Opinion
No. CV 05-4015961
January 31, 2006
MEMORANDUM OF DECISION
The plaintiff, The Metropolitan District (hereinafter "MDC") moves to vacate an arbitration award dated September 29, 2005 resolving disputes between it and defendant Connecticut Resources Recovery Authority (hereinafter "CRRA"), on the grounds that: (1) the arbitrators exceeded their powers in awarding relief that fails to conform to the submission, (2) manifestly disregarded the law respecting the statute of limitations, and (3) manifestly disregarded the law in concluding that MDC breached the covenant of good faith and fair dealing. The court determines each of these grounds is without merit and, as a consequence, denies the motion.
The facts are as follows:
On October 4, 1984, MDC and CRRA entered into an agreement for the operation of a solid waste disposal project known as the Mid-Connecticut Project. The agreement provided that CRRA shall pay MDC "the actual costs of the services and materials provided." It further provided that the Authority [CRRA] shall hold the District fully harmless from any risk of any loss whatsoever in respect hereof, by reason of the absence of any interest of the District herein." The reimbursement procedure was that the MDC and CRRA were each to open an account with a single bank. On a current basis the controller of MDC would certify to the paying bank and to CRRA that the MDC had incurred obligations for which payment was required. CRRA would review the certificates and if it approved them, would immediately notify the paying bank to transfer the approved funds to the district account. The MDC shall deposit into its account at the paying bank any amount which represents credits due the project from the District. Such amounts shall be used to pay subsequent District costs prior to the use of the certification procedure."
With respect to the remedies, the agreement provided that if CRRA breached the agreement, MDC was entitled to sue CRRA in law or equity for money damages or for injunctive relief, but the agreement provided if the district breached:
"In no event shall any breach hereunder nor any arbitration decision to permit termination . . . result in the District owing any monies to the Authority regardless of fault. The parties hereto agree that the sole and exclusive remedy available to the Authority, if the District is in default hereunder is specific performance."
The agreement contained the following arbitration clause:
All disputes, disagreements and questions arising between the parties to this Agreement shall be adjudicated by arbitration . . . The arbitrator or arbitrators shall have the right only to interpret and apply the terms of this Agreement and may not change any such terms or deprive any party hereto of any right or remedy provided in this Agreement . . .
The determination of the majority of the arbitrators shall be conclusive upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof.
At the inception of the agreement, a method was not in place for determining the proper allocation of indirect costs, such as administration, finance, clerical, engineering, and data processing expenses. CRRA engaged its certified public accountant Pannell, Kerr Forster to develop an indirect cost allegation system. From 1987 to 1999 MDC billed CRRA in accordance with that formula.
In 1999 the parties submitted to a panel of arbitrators, of which F. Owen Eagan was the chairman, two issues: the rights of CRRA to hire replacement workers under the agreement and the propriety of indirect costs charged to CRRA by MDC under the agreement. CRRA claimed that MDC overcharged for its services and thereby violated the covenant of good faith and fair dealing. Specifically one of the issues submitted by CRRA in the 1999 arbitration was:
Has the District violated the covenant of good faith and fair dealing by billing CRRA for Indirect Costs in an amount greater than the District's actual costs of providing services to CRRA.
The award of the panel as to the replacement workers issue is not relevant to this case. With respect to the indirect costs, at the time the agreement was entered into CRRA had few employees and was relying on the MDC's infrastructure for both construction and early operation. The Pannell methodology used a formula based upon the number of employees of MDC which were engaged in CRRA's business, as compared to the overall number of MDC employees, to determine the allocation of indirect costs. The Eagan panel noted that in the beginning this system worked well but in subsequent years "this methodology resulted in a disproportionate allocation of MDC's overhead to the Project." After considerable testimony, the panel concluded that:
the indirect cost allocation system, as it currently operates, is unfair to CRRA. The panel, however, does not have sufficient evidence to determine by what amounts the Pannell methodology has in the past, or currently, over charges CRRA . . . The panel believes on the current state of the evidence, CRRA may be entitled to some credit for the continued use of the Pannell indirect cost methodology after MDC came to doubt its continued efficacy.
The panel recommended that the parties adopt a new cost allocation method that allocates indirect costs "for only those costs which truly cannot be directly charged to CRRA." The award went on to state that if the parties were unable to agree, the panel would retain jurisdiction and make a determination based upon alternate proposals. Until the parties reached an agreement or the issue of indirect costs was resolved, the panel directed CRRA to pay 75% of the indirect costs owed to MDC within fourteen days of the decision and "that the balance be placed in an interest bearing escrow account pending the further determinations of this panel."
