t

he e xistin g ro a d, re wo rk ingthe ba se ma te ri a l,
re bu ild ingthe ro a d, wi de nin g and a dd ing sh ou lde rs in som e loc a tio ns , an d the n ap ply ing ho t mix to the top of t h e ro ad , wa s $4,991,761.42. All of the work unde r the c ontrac t was to be c ompleted within 210 working day s. I f J ordan Paving failed to c omplete the work in a timely manner, the
c o n t r a c ta l l o w e d

t h e D e p art m e n tt o i mp o s e l i qu i d a t e d d a m a g e s o f

$ 1 , 0 0 0 p e r

d ay. J o rd an P av i n g b ega nwo rko nt h e p ro j ec t o n J an u ary 3 0 , 1 9 9 9
. Ho we v er , 2 1 ch an ge order s were issued duri n g t he cour se of the pr oject and, a s a re sult, 119 working da y s were added to the projec t perfor

mance time. J ordan Pavingcompl eted the pr oject on Oc tober 21, 2000, four da y s a ft e r t he targ e te d c omp le tio n d a te , a nd the De pa

rtme nt imp os e d $4, 00 0 in liqu idate d d a ma g e s. Following the Depa

rtment’s ac cepta

nce of the pro j ec t, J ordan Pavinginitiated administrative proc eeding s under se ction 201.112 of the tra nsportatio n co d e for a dditional
c omp e ns a tio n in

the a mou nt o f $ 65 3, 66 0. 11 , p lus a tto rn e y s’ fe e s and c os ts. After

the Depa rtment 1 d e n i e d Jo r d anP a v i n g ’ s c l a i m s , Jo r d anP a v i n g r e qu e ste d a co n t e s t e d c a s e h e ar i n g b e f

o r e anA L J. The c ase w as ref

err ed to SOAH , and a four- day hear ing was held in Aug ust 2003. The AL J prepa red a proposa l for dec ision (“PFD” ) re commending that a portion of Jordan Paving ’s claims, t o t ali ng3

$2 98 ,7 94 .3 0, be g ra

nted. The AL J’s r e c omm e nd a tio n in c lud e d $ 29 0, 99 4. 30 in d e lay dama g e s, $3,800 for the cost of a

n additional month of barr icade s, and pay ment of the $4,000 the D epar tment ha d w ith he ld a s li qu idate d d a ma g e s.

After consideringthe PFD, the D epar tment’s executive direc tor issued a final orde r in which he spe cifica lly

declined to a dopt any

finding s of fa ct or c onclusions of law that stated that J ordan Paving , by

a pre pondera

nce of evidenc e, had met its burden to show that the dec isions of the De pa rtme nt’s are a

e ng ine e r w e re ba se d o n p art ia lity , f ra ud , mi sc on du c t, o r g ro ss e rr or a s w ou ld imply bad fa ith or failure to exercise hone st judgment. The executive direc tor adopted the rema ining finding s of fa ct and c onclusions of law a nd awa rded Jordan P av i n g $ 3 , 8 00 for the c ost of an
a dd iti on a l mo nth

of ba rr ic a de s, a s a g re e d by the p art ie s. Jord an Pavin g so ug ht j ud ic ia l r e vie w i n district court, which a ffirme d the Depa rtment’s final or der. On appe al, J ordan Paving seeks the AL J ’s re commended $290,994.30 in damag es
cause d by a delay in the Depa rtment’s approva l of

J ordan Paving ’s hot-mix desig n and pay ment of the $4,000 the De partment withheld a s liquidated damag es.

H o t m i x c o n s i s t s o f a g g r e g a t e , a s p h a l t , an d o t h e r a d d i t i v e s . T h e j o b m i x f or mul a (JM F) for the hot mix l ists the perce ntag e of e ach material c omponent and identifies the c ombined ag g reg ate gr adation. Samples of the JMFs are tested by both the contra ctor a

nd the Depa

rtment for various cha

rac teristics, including laborat o ry molded density , combined ag g reg ate g radation, and asphalt co n t en t , t o asce rtain whe ther they meet the spe cifications set forth in the contra ct. The ho t- mix de sig n f

or mul a is c omm on ly

re fe rr e d to a s th e JMF -1 . A ft e r t he con tr a c tor

pr ov ide s a JMF
- 1 th a t i s a

p p r o v e d b y th e D e p artm e n t, th e c o n tr a c to r b e g in s p r o d

u c in g tr ia l b a tc h e s o f h o t m ix.4

The trial mix batches are ref err ed to a s the J MF-2s. The J MF-2 batches a re the n tested to deter

mine wheth e r th e y me e t th e p ar a me te r s o f th e a p p r o v e d JMF
- 1
. Wh e n th e D e p artm e n t a pproves the J MF-2 tr ial batch, the c ontrac tor beg ins production. Once the hot mix is being produce d and applied to the road sur fac e, the hot-mix formula is then refe rre d to as the JM F- 3.

J ordan Paving

owns and ope rate s a hot-mix plant in Estelline, T exas. J ordan Paving int e nd e d to pr od

uc e the ho t mi x for

the Ha le County

pr oje c t a t th a t pl ant a

nd tr ans po rt it b y tr uc k to Ha le County
. Jord an Pa vin g hir e d Cor ne rs ton e L a

bs to c re a te the ho t mix de sign fo r t he pro je c t. The fir st J MF-1 de sign that Cornerstone submitted to the Depa rtment failed the Depa

rtment’s lab density test. Cornerstone c reated a se cond desig n known as JMF-1(2) a nd submitt ed that to the Depa rtment on Aug ust 7, 2000. On Aug ust 9, 2000, a hot-mix meet in g w a s h eld in Plainview betwee n repr esentatives of the De partment a

nd J ordan Paving in the office of Mike Craig , the Depa rtment’s ar ea e ng ineer , to discuss the upcoming paving work to be pe rfor med on t he proje ct. At this meeting , J ordan Paving was infor med that the Department’s de nsity test results of Jordan Paving’ s J MF-1( 2) we re low a nd outside the ac cepta

