A state agency has been ordered to pay about $1.2 million to a Texas developer over the way it handled negotiations that resulted in a failed development plan for state land at piers 5 and 6 near Aloha Tower.

The award was made by an arbitrator against the Aloha Tower Development Corp. in favor of developer Ken Hughes, who attempted to partner with the state in a $300 million residential and retail project.

The arbitration decision is another blemish on the agency's poor history of developing prime parts of the waterfront at Honolulu Harbor, though much of the monetary damages sought by Hughes were denied.

Arbitrator Keith Hunter, of Dispute Prevention & Resolution Inc., concluded that the ATDC's pace and manner of negotiations breached its duty to negotiate fairly in good faith.

Hunter's decision stopped short of saying that the agency negotiated in bad faith, but said certain actions — such as setting schedules that were unrealistic due to bureaucratic procurement issues and not clearly stating what was expected in terms of ground rent and improvements to parking for Aloha Tower Marketplace — made negotiations unreasonably difficult.

Hughes said it's a shame that a $300 million project that would have created jobs and income for the state ended on such a note and added that his experience with the agency was mind-boggling.

"We put our heart and soul in this deal," he said. "It's just incredible."

The developer said he invested about $6 million in time and effort over five years on the development plan solicited by the agency and terminated in February 2008.

Hunter awarded Hughes $903,592 for his effort during only the period for which ATDC was responsible for the problematic negotiations, plus $271,755 in interest from Aug. 1, 2006, to April 30, 2009.

More money is expected to be added to the award when Hunter includes the cost of Hughes' attorneys.

Hughes, however, was denied damages for what he argued were lost rights to develop the land and lost profits from the project.

In all, Hughes sought $23 million, according to the state.

Sandy Pfund, ATDC executive director, said the agency was disappointed by the decision but said that the award was substantially less than what Hughes sought.

"We went through years of working with him on trying to come up with a workable plan," she said. "It's unfortunate we couldn't agree."

Hughes, a developer from Dallas who has done business as Hughes Development LP and UC Urban, initially got involved at Piers 5 and 6 by responding to a request for proposals issued by the agency in 2002.

After much work that involved numerous project revisions by the developer, the agency tentatively approved a plan in July 2006 for a 130-foot-high complex with 300 condos for residential, hotel and time-share use, plus retail and restaurant space, 850 parking stalls and a public pedestrian promenade around the water's edge.

However, the developer and the agency did not agree on how much rent Hughes would pay the state for a 65-year ground lease and whether Hughes had to find a solution to a parking shortage at Aloha Tower Marketplace that was left over from a prior development plan for Piers 5 to 14 that another developer failed to complete.

Hughes said the agency's slow pace and unreasonable lease conditions killed the project. In October 2007, he demanded that the matter be arbitrated. In February 2008, the agency terminated the development agreement with Hughes.

The agency, in a counterclaim, sought repayment of $271,868 that it paid Hughes to reimburse him for some of his expenses. That claim was denied. Pfund declined to say how much the agency spent on outside attorneys to make its case during the arbitration, which produced nearly 1,000 exhibits and 36 witnesses.