Following the Eagan panel decision in May 2000, MDC in an effort to reach an accord with CRRA over the amount of indirect charges, agreed to reduce them by $1,000,000. MDC further implemented work rule changes that saved CRRA approximately $750,000 in costs in the budget for fiscal years 2001-2002. However, an agreement could not be reached as to indirect costs and on July 10, 2001 CRRA replaced MDC's employees at a Torrington transfer station which terminated the settlement discussions.
In 2004, MDC submitted new claims against CRRA to a different panel of arbitrators chaired by the Honorable Beverly J. Hodgson. These included claims by MDC that CRRA had breached the agreement by replacing MDC as the operator of and provider of transportation for several transfer stations, and that CRRA failed to pay MDC for certain direct costs. CRRA interposed defenses and also a counterclaim to the effect that MDC had breached the implied covenant of good faith and fair dealing by charging CRRA for indirect costs in excess of the actual costs incurred by MDC in providing services on the Mid-Connecticut Project and for failing to reimburse CRRA for such overpayment.
With respect to the MDC's entitlement for direct costs, the Hodgson panel concluded that CRRA violated the agreement by failing to pay MDC for direct costs relating to vehicle maintenance and equipment expenses in the amount of $468,000, and, further, CRRA violated the agreement by failing to pay MDC for medical expenses incurred by MDC's employees assigned to the Mid-Connecticut Project in the amount of $2,703,268.90. However, the panel noted that the proper way to treat this $3.1 million was "as an offset against any claims for overcharges for indirect costs because the Agreement requires CRRA to pay only `actual costs' and because the Agreement contemplates credits where costs turn out to be different from the budgeted amounts."
The Hodgson panel turned then to CRRA's counterclaim based upon a breach of the covenant of good faith and fair dealing by MDC overcharging for indirect costs. The panel noted that "The merits of CRRA's claim were partially adjudicated by the Eagan panel in its 2000 ruling." The Eagan panel had found the manner in which MDC was calculating indirect costs was resulting in overcharges to CRRA but it lacked sufficient evidence to determine either the amount of the past overcharges or the appropriate remedy. As a consequence, the Eagan panel ordered CRRA to pay MDC only 75% of the indirect charges for which MDC billed it under the Pannell method and the remaining 25% of the amounts charged be placed in a separate interest bearing escrow account. In the event that the actual direct or indirect costs were found to be greater than 75% MDC had received, MDC would be entitled to recover the additional amount from the escrow. In the event that no additional amounts were due to MDC, CRRA would retain the escrowed amount and would be saved from having continued to overpay while the dispute was being resolved. The Hodgson panel noted, "The Eagan panel stated . . . that CRRA would be able to receive credits in the event of findings of past overpayments."
The Hodgson panel found that MDC retained the highly detailed information concerning its expenses. The parties could not reach an agreement as to an alternative method of allocating indirect costs because MDC had installed a new computer system in late 1999 that was functioning so poorly that MDC was unable to access the cost data that an analysis by CRRA would have required. Thus, because MDC's computer problems prevented it from being able to calculate the going overhead rate, MDC continued to bill CRRA on the 1999 going overhead rate even though MDC was performing fewer functions for CRRA from 2000 on. The panel heard considerable evidence respecting the amount of overcharges by expert witnesses. It concluded that from 1996 to 2004 the MDC had overcharged CRRA the amount of $7,091,841. Though the panel found that MDC had been overcharging CRRA since 1993, it recognized there was some substance to MDC's defense of statute of limitations. It noted that a claim of breach of the covenant of good faith and fair dealing is a tort and is subject, therefore, to a three-year statute of limitations and for that reason it limited the amount of the overpayment to the years from 1996 to 2004.
The second defense the panel considered was the provision in the agreement to the effect that if MDC breached the agreement, CRRA was limited to the remedy of specific performance and no arbitration decision shall "result in the District owing any monies to the Authority regardless of fault." In recognition of this provision of the agreement the Hodgson award provided:
Though MDC cannot be ordered to pay damages to CRRA, it can be ordered to specifically perform its contract obligations. It assumed the obligation not to charge CRRA more than its actual costs. It agreed to give CRRA credits in the event of overcharges. (Article IV(2)) . . . While the contract language cited above means that MDC cannot be ordered to pay CRRA an amount of money for all the overcharges it collected, it can be ordered to offset the amount of its own claims in order to perform its duty to collect only the actual costs, both direct and indirect, of its services to CRRA.
