In this case, the plaintiff purchased a former precious metals manufacturing facility located in Fairfield, Conn. for $8 million in December 2003. Under the purchase and sale agreement, the defendant was required to demolish all existing buildings and structures to complete remediation by December 31, 2004. The purchase agreement contained a per diem clause that required the defendant to pay the plaintiff $5000 for each day after December 31, 2004 that the defendant failed to complete the demolition and remediation as specified therein
After the defendant failed to complete the remediation by the required date, the parties entered into an environmental indemnification agreement where the defendant agreed to indemnify the plaintiff for the losses caused by the defendant's failure to complete the remediation. The indemnification agreement contained an arbitration clause that provided that any disputes between the parties regarding their respective obligations would be resolved by expedited, binding arbitration in accordance with the rules of the American Arbitration Association.
In April 2005, the plaintiff invoked the arbitration clause. At the arbitration proceeding, the defendant did not dispute its liability for breach of the purchase agreement but disputed the validity of the $5000 per Diem clause, claiming it was an unenforceable penalty. The plaintiff argued the per diem clause was a valid liquidated damage and the arbitrator agreed, finding 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. As a result, the arbitrator awarded the plaintiff a total of $1,670,000 in damages. The arbitrator also ordered the defendant to pay the plaintiff 6% interest on all unpaid per diem charges, and to fund and complete the demolition and remediation of the property without delay.
The defendant appealed the decision, arguing that the arbitration award violated public policy. The trial court noted that while it was required to review the award de novo, it was obligated to defer to the arbitrator’s factual findings and interpretation of the underlying contract. The court then reviewed the record to determine if the arbitrator’s findings were supported by the substantial evidence. The court concluded that the arbitrator had properly concluded that the purchase agreement contained a valid liquidated damages clause. The trial court said the arbitrator’s findings were supported by the negotiated nature of the per diem charge and the difficulties of ascertaining economic loss because of the fluctuating liens on the property and determining how long the remediation would take.
The defendant appealed, contending that the trial court improperly deferred to the arbitrator’s findings. The Connecticut Supreme Court affirmed, noting that the substantial evidence test is highly deferential and provides for a lower level of judicial scrutiny that a clearly erroneous or weight of the evidence standard of review. The court then went on to say that a clause fixing damages for a contractual breach may be a permissible liquidated damages clause when three conditions are satisfied: (1) The damage to be expected as a result of a breach was uncertain in amount or difficult to prove; the parties intended to liquidate damages in advance; and (3) the amount stipulated was reasonable so that it was not greatly disproportionate to the amount of the damage the parties envisioned would be sustained in the event of a breach of the contract.
In reviewing how arbitrator applied these principles to his factual findings, the court noted that the arbitrator had credited the testimony of the defendant's negotiator who had testified that he had initial proposed liquidated damages of $1500 during the negotiations, and then increased the amounts to $2500 before finally agreeing to $5000 with the date commencing 180 days later than the parties had originally contemplated. The arbitrator also relied on the testimony of the plaintiff's negotiator who testified that the plaintiff expected to earn $5000 per day from the property so the per diem amount was a valid proxy for damage caused by inability to use the asset acquired and the anticipated rate of return. The court also noted that the arbitrator concluded that liquidation of damages was appropriate because the party in breach retained the power to stop the damages by remediating the property. The court said the clause was actively negotiated by sophisticated parties that had ample assistance of counsel. Finally in response to the assertion that the clause was an illegal penalty because the parties had consistently characterized it through the negotiations as a hammer or penalty, the court said it was well settled that whether a clause is a valid liquidated damage provision is a matter of the parties' intent and is not controlled by the fact that the phrase “liquidated damages” or the word “penalty” is used
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