ble tolera nces pr ovided by

the projec t specifica

tions. The molded density of the hot mix desig n had to ac hieve a density perc entag e between 95 perc ent and 97 pe rce nt. J ordan Paving’ s priv ate testing laboratory repor ted a pa ssing de nsity

of 96 per cent on the JMF-1(2)
. Ho we ve r, the De pa

rtme nt’ s te sts on

the JMF -1 (2 ) re fl e c te d a fa ili ng de ns ity re su lt o f 9 4. 3 p e rc e nt. Depa rtment repr esentatives offe red to a llow J ordan Pavingto beg in trial batche s if J ordan Paving would raise the asphalt conte nt of its hot-mix formula to 5.3 per cent. J ordan Paving ag ree d to the proposal, and the desig n beca me J MF-1( 3), the a

pproved de sign.5 At the time of the hot-mix m eetingin Aug ust 2000, J ordan Pavingwas ne aring completi o n of anothe r hot-mix job in W heele r, Texas. Be cause J ordan Pavingwas finishing the Whe e le r j ob , it

ha d to de c ide wh e re ne xt to t a ke its ho t- mix e qu ipm e nt a nd tr uck s, eith e r t o H a le County or to a proje ct J ordan Pavinghad wa iting in Childress. J o rd an Paving’ s primary conce rn when de termining wher e to m ove it s equipment was that it be moved to a proje ct wher e wor k was
rea dy to be per formed, be cause allowing the hot-mix plant, equipment, and a ssociated e m p l o y ees to sit i dle cost Jordan Paving $27,181.30 per day
. Acc epting the Department’s off er to a llow J ordan Paving t o g o d ir e c tl y in to th e p r o d u c ti o n o f tr ia l b a tc h e s , th a t is , p r o d u c ti o n o f JMF
- 2 s , J ordan P a v i n g m o v e d

i t s e n t i r e h o t
- m i x o p e r a t i o n s t o H a l e C o u n t y. On Aug ust 15 or 16, 2000, the first trial batch was run usi ng 5.3 perc ent asphalt. That trial batch r efle cted a

density of 99.6 per cent on the Depa rtment’s test and 98.1 per cent on Jordan Pa vin g ’s te st. Tr ia l ba

tc h 2 , r un on Au g us t 16 , a

nd tr ia l batc h 3, r

un on Au g us t 17 , f

a ile d b oth J o rd an P aving ’s and the D epar tment’s lab density

tests, as well as the D epar tment’s test on g ra datio n. Ho we ve r, tr ia l ba tc h 4 , r un on Au g us t 17 , pas sed Jord an Pavin g ’s la b d e ns ity te st (9 6. 4 p e rc e nt) , p a sse d both pa rt ie s’ te sts on

g ra datio n, bu t f

a ile d th e De pa

rtme nt’ s la

b d e ns ity te st (9 7. 4 p e rc e nt) . B a se d on th e data fr om t he fi rs t f our t ri a l batc he s, Jord an Pavin g wa s o pti mis tic it would be able to a chieve a passing density if it diale d the asphalt content back down to the orig inal 4.9 perc ent aspha lt. However, C raigdid not permit this m odification, and Jordan Paving was d ir e c te d to s h u t d o w nit s tr ia l b a tc h o p e r a ti o nan d r e d e s ig nth e mi x. After rede signing , J ordan Pavingsubmitt ed JMF-1(4) on Aug ust 22. J MF-1( 4) passed a ll tests and was ver ified as JMF-2 on Aug ust 23. Once ag ain, J ordan Pavingbeg an running6

trial batche s. Trial batc hes 5 thoug h 9 wer e run be tween Aug ust 23 and Aug ust 25, and al l failed
on e or mor e te sts
. F ina lly , tr ia l batc h 10 , ru n on Au g us t 25 , p a sse d a ll t e sts . Jor da n Pavin g we nt i nto production on August 28, and it completed the pa v i n g o p er ation 16 work da y s later, on September 18, 2000.
DI SCU SSIO N

J ordan Paving contends the Depa rtment’s executive dire ctor e rre d in failing to adopt the AL J ’s p ro p o s ed finding s of fa ct and c onclusions of law in their e ntirety . Specifica lly , J ordan Paving a rg ues t h at : (1) the e x ecutive dir ector failed to c omply

with the require ments in section 2001.058(e) of the g overnme nt code whe n chang ing the AL J ’s finding s and conclusions of law; (2) substantial evidence d o es not support the executive direc tor’s finding s and conc lusions of law reg ardingthe delay in the Depa rtment’s approva l of

J ordan Paving ’s hot mix desig n and re turn of liquidated damag es; (3) the D epar tment brea ched its contra ct with J ordan Paving ; (4) and the executive direc tor ac ted ar bitrarily and ca p ri cious ly

by failing to adopt all of the AL J ’s proposed conclusions of law
. Stand ard of Review

We reviewthe Depa

rtm en t ’s fi n al order under the substantial evidenc e rule
. See Te x. Tr ans p. Cod e Ann. § 2 01 .1 12 (d ); Te x. Go v’ t Cod e Ann. § 20 01 .1 74 (We st 2 00 8) . “ B ro a dly sp e a kin g , th e su

bs ta nti a l e vid e nc e ru le is a

c ourt re vie w d e vic e to ke e p the c ourt s out o f t he bu sin e ss of administering regulatory statutes enacted by

the L eg islature; but it remains the business of the cour ts to see that justice is administered to compet i n g p arties by g overnme ntal ag encie s.”7

Lewis v. Metro. Savs. &Loan Ass’n , 550 S.W .2d 11, 13 (T ex . 1 9 7 7 ). W e pre sume under a substantial evi d en ce revie w that the ag ency ’s orde r is supported by substantial evidence , and the appellant ha s the burden of overc oming the pr esum ption. State v. Mid-South Pav ers, Inc

. , 246 S.W .3d 711, 721 (Tex. App.—Austin 2 0 0 7 , p et
. denied) ; seealso Graff C hevrole t Co., Inc.