Thus, the panel concluded that the $3.1 million of direct costs to which MDC was entitled can be offset against the $7 million of overcharges by MDC and as a result, the panel concluded "MDC has overcharged CRRA for indirect charges in the amount of $3,920,218 and it is not entitled to any additional funds for either direct or indirect charges out of the escrowed funds." The panel added, "CRRA may not, however, recover the additional $3,920,218 that it overpaid MDC because the agreement precludes an order that `results in the District owing any monies to the authority, regardless of fault.'"
The Hodgson panel's award was a 2-1 decision with arbitrator Mark S. Shipman filing a minority report that differed with the majority determination on the three issues that MDC here asserts are the grounds for vacating the award.
STANDARD OF REVIEW
The submission to arbitration in the present case is unrestricted. The arbitration provision in the agreement between the parties provides that, "All disputes, disagreements and questions arising between the parties to this Agreement shall be adjudicated by arbitration . . . The determination of the majority of the arbitrators shall be conclusive upon the parties and judgment upon the same may be entered in any court having jurisdiction hereof." Courts have routinely held similar submissions to arbitration to be unrestricted. Garrity v. McCaskey, 233 Conn. 1, 5-6 (1992). The Board of Education of the Town of Preston v. Civil Service Employees Affiliates, Local 760, 88 Conn.App. 559, 568 (2005); Economos v. Liljedahl Bros., Inc., 86 Conn.App. 578, 583 (2004).
"Under an unrestricted submission, the arbitrators' decision is considered final and binding; thus the courts will not review the evidence considered by the arbitrators nor will they review the award for errors of law or fact." Industrial Risk Insurers v. Hartford Steam Boiler Inspection and Insurance Company, 258 Conn. 101, 110 (2001); American Universal Insurance Co. v. DelGrecco, 205 Conn. 178, 186 (1987). However, even in cases of unrestricted submissions, courts have recognized that courts may vacate an award if it contravenes one or more of the statutory proscriptions contained in Conn. Gen. Stat. § 52-418. Harty v. Cantor, FitzGerald Co., 275 Conn. 72, 81 (2005). In this case MDC argues that the subject award contravened Section 52-418(a)(4) because the arbitrators exceeded their powers by awarding a relief that fails to conform to the submission and manifestly disregarded the law as to statute of limitations and breach of the covenant of good faith and fair dealing.
1. The Issue of the Award Conforming to the Submission
MDC contends that arbitrators "exceeded their powers" (Section 52-418(a)(4)) by failing to conform to the submission in that the remedy they granted of offsetting MDC's direct costs of 3.1 million dollars against MDC's overcharges of $7,000,000 violated the agreement between the parties. In support of this contention MDC cites Board of Education v. Local 18, 5 Conn.App. 636, 640 (1985), "Where one party claims that the award, as issued, is inherently inconsistent with the underlying collective bargaining agreement, the court will compare the agreement with the award to determine whether the arbitrator has ignored his obligation to interpret and apply that agreement as written." See also Harty v. Cantor FitzGerald Co., 275 Conn. 72, 86 (2005). The underlying agreement provides "The arbitrator or arbitrators shall have the right only to interpret and apply the terms of this Agreement and may not change any such terms or deprive any party hereto of any right or remedy provided in this Agreement." The agreement further provides that no arbitrator's agreement shall result in MDC "owing any monies to the Authority [CRRA] regardless of fault . . . the exclusive and sole remedy available to the Authority [CRRA], if the district is in default hereunder is specific performance," MDC contends that it is entitled to be paid its direct costs of 3.1 million dollars and by the Hodgson panel denying that monetary remedy by offsetting the overcharges it failed to apply the agreement as written.
This court disagrees. "The arbitrators are authorized under an unrestricted submission to fashion any remedy that is `rationally related to a plausible interpretation of the agreement.' . . . Put another way, when the submission is unrestricted, the remedy determined by an arbitrator will be upheld as long as the remedy `draws its essence from the collective bargaining agreement . . .'" Board of Education v. Civil Service Employees Affiliate Local 760, 88 Conn.App. 559, 570 (2005).
