Hh East Parcel, LLC v. Handy and Harman

• Decision Date: 03 June 2008
• Docket Number: No. 18055.,18055.
• Citation: 287 Conn. 189,947 A.2d 916
• Parties: HH EAST PARCEL, LLC v. HANDY AND HARMAN, INC.
• Court: Connecticut Supreme Court

947 A.2d 916

287 Conn. 189

HH EAST PARCEL, LLC v. HANDY AND HARMAN, INC.

No. 18055.

Supreme Court of Connecticut.

Argued February 8, 2008.

Decided June 3, 2008.

John F.X. Peloso, Jr., with whom was Thomas J. Donlon, Stamford, for the appellant (defendant).

Andrew J. McDonald, with whom were Timothy G. Ronan and, on the brief, Cara Ann Ceraso, Bridgeport, for the appellee (plaintiff).

NORCOTT, PALMER, VERTEFEUILLE, ZARELLA and SCHALLER, Js.

NORCOTT, J.

In this appeal, we consider the appropriate level of deference that the courts, in performing their de novo review of whether an arbitration award violates public policy, should give to the arbitrator's factual findings. The defendant, Handy and Harman, Inc., appeals¹ from the judgment of the trial court granting the application of the plaintiff, HH East Parcel, LLC, to confirm, and denying the defendant's application to vacate, an arbitration award rendered in favor of the plaintiff. On appeal, the defendant claims that the trial court, in confirming the award, improperly deferred to the arbitrator's factual findings when the court concluded that a per diem provision in a contract for the sale and remediation of real estate was a valid liquidated damages clause, rather than a penalty clause, the enforcement of which would violate the public policy of Connecticut. We conclude that the trial court properly deferred to the arbitrator's factual findings in determining that the award did not violate public policy. Accordingly, we affirm the judgment of the trial court.

The record reveals the following undisputed background facts and procedural history. On or about December 31, 2003, the defendant sold real property located in Fairfield to the plaintiff for $8 million. The purchase and sale agreement (purchase agreement) required the defendant to demolish all existing buildings and structures on the property, and to remediate all environmental contamination on the property by December 31, 2004. The purchase agreement also provided that time was of the essence with regard to the remediation. Sections 14 and 15 of the purchase agreement contained a per diem clause that required the defendant to pay to the plaintiff $5000 for each day after December 31, 2004, that the defendant had failed to complete the demolition and remediation as specified therein.

Although the plaintiff paid the defendant $8 million and received title to the property, the defendant failed to complete the remediation by December 31, 2004, as agreed to by the parties. The defendant also failed to pay the necessary contractors and subcontractors for remediation services rendered by December 31, 2004, and they placed various mechanic's liens on the property. Thus, the parties then entered into an environmental indemnification agreement (indemnification agreement) that required the defendant to indemnify and hold harmless the plaintiff for the losses caused by the defendant's failure to complete the remediation.

Thereafter, on April 5, 2005, the plaintiff filed a demand for arbitration with the American Arbitration Association (association) pursuant to § 6 of the indemnification agreement,² and served a copy of that demand on the defendant.³ Attorney Edward V. Lahey, Jr., was selected as the arbitrator, and he conducted a two day arbitration in Stamford. At the arbitration, the defendant did not dispute its liability for breach of the purchase agreement, but did dispute the validity of the $5000 per diem clause, which the defendant claimed was an unenforceable penalty. The plaintiff contended, however, that the per diem clause was a valid liquidated damage provision. The arbitrator issued an award in December, 2005, upon concluding that the $5000 per diem clause was a reasonable and valid liquidated damages provision that had been properly negotiated by the parties. The arbitrator ordered the defendant to pay the plaintiff $5000 per day for all unpaid per diem charges occurring since January 1, 2005, through November 30, 2005, for a total of $1,670,000, and directed the defendant to begin making monthly payments on that sum starting January 1, 2006. The arbitrator also ordered the defendant to pay the plaintiff 6 percent interest on all unpaid per diem charges, and to fund and complete the demolition and remediation of the property without delay.⁴

