Opinion
No. X08 CV 05 4005012 S
June 28, 2006
MEMORANDUM OF DECISION RE MOTIONS TO CONFIRM AND TO VACATE ARBITRATION AWARD (128.00, 132.00)
I. Background
The plaintiff HH East Parcel, LLC (HH) and the defendant Handy Harman, Inc. (Handy) entered into an agreement on December 31, 2003 for the transfer of real property located at 1770 Kings Highway, Fairfield, Connecticut (Property). On the same day HH paid $8 million to Handy for the Property, which was sometimes referred to as the Eastern Parcel. Handy, which had operated a metallurgical refining facility on the Property until December 2002, undertook in the purchase agreement to demolish the facility and underground structures and environmentally remediate the Property in the year following the sale.
According to the purchase agreement Handy acknowledged that HH would incur "substantial economic loss" if the remediation was not completed in one year and agreed to use commercially reasonable efforts to complete the remediation by December 31, 2004 and, further agreed to pay $5,000 per day for each day after December 31, 2004 the remediation work remained uncompleted. In capital letters the agreement stated that the December 31, 2004 remediation completion date was a material part of the agreement and "time is of the essence."
Also, on December 31, 2003 HH and Handy entered into an Environmental Indemnification Agreement in which Handy agreed to indemnify HH and hold it harmless for any loss arising out of inter alia, Handy's failure to complete demolition and remediation by December 31, 2004. The indemnification agreement contained the following arbitration provision:
Section 6. Disputes. Any disputes which the parties have with respect to the parties' obligations under this Agreement shall be resolved by expedited, binding arbitration, conducted by a sole arbitrator, in Stamford, CT, in accordance with the rules of the American Arbitration Association, then prevailing, or any successor organization thereto having jurisdiction and having offices in Connecticut. The parties shall agree upon the arbitrator, to resolve such dispute, within ten (10) days of a notice of dispute hereunder. If the parties shall fail to agree upon the designation of such arbitrator within such ten (10) day period, then either party may apply to the American Arbitration Association in Connecticut, for the designation of such arbitrator. The designated arbitrator shall conduct such hearings and investigations as (s)he may deem appropriate and the decision of the arbitrator absent fraud, bad faith, coercion or other misdeed, shall be conclusively binding upon the parties. Each party shall pay its own counsel fees and expenses, if any, in connection with any such arbitration proceeding, but the non-prevailing party in such arbitration shall pay all expenses and fees of the arbitrator.
Because of delays in receiving necessary permits, demolition and remediation efforts were not able to commence until August 2004. In December 2004, unexpected underground conditions such as an unknown storage tank and debris and an irregular bedrock structure which contained liquid mercury, delayed remediation and escalated costs. The remediation was not completed by December 31, 2004 and remained ongoing until at least January 2006.
Arbitration commenced in 2005 in which HH claimed indemnification from Handy. An arbitration award was rendered in December 2005 in favor of HH.
II. Arbitration Award
The award found it undisputed there was a breach of contract and ordered Handy to pay HH all unpaid per diem charges occurring since January 1, 2005, totaling $1,670,000 as of November 30, 2005, and to pay the $5,000 per day until the remediation was complete, as well as six percent interest. Handy was ordered to fund and complete the demolition and remediation without delay and to pay all contractors and subcontractors who have worked on the demolition and remediation and to effect the satisfaction, discharge and release of all liens on the property at Handy's cost. Pursuant to General Statutes §§ 52-417 and 418 respectively HH has moved to confirm the award, and Handy has moved to vacate it.
III. The Parties' Contentions
In moving to vacate the arbitration award Handy makes several contentions. First, Handy argues that the award should be reviewed by this court on a de novo basis because the contractual provision of $5,000 per day is a penalty clause, the enforcement of which is against public policy. Handy also contends that the arbitrator overstepped his authority, that the arbitrator was not impartial and failed to disclose evidence of potential bias, and that the arbitration award was not timely rendered. HH has moved to confirm the award and opposes the Handy motion to vacate. In so doing, HH argues that the $5,000 per diem clause was a proper liquidated damages clause and that there is no merit to Handy's other arguments to vacate the award.