In reviewing the Hodgson award, the court determines that the arbitrators fashioned a remedy that is entirely consistent with the agreement. Basically the agreement provides that the authority shall pay the district the actual costs of the services and materials provided, that MDC shall have no economic interest in the Mid-Connecticut Project; and that CRRA shall not be entitled to money damages.
Based on the evidence presented during the hearings, the Hodgson arbitrators concluded that MDC had overcharged CRRA by $7,000,000 more than MDC's actual costs in providing the services from April 1996 through 2004. Significantly MDC does not challenge that finding. Thus, the arbitrators concluded that MDC had already received $7,000,000 more than its actual costs and that MDC was not entitled to receive the additional 3.1 million dollars that CRRA had not been paid for the vehicle and medical expenses during the same period. If the arbitrators had ordered CRRA to pay the 3.1 million dollars to MDC when MDC had already received $7,000,000 more than its actual costs, it would have resulted in MDC deriving a profit, which is expressly prohibited by the agreement providing MDC had no economic interest in the project.
Moreover, the arbitrators specifically ruled in accordance with the provision of the agreement that the decision not "result in the District owing any monies to the Authority regardless of fault" by providing that the 3.9 million dollars in overpayments not be required to be repaid by MDC. As the panel noted, although the MDC could not be ordered to pay damages to CRRA, it could be ordered to offset the amount of its own claims in order to perform its duty to collect only the actual costs, both direct and indirect, of its services to CRRA.
In Harty v. Cantor, FitzGerald Co., supra, where a contract between an employer and an employee contained an arbitration provision prohibiting special, punitive, or exemplary damages, an arbitrator awarded the employee double damages, pursuant to Conn. Gen. Stat. Section 31-72, for failure of the employer to pay annual bonuses. The court upheld the award against the challenge that it violated the provision forbidding special, punitive, or exemplary damages on the grounds that the award did not "necessarily" fall outside the scope of the submission, the arbitrator's interpretation of the contract was "plausible" and was "rationally derived from the parties' submission" at 98-99.
In the instant case by the arbitrators offsetting MDC's direct costs of $3.1 million dollars against MDC's overcharges to CRRA of $7,000,000 and by not awarding damages to CRRA against MDC for the difference of $3.9 million dollars, they made a plausible and rational interpretation of the agreement between the parties. As a consequence, its award did not exceed the scope of the submission.
2. The Issue of Arbitrators Manifestly Disregarding the Law as to the Statute of Limitations.
MDC argues that MDC's compliance with the Eagan panel's direction that it pay only 75% of MDC's billings and 25% to be held in escrow terminated any breach that existed prior to that decision. Consequently, any current claim for overcharges must relate to billings MDC generated after the Eagan award in 2000. CRRA filed its counterclaim regarding overcharges in 2004; more than three years after the statute of limitations expired. Despite that the arbitrators found that MDC had overcharged since 1996. MDC claims this was a manifest disregard by the arbitrators of the statute of limitations and, as a result, the court must vacate the award. There is no merit to this claim.
Our law recognizes that an award that egregiously or irrationally violates the law should be set aside, pursuant to Section 52-418(a)(4), because the arbitrator has exceeded his powers by so imperfectly executing them that a mutual, final and definite award upon the subject matter submitted cannot be made. In Garrity v. McCaskey, supra at 10 the court reemphasized, "however, that the `manifest disregard of the law' ground for vacating an arbitration award is narrow and should be reserved for circumstances of an arbitrator's extraordinary lack of fidelity to establish legal principles." As the court pointed out, "Judicial approval of arbitration decisions that so egregiously depart from established law that they border on irrational would undermine society's confidence in the legitimacy of the arbitration process." In Merrill Lynch Pierce, Fenner Smith, Inc. v. Bobker, 808 Fed.2d 930, 933-34 (2d Cir. 1986), the court stated that a manifest disregard of the law "clearly means more than error or misunderstanding with respect to the law . . . [t]he term 'disregard' implies that the arbitrator appreciates the existence of a clearly governing principle but decides to ignore or pay no attention to it . . . We are not at liberty to set aside an arbitration panel's award because of an arguable difference regarding the meaning or applicability of laws urged upon it" The Second Circuit has repeatedly affirmed that "even a `barely colorable' justification for the outcome reached will save an arbitrable award," Duferco International Steel Trading v. Klaveness Shipping A/S, 333 F.3d 383, 391 (2d Cir. 2003); the court "will confirm the award if we are able to discern any colorable justification for the arbitrator's judgment, even if that reasoning would be based on an error of fact or law." GMS Group, LLC v. Benderson, 326 F.3d 75, 78 (2d Cir. 2003). Our courts have similarly imposed a high standard for imposing this doctrine of manifest disregard of the law. As stated in Lathuras v. Shoreline Dental Care, LLC, 65 Conn.App. 509, 514 (2001), "Manifest disregard of the law may be found only where arbitrators understood and correctly stated the law but proceeded to ignore it."