v. T exas M otor Vehicle Bd. , 60 S.W .3d 154, 159 (Tex. App.—Austin 2001, pet. denied)

. When applying the substantial evidence standard to a n ag ency decision, we revie w the re cord to de termine whether some rea sonable ba sis ex ists for the ag ency ’s ac tion. Ce ntral Po we r & Lig ht C o. v . P ub lic Util. Comm’n , 36 S.W. 3d 54 7, 55 7 ( Te x. Ap p. —A us tin 20 00 , p e t. d e nie d) . We may no t su bs tit ute our judgm ent for that of the ag ency on matters committed to ag ency discretion

. Tex. Gov’t Code Ann. § 2001.174 ; H. G. Sle dge, Inc . v. Prospec tive Inv . & Trading Co., Ltd. , 36 S.W .3d 597, 602 (Tex. App.—Austin 2000, pet. denied)

. We will reverse the agen cy ’s orde r if the de cision is not
rea sonably

supported by

substantial evidence , is arbitrar y or ca pricious, or is ch ar ac t er i z ed by an abuse of discretion. See Tex. Gov’t Code Ann. § 2001.174(2)( E), (F ). Transportation Code § 201.112 versus Gove rnm ent Code § 2001.058(e ).

I n its first issue, J ordan Paving asser ts the executive direc tor’s chang es to the AL J ’s finding s of fa ct and conclusions of law fail to meet the standa rds set for th in section 2001.058 of the g overnme nt code. The Depa rtm en t , howeve r, ar g ues the e x ecutive dir ector need only

satisfy the re quirements set for

th in section 201.112(c) of the tra nsport at i o n co de whe n making chang es to the PFD. We ag ree with the Depa rtment that section 2001.058 does not apply in this case. As we noted in Mid-South Pave rs:8 T h e p la in

la n g u a g e o f

s e c ti o n 2 0 1
. 1 1 2 ( c ) s p e c if

ie s th a t s e ction 201.112(c) of the tra

nsportation code, not se ction 2 0 0 1.058 of the g overnme nt c ode, g overns the executive direc tor’s discretion to make chang es in a PFD
. 246 S.W .3d at 721. J ordan Paving ’s first issue on appe al is overr uled.
The Gr oss-Error Stand ard

The AL J applied the g ross-er ror standa rd to J ordan Paving’ s claims. The g ross-er ror standard a

pplies when the pa

rties to a contr act a g ree to be bound by a re fe ree ’s dec ision. Texas Dep’ t of Tr ansp. v. Jone

s Bros. Dirt & Paving Contractors, Inc., 92 S.W .3d 477, 480 (Tex. 2002)

. A ref ere e’s decision under the g ross-er ror standard is f

inal and conc lusive “unless in making it [ the
re fe re e ] is guil ty

of fr a ud , mi sc on du c t, o r s uc h g ro ss m ist a ke a s w ou ld i mpl y ba d f a ithor fa ilure to exercise hone st judgment.” City of San Antonio v

. McKenzie C o n s t r . Co., 150 S.W .2d 989, 996 (Tex. 1941)

. I tem 5.2 of the c ontrac t betwee n the Depa rtment and Jordan Paving makes it clea r the eng ineer ’s dec ision binds bot h parties: “T h e E n gi n eer will act as r efe ree in all questions arising under the terms of the c o ntrac t betwee n the par ties thereto a

nd his decisions shall be final a nd binding.” We conclude the plai n lang uag e of Item 5.2 supports application of the g ross-er ror standard to Jordan Paving ’s claims. See J ones Bros., 92 S.W .3d at 480. After revie wing the evidence, the A L J deter mined that Craig , the Depa rtment’s ar ea eng ineer , brea ched the contra ct and committed gr oss error when he order ed Jordan Paving to stop running trial batche s and re desig n. For the foll owing rea sons, the AL J conclude d Craig did much more than e rr or

make a decision with which a

nother e ng ineer might dis ag ree : Craig depar ted from the terms of t h e co n t rac t; his actions denied J ordan Pavingrig hts ex pressly provided it in the9

contra ct; he disreg arde d the obvious; and he re lied on an unwr itten Lubbock district rule or prac tice of which Jordan Paving had no notice.

The AL J proposed the following finding s of fa ct as the ba sis for her deter mination that Craig ’s mistake wa s so gr oss a s to be arbitra ry and ca pricious and to imply

bad fa ith or a fa ilure to e xer c ise a n h on e st j ud g me nt:
3 6
. A t t

h e [h o t m ix] me e ti n g [o nA u g u s t 9 , 2 0 0 0 ], D e p artm e nt repr esentatives offe red to let [J ordan Paving ] st art produc ing tr ial batch es i f [J ordan Paving ] would raise the aspha lt content to 5.3 perc ent and use two perc ent lime. 38. At the meeting , Department repr esentatives repr esente d to [ J ordan Paving] that they

would work wit h [J ordan Paving ] t o achie ve passing results in the t rial batches i f [ J ordan Paving] would make the desig n chang es th ey s u g g ested a nd mobiliz e its hot mix laying e qu ipm e nt at th e Ha le County Pr oje c t. 39
. B y

the e nd of the ho t mix me e tin g , [J or da n Pav ing ] ha d a g re e d to us e 5. 3 perc ent aspha lt, inst ead of 4.9 perc ent aspha lt, and to use two perc ent lime, instead of one perc ent lime. 41. As a re sult of the meeting , the appr oved d es i gn , containing 5.3 perc ent aspha lt and two perc ent lime, beca me J MF-1( 3). 47
. As of

Au g us t 9, 20 00 , [Jor da

n Pavin g ] h a d the c ho ic e of mov ingits ho t m i x e qu i p m e n t n e xt t o a p r o j e c t i n C h i l dr e s s , T e xa s ( w h e re it a lr e a dy ha d a n a pp ro ve d JMF ) o r t o th e Ha le County Pr oje c t. 48
. I n r e lia

nc e on the a g re e me nt t

he pa rt ie s r e a c hed at th e ho t mi x meeting , [J ordan Paving ] m oved its hot mix laying e quipment to the Hale County Project and filled the t anks at its hot mix plant with the [as ph a lt] r e qu ir e d f

or the Ha le County

Pr oje c t. 51. Every

one-te n t h p er cent increa se in asphalt should result in a four

t e n t h s t o s i x - t e n th s p e r c e n ti n c r e a s e i nl a b d e n s i t y.10

