Pier House Inn, Inc. v. 421 Corp., Inc.

• Decision Date: 18 December 2002
• Docket Number: No. 2001-33-APPEAL.,2001-33-APPEAL.
• Citation: 812 A.2d 799
• Parties: PIER HOUSE INN, INC. v. 421 CORPORATION, INC.
• Court: Rhode Island Supreme Court

812 A.2d 799

PIER HOUSE INN, INC. v. 421 CORPORATION, INC.

No. 2001-33-APPEAL.

Supreme Court of Rhode Island.

December 18, 2002.

Present LEDERBERG, FLANDERS, and GOLDBERG, JJ.

David L. Krech, Lauren Jones, Providence, for Plaintiff.

Marc DeSisto, Providence, for Defendant.

OPINION

LEDERBERG, Justice.

Can the Superior Court remand an arbitration award to the arbitrator for clarification? We answer in the affirmative. A Superior Court justice properly vacated an arbitrator's punitive damages award and remanded the award to the arbitrator. We affirm the Superior Court's confirmation of the clarified arbitration award.

Preliminary Facts

The dispute between the parties began in May 1993, when Pier House Inn, Inc. (Pier House or plaintiff) leased facilities in Narragansett, Rhode Island, to 421 Corporation, Inc. (421 Corp. or defendant) "to be used exclusively as a first-class restaurant." The parties' business relationship soon soured, and in February 1994, plaintiff filed an action for eviction and nonpayment of rent in District Court. Upon defendant's motion, the District Court submitted the case to arbitration pursuant to the terms of the lease. On December 20, 1994, the arbitrator issued an award, granting Pier House possession of the premises and also awarding $10,264 on its claim for rent, $10,634.93 on its claim for utility bills, and $41,030.18 on its claim for attorney's fees. On 421 Corp.'s counterclaim for breach of contract, the arbitrator granted judgment fordefendant in the amount of "$4,072.25 as compensatory damages" and "$150,000 as punitive damages."

The award termed "punitive damages" constitutes the core of the dispute between the parties. On April 5, 1995, a Superior Court hearing justice confirmed, upon defendant's motion, all parts of the award except the punitive damages, vacated the punitive damages award, and directed that "the matter [of punitive damages] be reheard by the arbitrator."¹ No further action was taken for two years until plaintiff filed a petition for issuance of a writ of certiorari that was denied by this Court on March 5, 1999. The defendant then sought the rehearing ordered by the hearing justice. On July 14, 2000, the arbitrator issued a clarified award, stating, "The award of punitive damages was in fact intended to compensate [defendant] for actual damages it sustained because of wrongful acts of Pier House Inn, Inc., related to the lease." The defendant moved to confirm the award as clarified. After a hearing before a different justice of the Superior Court, the award was confirmed on October 26, 2000, and plaintiff filed this timely appeal. Additional facts will be presented in discussing the issues on appeal.

Vacating the Punitive Damages Award

We first examine whether the April 5, 1995 hearing justice properly vacated the arbitrator's award of punitive damages. This Court has recognized that the judiciary's role in the arbitration process is "extremely limited." Purvis Systems, Inc. v. American Systems Corp., 788 A.2d 1112, 1114-15 (R.I.2002). By statute, General Laws 1956 § 10-3-12 directs that "the court must make an order vacating the award upon the application of any party to the arbitration:

"(1) Where the award was procured by corruption, fraud or undue means.

"(2) Where there was evident partiality or corruption on the part of the arbitrators, or either of them.

"(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in hearing legally immaterial evidence, or refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been substantially prejudiced.

"(4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made."

In addition to the above statutory grounds, an arbitration award may be overturned when the award is irrational or if the arbitrator "manifestly disregarded the law," Prudential Property & Casualty Insurance Co. v. Flynn, 687 A.2d 440, 442 (R.I.1996), such as when an arbitrator understands and correctly states the law, but ignores it in reaching a decision. Westminster Construction Corp. v. PPG Industries, Inc., 119 R.I. 205, 211, 376 A.2d 708, 711 (1977). Mere error of law or the failure to understand or apply the law, however, does not constitute manifest disregard. Id.

