Even when considering public policy grounds for vacatur, a court must defer to the arbitrator’s finding of fact when conducting its de novo review, according to the Connecticut Supreme Court.

In HH East Parcel, LLC v. Handy & Harman, Inc., No. 18055, 2008 WL 2185484 (Conn. June 3, 2008), HH East purchased real property from Handy. The contract required the demolition of buildings and cleanup of the property. The contract provided a per diem fee of $5,000 per day for every day the cleanup was not completed after the deadline had passed. Handy did not have the required work completed by the deadline.

Subsequently, the parties entered into an indemnification contract that contained an arbitration agreement. Pursuant to this second contract, HH East filed a demand for arbitration. The arbitrator ultimately awarded $5,000 per day for every day Handy exceeded the contract deadline – a total of $1,670,000 – holding that the per diem fee was a reasonable and valid liquidated damages provision that was properly negotiated between the parties.

HH East then moved to confirm the award. Handy moved to vacate the award, alleging that the award violated public policy by enforcing the per diem fee as an impermissible penalty clause. The trial court granted the motion to confirm, deferring to the arbitrator’s findings regarding the per diem fee.

While allegations that an arbitration award violates public policy are subject to de novo review, courts must defer to the arbitrator’s factual findings when undertaking that review. See Schoonmaker v. Cummings & Lockwood of Conn., P.C., 747 A.2d 1017, 1027 (Conn. 2000) (holding that a reviewing court is bound by the arbitrator’s factual findings in reviewing an award on public policy grounds). Therefore, even if the resolution of the public policy issue rests on a factual determination, a court must defer to the arbitrator’s findings of fact.

Many lower court cases had concluded that an arbitrator’s fact findings must be reviewed for substantial supporting evidence, but the Court held that these cases were based on an erroneous interpretation of the law taken from a case specifically involving the arbitration of lemon law claims that are subject, by statute, to a less deferential standard of review. Conn. Gen. Stat. § 42-181(c)(4).

Because the arbitrator considered Handy’s arguments that the per diem fee violated public policy as an impermissible penalty clause and specifically rejected those arguments, the Court would not disturb that conclusion on appeal.

The Court’s deference to the arbitrator’s fact-finding when considering public policy arguments for vacatur is consistent with the majority rule among courts considering the issue, but is the first highest state court to so hold. See, e.g., Int’l Broth. of Elec. Workers, Local 97 v. Niagara Mohawk Power Corp., 143 F.3d 704, 727 (2d Cir. 1998) ("the district court erred in reexamining the facts, inferences, and conclusions upon which the [arbitration] Panel rested its award"); Van Horn v. Van Horn, 393 F.Supp.2d 730, 753 (N.D. Iowa 2005) ("Even if this court were to conclude there is a public policy against ‘unjust enrichment,’ a determination it need not make, in order to find a violation of that policy, this court would have to engage in the type of factfinding condemned by the Supreme Court."); In re Etkin & Co., Inc., 652 N.Y.S.2d 285, 286 (N.Y. App. Div. 1997) ("To vacate an award on public policy grounds, a court must conclude – after examining the arbitration agreement or award on its face and without engaging in extended factfinding or legal analysis – that public policy precludes enforcement."); In re Lawrence Teacher’s Ass’n, 815 N.Y.S.2d 396, 399 (N.Y. Sup. 2006) ("[A] court must be able to conclude, without fact finding or legal analysis, that a law absolutely prohibits the particular matters to be decided").

This determination that arbitrators’ findings of fact are to be accorded deference even when undertaking a public policy inquiry is consistent with the United States Supreme Court’s general statement in United Paperworkers Int’l Union v. Misco, Inc. 484 U.S. 29, 45 (1987) ("[T]he fact that it is inquiring into a possible violation of public policy [does not] excuse a court for doing the arbitrator’s task.").