The Hodgson arbitrators found that the merits of the CRRA claim of breach of the covenant of good faith and fair dealing was "partly adjudicated by the Eagan panel in its 2000 ruling" but that that panel lacked sufficient evidence to determine either the amount of the past overcharges or the appropriate remedy. The Hodgson panel recognized that before it CRRA reiterated the same counterclaim of breach of the covenant of good faith and fair dealing that it had made before the Eagan panel. The Hodgson panel concluded after hearing all of the evidence that "CRRA has demonstrated that from 1993 to date MDC has breached its duty of good faith and fair dealing by charging indirect costs by a method that it knew did not reflect actual costs, but that overstated those costs in the manner that shifted to CRRA's customers some of the expenses of MDC's sewer and water operation." Thus, the Hodgson panel concluded that CRRA's claim for overcharges made in 1999 had not been determined by the Eagan panel and its reiteration of that claim in the 2004 arbitration was a continuation of the claim. The panel did however, recognize that a three-year statute of limitations for a tort claim applied and it limited CRRA's claim for overcharges to three years prior to 1999 or from 1996 forward.
This court concludes the panel properly applied the three-year statute of limitations when it found that CRRA first asserted its claim for breach of the covenant of good faith and fair dealing in April 1999. Such a ruling "is a far cry from the egregious or patently irrational misperformance of duty that ought to be shown in order to prove a manifest disregard of the law." Garrity, supra, 223 Conn. at 13.
3. The Issue of the Arbitrators Manifestly Disregarding the Law with Respect to CRRA's Claim for Breach of the Covenant of Good Faith and Fair DealingMDC contends that by complying with the Eagan panel's ruling to continue billing its indirect costs in accordance with the Pannell method, receiving only 75% of those billings and allowing 25% to be placed in escrow, by making efforts to reach an accord with CRRA to reform the method of reimbursing for indirect costs and by unilaterally reducing its billings by over one million dollars, such conduct cannot constitute "bad faith" in fulfilling its contractual duty that is a necessary element of the cause of action for a violation of the covenant of good faith and fair dealing. Alexandru v. Strong, 81 Conn.App. 68, 80-81, cert. denied 268 Conn. 906 (2004); Habetz v. Condon, 224 Conn. 231, 237 (1992). Thus the panel's determination that MDC breached the covenant of good faith and fair dealing was a clear disregard of the law.
This court disagrees. The panel correctly stated the applicable law: "Every contract carries an implied covenant of good faith and fair dealing requiring that neither party do anything that will injure the rights of the other to receive the benefits of the agreement. CUTPA v. New Britain General Hospital, 239 Conn. 574, 598 (1996)." It then cited the Restatement (Second) of Contracts, Section 205 that "construes this duty as requiring performance that is faithful to an agreed common purpose and consistent with the justified expectations of the other party."
The panel noted that the attempts by the parties to reform the Pannell method of determining indirect costs was frustrated by the fact that MDC's computer had functioned so poorly that MDC was unable to access the critical data needed for a proper analysis, and that moreover, MDC insisted that CRRA pay for MDC's faulty new computer system. The testimony that the panel received indicated that "MDC knew as early as 1993 . . . that it was overcharging CRRA for indirect costs." The panel concluded, "CRRA has demonstrated that from 1993 to date MDC has breached its duty of good faith and fair dealing by charging indirect costs by a method that it knew did not reflect actual costs but that overstated those costs in a manner that shifted to CRRA's customers some of the expenses of MDC's sewer and water operations."
To vacate this award the court must determine that the panel's decision on this issue so misconstrued the law as to demonstrate "the arbitrators' egregious or patently irrational rejection of controlling legal principles." Garrity, supra at 11-12. This court concludes the panel correctly stated the law and correctly applied it to the facts of the case. MDC disagrees with the ruling. But even if the panel was wrong, it certainly did not ignore the law or manifestly disregard it.
Based on the foregoing, the court denies the motion to vacate the arbitrator's award.