Opinion
No. CV 07-4031430S
April 22, 2008
MEMORANDUM OF DECISION
Citizens National Bank of Meridian (CNB) applies to vacate an arbitration award on the basis that the award violates public policy.
CNB's application to vacate the arbitration award included the following additional bases for vacatur that it since withdrew: 1) the award exceeded the authority of the arbitrator; 2) the award was made upon unlawful procedure; 3) the award was affected by manifest error; 4) the award was arbitrary and capricious. The only basis for vacatur remaining is that the award violates Connecticut public policy.
The following facts are relevant. CNB contracted with Directory Assistants, Inc. (DAI) to learn how to reduce its advertising costs in yellow page books. Pursuant to the terms of their contract, DAI submitted to arbitration a breach of contract dispute and a complicated liquidated damages clause. On June 20, 2007, the arbitrator awarded DAI $100,633.20 in damages and $31,699.29 in late fees and interest for a total of $132,332.49.
SAVINGS GUARANTEE: DAI will show the advertiser how to save at least 40% (gross) on its yellow page advertising costs. The advertiser will have the right to terminate this contract if DAI is unable to cure this within 10 days of receiving written notice from the advertiser, provided such notice is received at least 10 days prior to the baseline's first directory close date after the date of this contract.
RESOLUTION OF DISPUTES provides in pertinent part:
The parties agree to resolve any dispute out of or relating to this contract through confidential binding arbitration . . . The parties agree that if the arbitrator finds there is a contract, he/she is required to award DAI all its attorneys fees and all interest from the date this contract is signed. The parties also agree the arbitrator will have no authority to award punitive damages, will not render any "middle ground" or "compromise awards" and must hold the parties to the terms of the contract.
The parties understand fees due cannot be fully calculated until the last book in an advertiser's baseline yellow page program publishes for the final time during the term of the contract. Therefore, in the event of an advertiser breach the parties agree to accelerate fees due to a liquidated damages amount equal to 40% of the year one renewal cost of the baseline program (based on YPA Standard Rates Data) multiplied by three years plus tax, late fees and legal costs. In the event of an advertiser breach, the total fee will be considered to have been due on the date the first book in the baseline program publishes.
CNB argues the arbitration award in favor of DAI violates the following public policies: (1) against liquidated damages; (2) the requirement that damages must be reasonable and compensatory; (3) the rule that damages cannot constitute a penalty or a form of punishment; (4) the rule forbidding usurious amounts of interest; and (5) the requirement that DAI mitigate any damages.
An arbitration award may be vacated, on common-law ground, if it violates a clear public policy. Schoonmaker v. Cummings Lockwood, P.C., 252 Conn. 416, 428 (2000); Garrity v. McCaskey, 223 Conn. 1, 8 (1992). A challenge that an award is in contravention of public policy is premised on the fact that the parties cannot expect an arbitration award approving conduct which is illegal or contrary to public policy to receive judicial endorsement any more than parties can expect a court to enforce such a contract between them. State v. AFSCME, 257 Conn. 80, 90 (2001). A court's refusal to enforce an arbitration award should be limited to situations where the award would violate some explicit public policy that is well defined and dominant and is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interest. Id. Implicit in the stringent and narrow confines of this exception to the rule of deference to arbitrators' determinations is the notion that the exception must not be interpreted so broadly as to swallow the rule. S. Windsor v. S. Windsor Police Union Local 1480, 255 Conn. 800, 816 (2001).
"[I]n the face of a challenge to an arbitral award on public policy grounds, we engage in a two step process. First, we determine `whether an explicit, well-defined and dominant public policy can be identified. If so, we then decide if the arbitrator's award violated the public policy.' MedValUSA Health Programs, Inc. v. Member Works, Inc., 273 Conn. 634, 656 (2005). Where there is no clearly established public policy ground against which to measure the propriety of the arbitration award, there is no public policy ground for vacatur. Schoonmaker v. Cummings Lockwood, P.C., supra, 252 Conn. 429. But, if it is determined that an arbitration award implicates a clearly established public policy, and the challenge to the award has a legitimate, colorable basis de novo review of the award is appropriate to determine whether the award violates that policy. Id.; State v. New Eng. Health-Care Employees, 265 Conn. 771, 788 (2003). Then, the party challenging the award bears the burden of proving that the award's illegality or conflict with public policy is clearly demonstrated. State v. AFSCME, supra, 257 Conn. 91.