53. On the first trial batch using5.3 perc ent aspha lt, run on Aug ust 15 or 16 , 2 00 0, the de ns ity sh ot up to 9 9. 6 p e rc e nt o n th e De pa rtme nt’ s te st and 98 .1 pe rc e nt o n [Jor da

n Pavin g ’s ] te st. 54
. I n li g ht o f F ind ingof F a c t No. 51 , the inc re a se fr om 9 4. 3 p e rc e nt t o 99.6 perc ent wa s extreme and sug g ested a n err or in either the Depa rtment’s JM F- 1(2) test re sults or the Depa rtment’s t rial batc h 1 re su lts
. 57. Trial batc h 4, run on Aug ust 17, 2000, passed [ J ordan Paving ’s] lab density test (96.4), passed both parties’ te sts on gr adation, but fa iled the Depa rtment’s lab de nsity

test (97.4). 59. Trial batc h 4 fa iled the Depa rtment’s lab de nsity

test by only 0.4 perc ent (too hig h). 60. Special Specif

ication I tem 3022 [of the contrac t] p ro v i d ed that the c on tr a c tor

c ou ld a dju st the JMF duri ng tr ial ba tc he s, wi thi n c e rt a in limit ations and provided the asphalt conte nt stay ed within plus or minus 0.5 perce nt of the appr oved JMF-1. 61
. Af

te r t ri a l ba tc h 4 , [Jord an Pa vin g ] r e qu e ste d th a t it be pe rm itt e d to dia l th e a sp ha lt c on ten t ba c k d ow n to the or ig ina l 4. 9 p e rc e nt, in accor d an ce wi t h t h e s p ec i fi ca t i o nd es cr i b edi nFi n d i n g o f F ac tNo
. 6 0. 62. Mr. Craigdid not permit [J ordan Paving] to make this modification. 63. On August 17, 2000, pursuant to a de cision made by Mr. C ra i g, [J ordan Paving] was direc ted to shut down its trial batch o p eration an d r e d e s ig nth e h o t m ix. 64. I n order ing [J ordan Paving ] to shut down and rede sign when he did, Mr
. Cr a igr e li e d

o nanu n w r itte nr

u le o r p r a c ti c e in

th e Lu b bock dis tr ic t w he re by a

c on tr a c tor

wi ll b e shut d ow n a

nd re qu ir e d to re de sig n a ft e r f

our f a ile d tr ia l batc he s. 65. The c ontrac t documents do not ref lect the L

ubbock dis t ri ct’s unwritten rule or

prac tice of pe rmitting only four tria l batches be fore shutting a c ontrac tor down and r equiring it to redesig n.11

66
. [Jord an Pav ing ] ha d no noti c e of the Lub bo c k d ist

ri c t’ s unw ri tte n r

ule o r p ra ct i ce o f p er m i t t i n g o n l y fo u r t ri al b at ch es b ef

o re s h u t t i n g a contra ctor down a

nd requiringit to redesig n. 67. J MF-1( 3), the de sign [J ordan Paving ] was using in trial batches 1-4, was not [J ordan Paving ’s] own cre ation, but the Depa rtment’s desig n. 68. J MF- 1 (3 ) wa s cre ated in a ma nner not in ac corda

nce w ith Special Specification I tem 3022. 69. After

trial batche s 1-4 had be en run, Mr . Craig knew or should have known that the aspha lt conten t of the hot mix desig n neede d to be reduc ed. 70. Mr. Craigknew that r equiring [J ordan Paving] to redesig n afte r trial batc h 4 wo uld de lay [Jord an Pav ing ’s ] a bil ity to be g in l ay ingho t mi x on the Ha le County

Pr oje c t. 78. Pursuant to the Standard Speci f i cati ons for Const ruction and Mai n t enanceof Highways, Streets, and Bridges , Section 1.58, an e ng ine e r m

us t a bid e by pr inc ipl e s inc or

po ra te d in o r c on sis te nt w ith the ind ivi du a l c on tr a c t. 79
. Spe c ial S pecif

ic a tio n I te m 30 22 pe rm itt e d th e c on tr a c tor to d e viate from JMF-1 and de termine the “ optimal mix t u re ingr edients” f or J MF-2, pr ovided the contr actor met the re quirements set for th in the specific ations and t he aspha lt content did not deviate fr om the J MF-1 by mor e tha n p lus or min us 0. 5 p e rc e nt. 80. Special Specif

ication I tem 3022 g ave the eng ineer the rig ht to r equire a contr actor

to rede sign w hen an a

pproved t ri al m ix ture “ cannot be produce d from JMF 1" but conta ined no warning that a contr actor would be shut down and f orce d to rede s i gn afte r four unsucce ssful tr ia l batc he s. 81. At the time Mr. Craigrequire d [ J ordan Paving ] t o shut down and rede sign, a

n approve d trial mix ture c ould have be en pr o duced f rom JMF -1 (3 ) h a d [Jor da

n Pavin g ] be e n p e rm itted to red uc e the a sp ha lt c on te nt.12

82. I n shutting [J ordan Paving ] down in t he cir cumstance s summarized above, Mr . Craig did more than e rr or make a decisio n wi t h which another eng ineer might disag ree . 83. I n denying [J ordan Paving ] permission t o reduc e the asphalt content a ft e r t ri a l batc h 4 , M r. Cr a ig de pa rt e d f ro m th e te rm s o f t

he c on tr a c t, de nie d [Jor da

n Pa vin g ] ri g hts e xp res sly

pr ov ide d it

in t he c on tr a c t, and disreg arde d the obvious, i.e. , tha t the a sp ha lt co nte nt of the mix neede d to be re duced. Th e AL J als o p ro po se d th e fo llo wi ngfi nd ingof fa c t r e g ard ingCr a ig ’s de c isi on s: 71. Mr. Craig ’s asser