IV. Standard of Review
Similar to the federal courts and other jurisdictions, Connecticut has a strong policy favoring arbitration as a means of resolving disputes and enforcing arbitration decisions. Stratford v. Int'l Ass'n. of Firefighters, AFL-CIO Local 998, 248 Conn. 108 (1999); General Statutes § 52-408. A superior court to which an application to confirm an arbitration award is made, must confirm it unless it is vacated, modified or corrected. General Statutes § 52-417. The bases for vacating an award are:
(a) Upon the application of any party to an arbitration, the superior court for the judicial district in which one of the parties resides or, in a controversy concerning land, for the judicial district in which the land is situated or, when the court is not in session, any judge thereof, shall make an order vacating the award if it finds any of the following defects: (1) If the award has been procured by corruption, fraud, or undue means; (2) if there has been evident partiality or corruption on the part of any arbitrator; (3) if the arbitrators have been guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown or in refusing to hear evidence pertinent and material to the controversy or of any other action by which the rights of any party have been prejudiced; or (4) if the arbitrators have exceeded their powers or so imperfectly executed them that a mutual, final definite award upon the subject matter submitted was not made.
General Statutes § 52-418.
The arbitration which is the subject of this proceeding is a creature of contract and, as such, courts are reluctant to interfere substantively with the arbitral product; Stratford v. Int'l Ass'n. Local 998, supra; and the court should make every reasonable presumption in favor of the award. Board of Education of City of Hartford v. Hartford Federation of School Secretaries, 28 Conn.App. 351 (1992).
One exception to the deference accorded arbitrators' findings and conclusions arises when there is a colorable claim that enforcement of an arbitration award would contravene established public policy. In such cases, the Connecticut Supreme Court has held that the judicial review of such awards rises to the level of de novo review. Schoonmaker v. Cummings Lockwood of Connecticut, P.C., 252 Conn. 416 (2000). In applying de novo review, this court should defer to the arbitrator's interpretation of agreements and intervene only when such interpretation violates public policy. Id., 432, n. 8; see also State v. AFSCME, AFL-CIO, Council 4, Local 2663, 257 Conn. 80, 90 (2001) (judicial review limited to contract as interpreted by arbitrator). A de novo review essentially requires the court to find that factual determinations by the arbitrator are supported by substantial evidence in the record and that substantial rights of the party moving to vacate have not been prejudiced. Metropolitan District Commission v. AFSCME, Council 4, Local 1848, 9 Conn.App. 680, 686 (2005). The challenger of an award has the burden of proving the conflict with public policy is clearly demonstrated. Groton v. United States Steelworkers of America, 254 Conn. 35, 46 (2000).
The court determines that there is a public policy against enforcing penalty clauses in contracts. The Connecticut Supreme Court has stated that "[i]t is settled law that a contract provision which imposes a penalty for a breach of the contract is contrary to public policy and is invalid . . ." Norwalk Door Closer Co. v. Eagle Lock Screw Co., 153 Conn. 681, 686 (1966); see also Hanson Development Co. v. East Great Plains Shopping Center, Inc., 195 Conn. 60, 65 (1985). Both of the above cases, however, also recognized that a contractual provision allowing for liquidation of damages for breach of the contract is enforceable if the provision satisfies certain conditions. Norwalk Door Closer, supra, 153 Conn. 686; Hanson Development Co., supra 195 Conn. 65. In Hanson Development Co., the three conditions were spelled out:
(1) the damages which was to be expected as a result of a breach of contract was uncertain in amount or difficult to prove; (2) there was a intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable.
Id., [citing Berger v. Shanahan, 142 Conn. 726, 732 (1955)].
V. Liquidated Damages or Penalty A. The $5,000 Per Diem Clause
The parties dispute whether the $5,000 per diem clause is a penalty provision or a liquidated damages clause. The arbitrator enforced the provision in his award, as a liquidated damages clause, and for the reasons stated in Part IV of this memorandum this court will review that determination on a de novo basis.
The contract provision in question reads as follows:
Subsequent to the Closing, Seller shall diligently pursue the Remediation of the Eastern Parcel. Seller shall use commercially reasonable efforts to complete the Eastern Parcel Active Remediation (as hereinafter defined) by December 31, 2004. Seller acknowledges that Buyer will incur substantial economic loss if Eastern Parcel Active Remediation is not complete by December 31, 2004. Therefore, notwithstanding anything to the contrary contained herein, Seller shall pay Buyer the sum of Five Thousand Dollars ($5,000), per day, for each day after December 31, 2004, that Seller has not completed Eastern Parcel Active Remediation in the manner required under this Article 14, any such amounts due from Seller, pursuant to this Section 14(b)(ii), being referred to as the " Eastern Parcel Remediation Per Diem Charge." Seller shall pay all accrued Eastern Parcel Remediation Per Diem Charges to Buyer, monthly, on the last day of each calendar month following the month in which any Eastern Parcel Remediation Per Diem Charges were incurred. Unpaid Eastern Parcel Remediation Per Diem Charges shall bear interest at the rate of six percent (6%), per annum, until paid.