CNB first argues the arbitration award violates Connecticut's public policy against liquidated damages. To support this proposition, it points solely to Hanson Development Co. v. East Great Plains Shopping Ctr. Inc., 195 Conn. 60, 64-65 (1985) and Norwalk Door Closer Co. v. Eagle Lock Screw Co., 153 Conn. 681, 686 (1966). Contrary to CNB's assertion, those cases do not provide support for the contention that Connecticut has a well established or clearly defined public policy against the award of liquidated damages. Rather, they clearly hold that a contractual provision which fixes liquidated damages for a breach of contract is enforceable if it satisfies the following conditions: (1) the damage which was to be expected as a result of the breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage, which as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of the contract. Moreover, Connecticut has a long-standing history of allowing liquidated damages. See Lifton Industries Credit Corporation v. Catanuto, 175 Conn. 69, 74-75 (1978) (recognizing acceleration clauses may be valid liquidated damages clauses, and holding purpose of liquidated damages clause is to obviate difficulty of proof of actual damages); Berger v. Shanahan, 142 Conn. 726, 731 (1955) (holding contractual provision fixing the amount of damages to be paid in the event of breach is enforceable if it satisfies certain conditions); King Motors v. Delfino, 136 Conn. 496, 498 (1950) (holding provision for liquidated damages in contract will be enforced when damages to be anticipated from breach are uncertain in amount or difficult to prove, and amount fixed is reasonable); New Britain v. New Britain Telephone Company, 74 Conn. 326, (1902), overruled on other grounds (holding parties can contract to liquidate their damages). Connecticut does not have a clearly established public policy against awarding liquidated damages.
The remaining public policy bases that CNB asserts are the requirement that damages must be reasonable and compensatory; the rule that damages cannot constitute a penalty or a form of punishment; the rule forbidding usurious amounts of interest; and the requirement that DAI mitigate any damages.
CNB does not provide this Court with any legal authority or specification for these propositions other than generalized assertions. CNB points to no statute or regulation but rather relies on cases which evince only a generalized concern with limiting damage awards and against punitive or unreasonable damages awards. Finally, an arbitration award of liquidated damages does not implicate a public policy requiring mitigation of damages. See Francis T. Zappone Co. v. Plymouth Commons Realty Corp., judicial district of Hartford at Hartford, Docket Nos. 820681 and 816568, (Jan. 22, 2004, Sheldon, J.) (finding doctrine of mitigation of damages does not apply when contract contains valid liquidated damages provision) citing Camp v. Cohn, 151 Conn. 623, 626 (1964) (rejecting argument that contractee seeking liquidated damages pursuant to contract was required to mitigate damages).
Moreover, CNB's public policy claims concerning reasonableness of damages, penalties and usury are a back door attempt to re-litigate the factual findings of the arbitrator regarding the conditions necessary to enforcement of a liquidated damages clause generally and to the liquidated damages clause in this case, to wit that 1) the damage which was to be expected as a result of the breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage, which as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of the contract (Emphasis supplied). Norwalk Door Closer Co v. Eagle Lock and Screw Company, supra 153 Conn. 686. Our Supreme Court has recognized the principle that there are circumstances that justify private agreements to supplant judicially determined remedies for breach of contract. See Vines v. Orchard Hills, Inc., 181 Conn. 501, 511 (1980).
The parties' submission to the arbitrator required him to decide whether the complicated damages clause contained in the contract between the parties was a penalty or a valid liquidated damages clause. The arbitrator awarded liquidated damages to DAI, thereby implicitly finding the damages clause was reasonable and neither a penalty nor usurious. "When a challenge to an arbitrator's authority is made on public policy grounds, . . . the court is not concerned with the correctness of the arbitrator's decision but with the lawfulness of enforcing the award." Groton v. United Steelworkers of America, 254 Conn. 35, 45(2000).
CNB failed to satisfy the first requirement for vacating an arbitration award on public policy grounds by demonstrating a well-defined and dominant public policy that would justify setting aside a private, consensual arbitration award on the basis of the stringent and narrow confines of the public policy exception. See MedValUSA Health Programs, Inc. v. Member Works, Inc., supra, 273 Conn. 656.
The application of CNB to vacate the arbitration award is denied.