tion that his decisions were ba sed on conc erns a bout the g radations i n [ J ordan Paving ’s] stockpile was not supported by cre dible evidenc e. Th e e xec uti ve dir e c tor

in h is f ina l or de r f

ound the fo llo wi ng : [T] here was insufficient evidenc e to find t hat the eng ineer ’s dec isions were ba sed on pa rt ia lity , f ra ud , mi sc on du c t, o r g ro ss erro r a s w ou ld i mpl y ba d f a ithor fa ilure to e xer c ise ho ne st j ud g me nt. Th e Exe c uti ve Di re c tor fin ds that th e re is c re dib le evidenc e to support conc erns a bout gr aduation [ sic] of t he st ockpile (contrar y to FoF No. 71); in shutting [J ordan Paving ] down, the eng ineer did not do more than er

r or make a decision with which a

nother en gi n eer

might disag ree (contra

ry to FoF No. 82); deny

ing pe rmission to reduce the asphalt conte nt was within the terms in the contra ct (c ontrary

to FoF No. 83); an d [ J o rdan Paving ] i s not entitled to delay damag es or liquidated da

mag es (c ontrary

to FoF Nos. 96 and 108).
Th e e xec uti ve director a lso fo un d th a t th e e ng ine e r w or ke d w ith in t

he pr ov isi on s o f t

he c on tr a c t, contra ry to proposed conc lusion of law 9, which state d the e n gi neer did not follow the provisions of t he contract as require d by the Standard Specifications for Cons truction of Highways, Streets, and Bridges Section 1.58 (1995).

T h e A L J ’ s p r o p o s e d

c o n c l u s i o no f

l aw 1 0 s t a t e d

t h a tJ o r d anP a v i n g s h o w e d b y a pr e po nd e ra

nc e of the e vid e nc e th at the e ng ine e r’ s d e c isi on s to de ny Jord an Pavin g ’s re qu e st t o
re du c e the a sp ha lt co nte nt af te r tr ia l bat c h 4, to re qu ir e Jord an Pavin g to s top pr od uc ingtr ia l batc he s,13

and to re quire Jordan Paving to rede sign w ere based on gross err or and, the ref ore, br eac hed the
c on tr a c t. Con c lus ion of law 11 as pr op os e d b y the AL J found

that th e e ng ine e r’ s e rr or

wa s so g ro ss
a s to be ar

bit ra ry and c a pr ic iou s and to imp ly

ba d f a ithor a fa ilure to e xer c ise an h on e st j ud g me nt. The e x ecutive dir ector , howeve r, found that Jordan P aving “fa iled to show by the pre pondera

nce of the evidenc e that the eng ineer ’s decision to de ny the reduc tion of asphalt conte nt met the standard of re view (c ontrary

to CoL Nos. 10 and 11).”
Com plian ce with Section 201.112

J o rd an P av i n g ar gu es t h e De p ar t m en t ’s fa i l u re t o ad o p t t h e A L J ’s p ro p o s edfi n d i n gs of fa cts and c onclusions of law is not supported by substantial evi d en ce an d was a rbitrar y and
ca p r i c i o u s . T h e D e p art m e n tr e s p o n d s t h a ts e c t i o n2 0 1
. 1 1 2 ( c ) a l l o w s t h e e x e c u t i v e d i r e ct o r t o ch an ge a finding of fa ct or c onclusion of law at his discretion as lo n g as h e p ro v i des a w ritten statement containing the re ason an d l ega l b asi s for the c hang e. In this case, the D epar tment argues the executive direc tor g ave a

written explanation and brief ly identified the re asons for the chang es t o the AL J’s f ind ing s and

c on c lus ion s. B e c a

us e we c on c lud e the e xec uti ve dir e c tor fa ile d to c omp ly

wi th section 201.112 when makingchang es to the AL J ’s finding s of fa ct and c onclusions of law a nd acte d
arb itr ari ly and c a pr ic iou sly , w e su sta in Jor da n Pavin g ’s se c on d, fi ft

h, and sixthiss ue s. Th e e xec uti ve dir e c tor ’s a uth or ity to c ha ng e a fi nd ing of fa c t or

c on c lus ion

of law i s not unlimi ted. M

i d

- S o u th P a v e rs , 246 S.W .3d at 722. Althoug h section 201.112 allows the executive direc tor to make chang es to an AL J ’s proposed f inding of fac t or conc lusion of law, the statute require s that “the director shall provide a written st atement containing the rea son and leg al basis for a

chang e made under this subsection.” Tex. Transp. Code Ann. § 201.112(c )

. I n addition,14

the executive dire ctor’s f inal order must be supported by substantial evidence consideringthe
r e li a b le an d p r o b a ti v e e v id e n c e in th e r e c o r d a s a whole. S ee id. § 201.112(d); Te x . Gov’t Code Ann. § 2 00 1. 17 4. Mo re ov e r, the fi na l ord e r mus t not exc e e d the a g e nc y ’s statut or y a uth or ity ; mu st be fr ee of constitutional, statutory , proce dural, or othe r leg al er ror; and m ay

not be ar

bitrary or capr icious or otherw ise cha rac terized by

an abuse of discre tion. See Tex. G o v ’t C o d e Ann. § 2001.174. I n deter

mining whether the executive direc tor ac ted ar bitrarily and ca priciously , we must decide whe ther the f inal order was ba sed on a consideration of all releva nt fac tors and whe ther t h ere is a rational c onnection betwe en the f acts a nd the executive dire ctor’s de cision. Mi d- So uth Pa v e rs , 24 6 S. W.3 d at 72 6; Starr County v . Starr Indus. Servs., Inc

. , 5 8 4 S. W. 2 d 3 5 2 , 3 5 5
- 5 6 ( T e x. Civ. App.—Austin 1979, writ ref’d n.r .e.)