In determining the above provision was enforceable the arbitrator wrote the following:
Respondent does not dispute the breach of contract but maintains that the payment of $5,000 per day is a contracted penalty and is therefore unenforceable.
Claimant characterizes these per diem payments as liquidated damages, but the cases cited by both sides make clear that what the parties call such payments is not dispositive of the issue. We must look to the facts to determine intent and thereby determine enforceability in a three-part test:
1. Was the damage from breach expected to be uncertain or difficult to prove? In this case, this proceeding has demonstrated that damage here was expected to be and is indeed difficult to estimate, and to prove.
2. Was there intent by the parties to liquidate damages in advance? Apparently so, since both parties proposed per diem amounts during negotiations and agreed on $5,000.
3. Is the amount stipulated reasonable — i.e. not greatly disproportionate to the damage the parties reasonably expected to follow from a breach? I find that $5,000 per day is reasonable because:
1. Mr. Dixon, Respondent's (Handy's) negotiator, proposed $1,500 then $2,500 and agreed on $5,000, starting 180 days later than he had offered. Thus, representatives of two sophisticated businesses both proposed amounts in the same broad range.
CT Page 11989
2. Mr. Bradley, Claimant's (HH's) negotiator, testified that he proposed $5,000 because it is just short of the 20% internal rate of return which his firm seeks to earn for its investors.
3. The use of an anticipated rate of return on the money invested is a valid proxy for damages caused by inability to use the asset acquired.
4. The per diem structure is particularly apt for a situation where the party in breach can stop the breach (by remediating the property) and thus cut off per diem damages.
Award, 1-2.
It is quite clear from the above that the arbitrator closely followed the directions from the Connecticut Supreme Court in ascertaining whether the $5,000 per day clause met the conditions to qualify as a liquidated damages clause and, therefore, be enforceable. He found as a fact that (1) damages resulting from breach of the contract would be difficult to estimate or prove, (2) that the parties intended to liquidate damages, and (3) the amount stipulated in the agreement was not unreasonable.
Based on the language cited above in Schoonmaker the reviewing court is bound by the factual findings of the arbitrator. See State v. AFSCME, AFL-CIO Council 4, Local 2663, supra, 257 Conn. 95 (deferring to arbitration's factual determination on authority of Schoonmaker). If that is the case, the arbitrator's factual findings support his conclusion that the subject clause is not a penalty provision and therefore enforceable and Handy's challenge on public policy grounds must fail. If, on the other hand de novo review includes, as stated by Metropolitan District Commission, a determination that the arbitrator's fact findings are supported by substantive evidence, the inquiry must continue.
Although not fully persuaded that de novo review requires it, this court chooses, in this case, to review the arbitrator's fact findings to ascertain whether they are based on substantial evidence. The arbitrator's first finding was there was evidence in the record demonstrating that damages were difficult to estimate and prove. The court determines there is substantial evidence in the record to support this finding mainly because proof of damages on the basis that HH had lost a potential buyer or lessee of the Property because of its unremediated condition would necessarily involve proof of the subjective intent of possibly unidentifiable parties. Additionally, there were other variables, such as a fluctuating amount of liens on the Property, and whether Handy or HH would complete the remediation. Crossman Aff., Exs. 53, 55. There was also evidence before the arbitrator that the parties differed as to how long the remediation would take. Crossman Aff., Ex., 45 (Transcript, October 25, 2005) pp. 5, 11. Indeed as of the arbitration hearing there was no definite date for completion. Obviously, the length of remediation directly affected how long HH would have to wait to have beneficial use of the asset, i.e. an asset it could use or resell.
The court finds the arbitrator's second finding, that the parties intended to liquidate damages, to be supported by substantial evidence in the record. The arbitrator noted that the parties bargained about the per diem amount ($1,500, $2,500, $5,000) and the date the per diem charge would begin. See Crossman Aff. Ex. pp. 45, 8, 11, 12. There was evidence that Handy would not agree to putting any of HH's $8 million payment into escrow and the per diem amount was a form of substitute for an escrow. Id., pp. 7, 33, 34. The point of these negotiations was to reach an acceptable manner to recompense HH for losses it would incur if the remediation was not completed in a timely fashion. Handy acknowledged in the agreement that HH would suffer economic loss and the per diem charge was the means chosen to remedy that loss. The Connecticut Supreme Court has defined a penalty clause as one with the prime purpose of preventing a breach by holding over the head of one party the threat of punishment for a breach. In contrast, a liquidated damages clause is one with the real purpose to fix fair compensation for the party injured by the breach. Berger v. Shanahan, supra, 142 Conn. 731. This court finds that the evidence tends to show more of a compensation than a punishment purpose as the motivation behind the per diem provision.