Shortly thereafter, the plaintiff brought this application to confirm the arbitration award pursuant to General Statutes § 52-417,⁵ and the defendant filed its application and cross motion to vacate the award pursuant to General Statutes § 52-418(a),⁶ claiming, inter alia, that "the award violate[d] public policy by awarding a draconian, limitless penalty...."⁷ The trial court relied on our decision in Schoonmaker v. Cummings & Lockwood of Connecticut, P.C., 252 Conn. 416, 747 A.2d 1017 (2000), and noted that, although it was required to review the award de novo because the defendant claimed that it violated the well established public policy against the enforcement of penalty clauses in contracts, it nevertheless was obligated to defer to the arbitrator's factual findings and interpretation of the underlying contract. The trial court determined that the arbitrator properly applied Connecticut law to conclude that the purchase agreement contained a valid liquidated damages clause based on his findings that the damages resulting from the breach of the contract would be difficult to estimate or provide, that the parties had intended to liquidate any resulting damages, and that the amount agreed upon in the contract was not unreasonable. The trial court also conducted, however, an additional review of the record in detail to determine whether the arbitrator's findings were in fact supported by substantial evidence, and concluded that the findings were supported by: (1) the negotiated nature of the per diem charge and the date that it would begin; and (2) the difficulties of ascertaining economic loss because of the fluctuating liens on the property and determining how long the remediation would take. Accordingly, the trial court rejected the defendant's claim that the arbitration award violated public policy, and rendered judgment confirming the award. This appeal followed.⁸

On appeal, the defendant claims that the trial court improperly deferred to the arbitrator's factual findings because the issue of whether the per diem clause was a penalty is a mixed question of fact and law subject to de novo review. The defendant also claims that the trial court improperly confined its review to the issue of whether the arbitrator's findings were supported by substantial evidence, and claims that, even under that more restrictive standard of review, the evidence in the record does not support the arbitrator's conclusion that the per diem clause was not an illegal penalty. In response, the plaintiff relies on our recent decision in C.R. Klewin Northeast, LLC v. Bridgeport, 282 Conn. 54, 919 A.2d 1002 (2007), and contends that, in conducting its public policy analysis, the trial court properly relied upon and deferred to the arbitrator's factual findings. The plaintiff further argues that, although the trial court did not need to conduct that level of review, that court nevertheless properly determined that the arbitrator's factual finding that the parties intended to liquidate their damages, rather than impose an illegal penalty, is supported by substantial evidence in the record.

At the outset, we note that whether the trial court engaged in the correct level of review of the arbitrator's decision presents a question of law over which our review is plenary. See id., at 93, 919 A.2d 1002; see also LaSalla v. Doctor's Associates, Inc., 278 Conn. 578, 586, 898 A.2d 803 (2006) ("the proper scope of review, in both the trial court and this court, for a colorable claim that an award violated public policy is plenary").

Most of the general principles at issue herein are undisputed, namely, that "arbitration is a creature of contract, whereby the parties themselves, by agreement, define the powers of the arbitrators.... Moreover, we have stated that when the parties have established the authority of the arbitrator, the extent of our judicial review of the award is delineated by the scope of the parties' agreement.... When the parties have not restricted the scope of the arbitrator's authority, the resulting award is not subject to de novo review even for errors of law so long as the award conforms to the submission....

"The long-standing principles governing consensual arbitration are, however, subject to certain exceptions. Although we have traditionally afforded considerable deference to the decisions of arbitrators, we have also conducted a more searching review of arbitral awards in certain circumstances. In Garrity v. McCaskey, [223 Conn. 1, 6, 612 A.2d 742 (1992)], this court listed three recognized grounds for vacating an award: (1) the award rules on the constitutionality of a statute ... (2) the award violates clear public policy ... or (3) the award contravenes one or more of the statutory proscriptions of § 52-418(a).... The judicial recognition of these grounds for vacatur evinces a willingness, in limited circumstances, to employ a heightened standard of judicial review of arbitral conclusions, despite the traditional high level of deference afforded to arbitrators' decisions when made in accordance with their authority pursuant to an unrestricted submission." (Citations omitted; internal quotation marks omitted.) Schoonmaker v. Cummings & Lockwood of Connecticut, P.C., supra, 252 Conn. at 426-28, 747 A.2d 1017.

"A court's refusal to enforce an arbitrator's award ... because it is contrary to public policy is a specific application of the more general doctrine, rooted in the common law, that a court may refuse to enforce contracts that violate law or public policy.... This rule is an exception to the general rule restricting judicial review of...