. W e m ay n o t s u b stitut e our judg ment for that of the ag ency . Id. Th e legisl atu re in s e c tio n 2 01 .1 12 ha s e xpre ssl y re qu ir e d th e e xec uti ve dir e c tor to provide a written statement c ontaining the rea son and legal b asi s for e ach c hang e to the AL J ’s f i n d i n g s o r

c o n c l u s i o n s . T e x. T r an s p . C o d e § 2 0 1
. 1 1 2 ( c ); Mi d-Sou th P av e rs , 246 S.W .3d at 728;

se e als o Le v

y v . Te x as Sta te Bd

. o f M e d. Ex am ’r

s , 966 S.W .2d 813, 816 (Tex. App.—Austin 1998, no pet.) (a g ency

require d to “ar

ticulate sp e c ifi c all

yits re a so ns for each individua l change made ”). Contrary to the Depa

rtment’s a s s er t ion that it identified the rea sons for the e x ecutive dir ector ’s chang es, our r eview of

the fin al o rder

shows that the executive dire ctor c hang ed finding s of fa ct 7 1 , 8 2 , 8 3 , 9 6 , an d

1 0 8 an d co n cl u s i o n s o f l aw 9 , 1 0 , 1 1 , 1 2 , an d 1 4 , an d d ec l i n edt o ad o p tfi n d i n gs of fa ct 106 and 107, without pr oviding a written statement for eac h individual c hang e to the AL J ’s15

fi nd ing s o f f

a c t and c on c lus ion s of law that expla ins the e xec uti ve dir e c tor ’s ratio na le and le g a l ba sis for e ach c hang e, as r equire d by section 201.112(c ). B y

not providing a

writ t en s t at ement for

eac h individual chang e to the AL J ’s finding s of fa ct and c onclusions of law that e x plained the e x ecutive direc tor’s rationale for e ach chang e, the executive di rec tor failed to c omply with section 201.112(c)
. The executive direc tor’s chang es to pa rticular finding s and conclusions proposed by the AL J sug g est the executive dire ctor wa s acting as the De partment’s f actf i n d er , d es pite the leg islatur e h aving deleg ated that r esponsibility to the AL J in section 201.112(b). Se e Mi d- So uth Pa v e rs , 246 S.W .3d at 722; Mo ntgom e ry In de p. Sc h. Di st. v . D av is , 34 S.W .3d 559, 564 (Tex. 2000) (“H aving chosen to de leg ate the fac t-finding role to the hear ing- examiner, a board cannot then ig nore tho se fi nd ing s w ithwh ic h it disag re e s and

su bs tit ute its ow n a dd iti on a l f

ind ing s. ” ). B y

fa ili ngto comply with the require ment to pr ovide a wr itten statement containing the re ason and le g al basis for chang ing the AL J ’s finding s and conc lusions, the exe c utive direc tor’s dec ision in hi s final orde r ra ises
se ri ou s d ue pr oc e ss c on c e rn s. An a g e nc y mus t r e sp ect th e du e proc e ss r ig hts of pa rt ie s th a t a

pp e ar b e fo re it i n contested c ases. See Mi d- So uth Pa v e rs , 246 S.W. 3d a t 72 2; Fl or es v . E

mp loy e es R e t. S

y s. , 74 S.W .3d 5 3 2 , 5 3 9 (T ex . Ap p . —

Au s t i n2 0 0 2 , p et
. d en i ed ) ( ci t i n g Te x as Sta te Bd

. o f P ha rm ac

yv . S e e ly , 764 S.W .2d 806, 815 (Tex. App.—Austin 1988, writ denied))
. Section 201.112 contemplates that, when
a contra ctor is dissatisfied with the Depa rtment’s informal resolution of its c laims, the contrac tor may reque st a forma l administrative hear ing to resolve thos e claims under chapter 2001 of the g overnme nt code. Mi d- So uth Pa v e rs , 246 S.W .3d at 722; see Tex. Transp. Code Ann. § 201.112(b) ; Tex. Gov’t Code Ann
. § 2001.051 (West 2008) (opportunity for c ontested ca se hea ring ). Unde r theSee F. Scott McCown, W hen Can an Agenc

y Change the Findings o r C o nclusions of an 2 Administrati ve Law Judge ? 50 Ba y lor L.Rev. 65, 74 (1998).

16 transportation code and the Depa rtment’s rules, the hear ing is deleg ated to an A L J at SOAH. See Tex. Transp. Code Ann. § 201.112(b)- (c) ; 43 Tex. Admin. Code §§ 1.21-.33 (pr ocedur es in contested
c a se s) , 9 .2 (g )( 3) (D ) ( ii) (r e qu e st fo r c on te ste d c a se he ari ng ) (We st 20 08 ). A he ari ng g ive s li tig a nts an opportunity

to present e vidence , an d any conflicts in the evide nce a re r esolved by

the dec isionmaker by weig hing the evidenc e and e valuating the cr edibility of witnesses. Mi d- So uth Pa v e rs , 246 S.W .3d at 723. Be cause the AL J has heard the evidence and obser ved the witnesse s’ demea

nor, 2 the AL J is in a superior position relative to an a g ency head or board r eviewingthe AL J ’s proposed decision to make those de terminations. Mi d- So uth Pa v e rs , 2 46 S.W. 3d a t 72 3 ( c iti ng 2 K e nn e th C ulp Davis & Richard J. P ierc e, Jr., Ad mi nis tra tiv e Law T

re ati se § 9.8 at 67 (3d e d.1994)). By allowing a dissatisfied contractor to reque st a formal administrative hearing under section 2 0 1 .112(b), the le g islature has r ecog nized the importance of a neutr al dec ision-maker. M i d

- S o u th P a v e rs , 246 S.W .3d at 723. The le g islature has a lso lim ited the executive dire ctor’s discretion to make c hang es to the AL J ’s proposed f indings of f

act a nd conclusions of law by

requiring the executive dire ctor to provide a written statement of

the re ason and le gal b as i s for e ach c hang e. Id.; Tex. Transp. Code § 201.112(c ). The supreme c ourt rec og nized the importance of this li mitation inMo ntgom e ry