As for his third finding — that the contracted amount was reasonable — the arbitrator set forth four subsidiary reasons to support his conclusion. The first two reasons are supported by substantial evidence in the record. The testimony of HH negotiator Michael Bradley, which was unrebutted, sets forth evidence that various per diem rates starting at various times were proposed and evidence for his reasons to adopt a $5,000 per diem rate as approximating his clients' goals of a 20 percent annual return. Crossman Ex. 46, pp. 1-25. The remaining two reasons are not so much strictly factual conclusions as conclusions or observations based on facts already found. Therefore, the court determines these conclusions are well founded in the record and certainly do not represent any prejudice to the substantial rights of Handy.
Based on the foregoing, the court finds the arbitrator's interpretation of the per diem clause to be an enforceable liquidated damages clause to be correct.
VI. Claim of Overstepping Authority and Violation of Section 52-418(a)
Handy contends that the arbitrator violated General Statutes § 52-418(a) in several ways. These contentions are so tersely briefed as to be nearly abandoned. First, Handy argues that making an award enforcing a penalty provision is exceeding an arbitrator's powers. This contention is rejected for the reasons stated above.
Second, Handy claims that since HH expressly declined to seek actual damages, the arbitrator's finding that "damage here . . . is indeed difficult to estimate, and to prove" is in excess of the issues submitted to the arbitrator. Because the issue of a penalty provision was raised by Handy, and the arbitrator's finding was necessary to resolve the issue, Handy's argument is close to absurd and is rejected.
Finally, Handy's claims that the arbitrator's failure to grant a continuance to allow presentation of evidence on actual damages is unintelligible as briefed and would seem to be moot since evidence on damages was not allowed. This claim is also rejected.
VII. Appointment and Retention of the Arbitrator
Handy seeks to vacate the award on the grounds that the arbitrator (1) was appointed in violation of the applicable rules and (2) was subject to evident partiality.
A. Appointment
Rule 16 of the Commercial Arbitration Rules of the American Arbitration Association (AAA) requires that any one appointed an arbitrator shall disclose to the AAA "any circumstance likely to give rise to justifiable doubt as to the arbitrator's impartiality or independence . . ." General Statutes § 52-411(a) provides that if, in a written agreement to arbitrate, "a method of appointing an arbitrator . . . has been provided, the method shall be followed." Handy claims that the information provided by the AAA about the arbitrator was seriously incomplete in that it did not disclose his residence address which was the Town of Fairfield, Connecticut, the site of the Property.
This issue arises through the following facts. The parties, through counsel, were provided a list of names of ten potential arbitrators by the AAA along with the individuals' resumes (cvs). The parties selected Edward V. Lahey, Jr. whose resume indicated he was General Counsel of Essex Boat Works since 1998 and previously had been General Counsel of Pepsico, Inc. for twenty-five years. The resume indicated Mr. Lahey's "locale" was Essex, Connecticut. Crossman Aff., Ex. 46. Handy claims it did not find out Mr. Lahey lived in Southport, a part of Fairfield, until the middle of the arbitration hearing. Handy challenged Lahey and sought his removal as arbitrator, but the AAA rejected this request. Id., Exs. 64-71. HH points out that in a preliminary conference between attorneys and the arbitrator in July 2005 Lahey had mentioned he lived in Southport. Ronan Aff., Feb. 16, 2006, ¶ 14. This claim is disputed by Handy.
Handy's argument that the failure to disclose his residence in his resume was a failure by the arbitrator to disclose a circumstance likely to give rise to justifiable doubt as to his impartiality is not persuasive. It has presented no evidence to support the supposition that doubt was "likely" to arise or that such doubt, if any, was justifiable. In contrast, Mr. Lahey submitted an Arbitrator's Oath stating that he had disclosed everything required by the AAA rules. Ronan Aff., Ex. D. Mr. Lahey also made an additional disclosure, dated June 6, 2005 noting that he had recently decided a "long pending arbitration" in which Handy's co-counsel had represented one of the parties. Id., Ex. E. Finally, Mr. Lahey expressly stated his confidence that his residence in Fairfield would not "in any way affect my impartiality" when inquiry on that subject was made after Handy's objection. Crossman Aff., Ex. 69. The court concludes that General Statutes § 52-411 has not been violated.
