John T. Brady & Co. v. Form-Eze Systems, Inc., FORM-EZE

• Decision Date: 19 June 1980
• Docket Number: No. 1084,FORM-EZE,D,1084
• Court: U.S. Court of Appeals — Second Circuit
• Parties: In the Matter of the Application of JOHN T. BRADY & COMPANY, Petitioner- Appellant, v.SYSTEMS, INC., Respondent-Appellee. For an Order Vacating, Modifying and Correcting an Arbitration Award pursuant to "9 U.S.C. Sections 10 and 11." In the Matter of the Arbitration betweenSYSTEMS, INC., Petitioner- Appellee, v. JOHN T. BRADY & COMPANY, Respondent-Appellant. ocket 80-7072.

Page 261

623 F.2d 261

In the Matter of the Application of JOHN T. BRADY & COMPANY,

Petitioner- Appellant,

v.

FORM-EZE SYSTEMS, INC., Respondent-Appellee.

For an Order Vacating, Modifying and Correcting an

Arbitration Award pursuant to "9 U.S.C. Sections 10 and 11."

In the Matter of the Arbitration between FORM-EZE SYSTEMS,

INC., Petitioner- Appellee, v. JOHN T. BRADY & COMPANY, Respondent-Appellant.

No. 1084, Docket 80-7072.

United States Court of Appeals, Second Circuit.

Argued April 17, 1980.

Decided June 19, 1980.

David Morgulas, New York City (M. Carl Levine, Morgulas & Foreman, New York City, of counsel) for petitioner-appellant.

Stuart M. Levine, New York City (Sacks, Montgomery, Pastore & Levine, New York City, of counsel) for respondent-appellee.

Before MULLIGAN, Circuit Judge and SPEARS ^* and SWEET ^**, District Judges.

MULLIGAN, Circuit Judge:

Form-Eze Systems, Inc. ("Form-Eze"), a New Mexico corporation, is in the business of manufacturing, selling and leasing concrete forming equipment for use by contractors on building projects. John T. Brady & Company ("Brady"), a New York corporation, was the general contractor for the construction of a mail facility for the Postal Service of the United States at the John F. Kennedy Airport. On April 26, 1977, the parties entered into a contract whereby Form-Eze leased to Brady approximately $400,000 worth of concrete forming equipment for the Kennedy installation. Some 30,000 pieces of special types of moveable equipment were involved. A rental fee of $102,800 was fixed in the agreement for the first seven months of the lease, and $15,000 per month was agreed upon as the rental for each succeeding month. It is conceded that the rental agreement terminated on July 15, 1978. At that juncture, Form-Eze claimed that Brady failed to return certain pieces of equipment and had damaged others. The agreement contained an arbitration clause and Form-Eze gave its Notice of Intent to Arbitrate on November 21, 1978. Hearings were held in January 1979 and on March 14, 1979 the arbitrator awarded Form-Eze $45,590 in damages, which represented the value of the unreturned and damaged equipment. Brady does not contest this part of the award and that issue is not before us. However, the agreement provided further that if any of the equipment was lost or damaged, Brady became responsible not only for its value, but "(t)he monthly rental for the total equipment shall continue until such time as this sum is paid." Applying this clause, the arbitrator awarded Form-Eze the further sum of $90,000 in damages. This sum represented six months of rent ($15,000 per month from July 15, 1978 until January 14, 1979) plus interest at the rate of 1 1/2% per month from July 15, 1978 until November 21, 1978. In an opinion dated December 27, 1979, Hon. Thomas P. Griesa, United States District Judge for the Southern District of New York, confirmed the award finding it to be justified by a reasonable interpretation of the contract. We affirm.

On this appeal, Brady argues that the clause of the rental agreement permitting Form-Eze to recover not only the value of the damaged or lost equipment, but the agreed monthly rental for all the leased equipment until such time as the value of the lost and damaged equipment was paid, constitutes a penalty clause and not merely a liquidated damages provision. This argument was concededly raised before the arbitrator, but was not specifically covered in his opinion.

It is well settled in New York that a clause in a contract providing for the payment of a fixed amount upon a breach of any provision in that contract, no matter how trivial the breach, cannot be sustained as a liquidated damages provision since it does not represent an estimate of prospective actual damages. Rather, such a clause is considered to be an unlawful penalty and is therefore unenforceable. Lenco, Inc. v. Hirschfeld, 247 N.Y. 44, 159 N.E. 718 (1928); Seidlitz v. Auerbach, 230 N.Y. 167, 129 N.E. 461 (1920); Restatement, Contracts § 339(1), Comment g. Brady argues here, as he did before the arbitrator, that the contract requirement that the lessee pay $15,000 per month, the amount which represented the rental for all the equipment leased, no matter how insignificant the damage to equipment or value of any unreturned equipment might be, constitutes a penalty. Brady maintains that such a provision is contrary to the public policy of the State of New York, and is therefore an award beyond the powers of the arbitrator which must be vacated under the Federal Arbitration Act, 9 U.S.C. § 10(d). ¹

The appellant relies upon Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 356-57, 386 N.Y.S.2d 831, 832, 353 N.E.2d 793, 795 (1976), where the New York Court of Appeals stated that "(s)ince enforcement of an award of punitive damages as a purely private remedy would violate public policy, an arbitrator's award which imposes punitive damages, even though agreed upon by the parties, should be vacated." (citations omitted). Garrity was a breach of contract case in which the arbitrator awarded not only compensatory damages, which were computed without difficulty, but punitive damages as well, expressly denominating them as such. No liquidated damage clause was involved in that case, and under familiar principles an award of punitive damages for breach of contract violated the public policy of the state. The case was distinguished however in a later Court of Appeals decision, Board of Education v. Niagara-Wheatfield Teachers Ass'n, 46 N.Y.2d...