In de pe nd e nt S c ho ol D ist

ric t v . D av is :
I f a boa rd could find additional fac ts, resolving conflicts in the evidenc e and c redibility

disputes, it would then be servingas its own fac tf in d e r d e s p it e dele g ating the fa ctfinding role to a he aringexaminer, and the pr oc e ss w ou ld b e me anin g le ss. An ind e pe nd e nt f

a c tf ind e r i s integ ral to the struc ture of the hear ing- examiner p ro cess. . . . The L egi s l at u re has further

prot ec t edt h e i n d ep en d en tn at u re o f t h e h ea ri n g-I n th e PF D, the AL J n ote d that the De pa rtme nt e le c te d n ot t o c a ll Cu nn ing ham a s a

wi tne ss, 3 e ve n th ou g h h e ha d b e e n pr e se nt a t the he ari ngand kn e w m or e a

bo ut Jor da

n Pavin g ’s pla

nt a nd its c on tr ols tha

n th e oth e r w itn e sse s. 17 examiner proce ss by requiring the boar d to state in writing the rea son, including the leg al basis for a ny chang e or r ejec tion it m akes . . . .
34 S.W .3d at 564.

I n finding of fa ct 71, the AL J deter mined there was no c redible e vidence supporting Craig ’s asser

tion that his decisions to shut down J ordan Pavingand re quire it to rede sign w ere based
on conce rns about the g radations in J ordan Paving ’s stockpile. I n the PFD, the A L J pointed out that Craig testified that he ha d obtained informa tion about the g rada tions from Ricky Walker, the Depa rtment’s lab super

visor in the Lubbock district, a nd Chris Cunning ham, the Depa rtment’s hot mix sp e c ia lis t a t Jord an Pa vin g ’s ho t mix pla nt. No tin g that th e g ra datio ns in t ri a l batc h 4 pa sse d b oth J ordan Paving ’s tests and the De partment’s tests, the AL J observe d that neither Craig nor any other Depa rtment witness provided pe rsuasive e vide n c e to s u p port the De partment’s c ontention that J ordan Paving ne eded to r edesig n. The De partment re sponds that, in chang ing f inding of fac t 71, the 3 executive direc tor was “ corr ecting ” the AL J ’s er ror. Th e e xec uti ve dir e c to r’s fa ilure to p ro vid e an e xplanatio n f or the c ha ng e ma de to fi n d i n g o f fa ct 7 1 d em o n s t ra t es t h at t h e ex ec u t i v e di re ct o r ab u s ed h i s d i s cr et i o n i nm ak i n g t h e c h an ge and that his decision was a rbitrar y and ca pricious. Se e Mi d- So uth Pa v e rs , 246 S.W .3d at 727. The AL J deter

mined the witnesses’ c redibility when she explained that neither Cra ig nor any other Depa rtment witness provided “ cre dible evidenc e” that J ordan Pa v i n g neede d to rede sign ba sed on
conce rns about the g radations in J ordan Paving’s stockpile. Although the executive di rec tor found18

that th e re wa s c re dib le e vid e nc e to sup po rt c on c e rn s a

bo ut g ra datio n, he pr ov ide d n o e xplanatio n to support his decision. Be cause he did not hear the testimony or evaluate the witnesses’ demea nor but chose to re solve the conflict in c redibility in favor of the Depa rtment, the executive dire ctor’s f ailure to e xpla in h is f

ind ingtha

t th e De pa

rtme nt w itn e sse s p ro vid e d c re dib le evi den c e un de rc uts his de te rm inatio n, re nd e ri ngit a rb itr ary and c a pr ic iou s. We conclude that the executive direc tor’s dec ision was arbitra ry and ca pricious and
an a bu se of dis c re tio n. With ou t kn ow ing o n wh a t f a c ts t he e xec uti ve dir e c tor

re lie d to make his finding of “c redible e vidence ,” ther e is no rational c onnection betwe en the f acts a nd the ex ecutive direc tor’s dec ision. S

e e M i d

- S o u th P a v e rs , 246 S.W .3d at 727. We have, in Mi d- So uth Pa v e rs , a lr e a dy re je c te d th e De pa

rtme nt’ s argume nt that se c tio n 20 1. 11 2( c ) pe rm its the e xec uti ve dir e c tor to weig h the evidenc e anew , substitut e his ow n cre dibilit y deter minations in plac e of those ma de by the AL J , and chang e an AL J ’s findi ng of fact or a conclusion of l aw at his unfettere d discretion. Id. See als o Da v is , 3 4 S. W.3 d at 56 4; Flores , 74 S.W .3d at 540. On thi s rec ord, whe re the AL J , not the executive direc tor, hea

rd the testimony

and obser

ved the d em eanor of the witnesse s and, in the absenc e of any explanation that points out evidenc e in the rec ord to support the executive dire ctor’s
cr edibility

choice , we c onclude that the e x ecutive dir ector ’s dec ision to reject the AL J ’s findi n gs ba se d on cr e dib i l i t y

w a s ar b i t r ar y an d c a p r i c i o u s an d

ana b u s e o f d i s c r e t i o n . I nl i g h to f t h is conclusion, we likewise conc l u d e that the e x ecutive dir ector ’s re lated cha ng es to finding s of fa ct 82 and 83 and c on c lus ion s o f l aw 9 , 1 0, and 11 were arbitr ary

and c a pr ic iou s a

nd an a bu se of discre tion.19

Jordan Paving’s Dam ages

Reg ardingthe amount of de lay damag es ca

used by the Depa rtment’s a c ti on of shutting down J ordan Pavingand requiring it to rede sign J MF-1, the AL J proposed the following finding s of fa c t:
8 8
. The D e p artm e n t’ s a c ti o n , o no r a f te r A u g u s t 1 7 , 2 0 0 0 , o f

s h u tt ing [J ordan Paving ] down and requiringit to redesig n J M F- 1 cause d a delay of six working day s in the beg inning of [J ordan Paving ’s] hot pavin g op e ratio ns . 90. When the Depa