The record does not indicate upon which of the statutory grounds the April 5, 1995 hearing justice relied in vacating the award. The justice began his analysis of the punitive damages award by rejecting defendant's argument that punitive damages were authorized by the American Arbitration Association (AAA) arbitration rules. He specifically pointed out that "people who are entering into agreements subject to arbitration in commercial contracts would be stunned to learn that they are thereby exposed to punitive damages in situations in which the law of the jurisdiction forbids punitive damages," an observation with which we generally agree. The hearing justice next correctly summarized the grounds for vacating an award, as set forth in § 10-3-12 and by this Court. He then vacated the punitive damages award and ruled that, in the absence of an agreement by the parties, an arbitrator may not award punitive damages that arenot authorized by Rhode Island law. He did not state whether he found the award of punitive damages to have been a manifest disregard of the law or simply a mistake in nomenclature, and he declined to take evidence on whether the arbitrator meant the award to be compensatory. Although the hearing justice did not specify the authority on which he relied to vacate the punitive damages award, he did find that § 10-3-13 authorized him to direct the arbitrator to rehear and clarify the vacated punitive damages award. The arbitrator did not hold a rehearing, but instead accepted memoranda from the parties and issued a "Clarification of Award of Arbitrator" on July 14, 2000.

After the clarified award was issued, defendant again filed a motion to confirm the award. At the October 26, 2000 hearing on the motion, Pier House conceded that the § 10-3-12 grounds for vacating the disputed award could not be met, but it argued on appeal that the hearing justice was nevertheless correct in vacating the punitive damages award. Having examined the record, we agree that the April 5, 1995 hearing justice was correct in vacating the punitive damages award, given the arbitrator's manifest disregard of the law in awarding punitive damages, but we disagree that his authority to do so obtains from § 10-3-13.

We have pointed out that the judiciary's "`review [of] the merits of an arbitration award is extremely limited,'" Town of North Providence v. Local 2334 International Association of Firefighters, AFL-CIO, 763 A.2d 604, 605 (R.I.2000) (per curiam), and that an arbitration award can be vacated only if the award falls within one of the statutory criteria set out in § 10-3-12, or if the award is irrational, or if the arbitrator has manifestly disregarded the law. Bradford Dyeing Association, Inc. v. J. Stog Tech GmbH, 765 A.2d 1226, 1232 (R.I.2001); Aetna Casualty & Surety Co. v. Grabbert, 590 A.2d 88, 92 (R.I.1991). Neither an arbitrator's mistake of law noran error of law is a ground for vacating an arbitration award. Bradford Dyeing Association, 765 A.2d at 1232; Westminster Construction Corp., 119 R.I. at 210, 376 A.2d at 711.

With respect to whether the arbitrator's award manifestly disregarded the law, we have recognized "that punitive damages are severely restricted under Rhode Island law." Mark v. Congregation Mishkon Tefiloh, 745 A.2d 777, 779 (R.I.2000). Such damages are appropriate only when a defendant's conduct requires deterrence and punishment over and above that provided in an award of compensatory damages, such as when a defendant "act[s] with malice or in bad faith." Palmisano v. Toth, 624 A.2d 314, 318 (R.I.1993). For example, in Peckham v. Hirschfeld, 570 A.2d 663, 669 (R.I.1990), we held that punitive damages were appropriate in a slander of title action, when the defendant maliciously interfered with the plaintiff's ownership of real estate by knowingly filing an invalid purchase agreement in order to cloud the plaintiff's title and thereby prevent him from selling the property to a third party.

Although we cannot ascertain whether the arbitrator considered, then disregarded, the high bar that must be met before awarding punitive damages, his ready disavowal of that award upon remand is probative of his oversight in labeling the award punitive damages. The arbitrator's clarification is reasonable in light of the fact that the common law established by this Court requires a party seeking punitive damages to demonstrate the validity of the claim by producing evidence of "such maliciousness, wantonness or willfulness, `on the part of the party at fault, as amounted to criminality, which for the good of society and warning to the individual, ought to be punished.'" Id. (quoting Sherman v. McDermott, 114 R.I. 107, 109, 329 A.2d 195, 196 (1974)). The defendant has not met this burden, given 421 Corp.'s failure to present any willful, wicked, reckless, or malicious acts by plaintiff that would serve as grounds for a punitive damages award.

Furthermore, although plaintiff characterized the arbitrator's authority as the power to "do whatever he can to supply equity to the parties," the relevant portion of Rule 45(a) of the American Arbitration Association's Rules entitled "Scope of Award" provides: "The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract." (Emphasis added.) In this case, the parties did not agree to the imposition of punitive damages....