B. Partiality Handy also claims that the arbitration award should be vacated pursuant to General Statutes § 52-418(a)(2) because there was "evident partiality" on the part of the arbitrator. According to the Connecticut Appellate Court "evident partiality"requires showing of a reasonable impression of partiality on the arbitrator's behalf. (Internal quotation marks omitted.) Scott v. Prudential Securities, Inc., 141 F.3d 1007, 1015 (11th Cir. 1998), cert. denied, 525 U.S. 1068, 119 S.Ct. 798, 142 L.Ed.2d 660 (1999). The alleged partiality must be directed, definite and capable of demonstration rather than remote, uncertain and speculative. (Internal quotation marks omitted.) Id., Harter v. Iowa Grain Co., 220 F.3d 544, 553 (7th Cir. 2000). This standard requires more than an appearance of bias, but less than a showing of actual bias. Anderson, Inc. v. Horton Farms, Inc., 166 F.3d 308, 325 (6th Cir. 1998).
For present purposes, we treat these terms as functionally identical to structural bias. Appearance of bias is not, however, enough to disqualify an arbitrator. Barter v. Iowa Grain Co., supra, 220 F.3d 555-56; Andersons, Inc. v. Horton Farms, Inc., supra, 166 F.3d 329. Connecticut law is to the same effect. Clisham v. Board of Police Commissioners, 223 Conn. 354, 361-62, 613 A.2d 254 (1992).
Hottle v. BDO Seidman, LLP, 74 Conn.App. 271, 279 (2002), aff'd, 268 Conn. 694 (2004) (internal quotation marks omitted). The Appellate Court was discussing 9 U.S.C. § 10(a), a provision of the Federal Arbitration Act very similar in language and purpose to General Statutes § 52-418(a).
This court notes that in discussing Connecticut law on arbitrator bias and possible disqualification, the Appellate Court cited Clisham v. Board of Police Commissioners, 223 Conn. 354 (1992), although that case involved a public administrative board's action not an arbitrator's. As set forth above, in Hottle and also stated in Clisham, appearance of bias is not sufficient to disqualify an arbitrator. The party seeking to vacate an arbitration award because of alleged arbitrator bias, has the burden to produce evidence to sustain the claim. Schwarzchild v. Martin, 191 Conn. 316, 327 (1983). While actual bias does not have to be shown, the burden must include proof that is direct, definite and demonstrable rather than uncertain and speculative. Hottle, supra, 74 Conn.App. 278. In this case Handy has not met that burden. While Handy speculates that the arbitrator may have been influenced by neighbors or a possible effect on tax rates, there are no facts to give even a modicum of support to these theories.
VIII. Timeliness of Award
Handy claims that the arbitration award was rendered late and in violation of General Statutes § 52-416 which requires the award to be rendered within 30 days of the time set for receipt by the arbitrator of additional material submitted after the hearing, and that an award made after that time will be of no legal effect. Handy contends the award was rendered "at least 34 days after the date fixed . . . for receipt of material (November 23)."
The chronology is as follows. The parties and the arbitrator agreed that post-hearing briefs would be filed by November 23, 2005, the day before Thanksgiving. HH's brief was received by the AAA on November 23, 2005 and Handy's brief was received on November 28, 2005. Ronan Aff. ¶¶ 24-28, Exs. H, I.
On December 9, the AAA wrote all counsel that the arbitrator had received the final briefs on December 7, 2005 and would have until January 6, 2006 to render an award. Id., Ex. J. No objection to the date set by the AAA was made. The arbitrator's award was dated December 23, 2005 and transmitted to counsel by the AAA on December 27, 2005. Crossman Aff., Ex. 72.
In C.F. Wooding v. Middletown Elk's Home Corp., 177 Conn. 484 (1979), the Connecticut Supreme Court found a trial court did not commit error in holding, in a fact pattern striking similar to this, that the 30-day period of Section 52-416 began to run from the date of the receipt of the last brief, even though that brief was filed four days late, on December 27, 1977. C.F. Wooding is dispositive, and Handy's claim must be rejected.
IX. Conclusion
For the reasons stated above, the motion to confirm the award is granted, and the motion to vacate the award is denied.