rtment requir ed [J ordan Paving ] t o shut down and rede sign, most of the trucke rs [J ordan Paving] had lined up could not a ff or d to s it idle , w a iti ngfo r t he pavin g ph a se of

the Ha le Cou

nty P roje c t to be g in, and

so the y le ft to f ind oth e r w or

k. As a re su lt, [J ordan Paving ] had f

ewe r trucks available to ha ul the hot mix to the Hale [County ] P rojec t than it had planned. 91
. [Jord an Pa

vin g ] la id a

tot a l of 21 ,3 75 .1 7 to ns of

ho t mi x on

the Ha le County Pr oje c t. 92. On September

14, 2000, when [J ordan Pavi n g ] ran 35 trucks (a number similar to the number o f trucks it ran at its peak on the Wh e e le r Co u n ty Pr o je c t) , it la id 2 , 0 6 2
. 3 7 to n s o f

h o t m ix. 93. Had [ J ordan Paving] been able to run approx imately 35 trucks eve ry day on the Hale C o u n ty

Project, it would have be en able to lay the 21,375.17 tons of hot mix in approximately 11 day s, rathe r than the 16 day s it took [ J ordan Paving ] t o complete the pa ving job. 94. The De partment’s a ctions resulted in a f ive-da y delay d u ri n g the pavin g ph a se of

the pr oje c t. 95. [J ordan Paving ’s] calculation of its delay damages at a rate of $27,181.30 per da

y constitutes a reasonable and necessar y char g e . .

. .The Court note s that 11 day s’ delay at the ra te of $27,181.30 pe r day

equals a n amount of 4 $ 2 9 8 , 9 9 4
. 3 0 i nd e l ay

d a m a g e s , r a t h e r

t h ant h e $ 2 9 0 , 9 9 4
. 3 0 a s f o u n d b y t h e A L J. As pointed out in footnote 4 above, the total amount of delay damag es, at the r ate of 5 $27,181.30 per da

y for 11 da y s, equals $298,994.30

20 96. [J ordan Paving ] i s entitled to recove r 11 day s’ d el ay damag es at the rate of $27,181.30 per

day , for a

total of $290,994.30. 4 R ega rd i n g t h e a m o unt of liquidated d am age s , t h e A L J p ro p o s edt h e f o l l o wi n g fi n d i n gs of fa c t: 1 0 6
. T h e a ct i o n s o f t h e D ep ar t m en t , as d es cr i b edi nt h e f o re go i n g Fi n d i n gs of F a c t, d e lay e d th e pr oje c t by 11 da y s. 10 7. Th e fo ur

da y s it too k [J or da

n Pav ing ] to c omp le te wo rk on the pr oje c t, bey ond the c o ntrac t completion date, we re attributable to the De pa rtme nt’ s a c tio ns . 108. The De partment should extend the contra ct per formanc e per iod by four da y s and pa y

[J ordan Paving ] t he $4,000 in liquidated damag es it previously

assessed.
The AL J d et er m i n edi nco n cl u s i o no f l aw 1 2 t h at J o rd an P av i n g wa s en t i t l edt o rec over delay damag es bec ause it showed b y a p reponde ranc e of the evidenc e that its work on the paving phase of the contra ct was delay ed, that the Department’s actions and inac tions caused that de lay , and that J ordan Pavingwas damag ed by t h at delay . I n conclusion of law 14, the AL J found that the fo llo wi ngof

Jord an Pa

vin g ’s c on tr a c t c la ims sh ou ld b e g ra nte d: Jor da

n Pavin g was e nti tle d to $2 90 ,9 94 .3 0 in

de lay dama g e s, $3,800,00 for the c ost of an additional mont h of bar rica des, and 5 pay ment of the $4,000.00 the D epar tment previously

withheld as liquidated dama g es, for a tot al of $298,794.30. The e x ecutive dir ector found that J ordan Paving was not entitled to delay or liquidated damag es (contra

ry to f indings of f

act 96 a nd 108) and c oncluded that Jordan Paving was not entitled21

to r e c ov e r d e lay

a nd liq uid a te d d a ma g e s a s th e sta nd ard of revi ew was no t me t ( c on tr a ry to conclusions of law12 and 14).

I n light of our

conclusion that the e x ecutive dir ector ’s decisions on the issues of
cre dibilit y

wer e ar bitrary and ca pri ci ous and an a

buse of discr etion, we likewise conclude that the executive direc tor’s cha

ng es to finding s of fa ct 96 and 108 a nd conclusions of law

12 and 14 we re arbitra ry and ca pricious and a

n abuse of

discretion. We sustain J o rd an P av i n g ’s third and fo ur th i ssu e s. Our review of the final order shows that the executive dire ctor a lso declined to adopt finding s of fa ct 106 and 107 but fa iled to provide the e x planation re quired in sec tion 201.112(c).
CO NC LU SION Havingconsidere d all the claims raised on a ppeal by J ordan Paving , we r ever se the district court’s judg ment aff irming the final order and rema nd this cause to the Depa

rtment for f

urther proce eding s consistent with our opinion as authorized und er section 2001.174(2) of the Administrative Procedur es Ac t. See Tex
. Gov ’t Cod e Ann. § 2 00 1. 17 4( 2) (We st 2 00 8) . We lim it the scope of this remand to the rec ord previously established by

the par ties befor e the AL J
. See MidSo uth Pa v e rs , 246 S.W .3d at 733; Te x as He alt h Fac ili tie

s Comm ’n v . Nu e c es Co un ty Ho sp . D ist
. , 581 S
. W.2d 768, 770 (Tex. C iv. App.—Austin 1979, no writ) (limiting scope of re mand under simil ar statut e ); Fi rst

Sa v . &Loa n A sso c . v . Le wis , 51 2 S. W.2 d 6 2, 64 (T e x. Civ . App .— Au sti n 1 97 4, wr it ref ’d n.r.e .) (c ourt may

control scope of its remand)
.22 J . Woodfin J ones, Chief Just ice Be fore Chief J ustice Jones, J ustices Patterson and Pury ear Reverse d and Remande d Filed: June 3, 2009