Opinion ID: 1910081
Heading Depth: 1
Heading Rank: 7

Heading: Was it a mistake to award damages greatly disproportionate to Perini's fee?

Text: An excessive or inadequate arbitration award is not grounds in and of itself to warrant judicial interference. Generally, there must be a showing of misconduct or want of good faith on the part of the arbitrator. Held, supra, 136 N.J.L. at 642, 57 A. 2d 20. Perini argues that a damage award of over $14,000,000 is grossly disproportionate to the $600,000 management fee [3] it was to receive under the $24,000,000 contract and is, therefore, in direct violation of this Court's recent decision in Dixon Venture v. Joseph Dixon Crucible Co., 122 N.J. 228, 584 A. 2d 797 (1991). Perini states that in Dixon this Court was concerned with a damage award that was 16% of the contract price (in Dixon the contract price and the fee were the same), whereas the damages awarded to Sands were 2400% of the fee received by Perini. [4] Put differently, the damage award to Sands was twenty-four times Perini's fee and the damage award in Dixon was .16 times the seller's price. Dixon involved liability for the cleanup of property under the Environmental Cleanup Responsibility Act (ECRA), N.J.S.A. 13:1K-6 to -13. Generally, under ECRA the seller will be subject to absolute liability without regard to fault. Id. at 232, 584 A. 2d 797 (citing N.J.S.A. 13:1K-13a). Because the seller was not aware of ECRA's requirements when it entered into the contract, the Court was concerned that the seller might be required to shoulder the entire cost of the cleanup, stating that an unqualified adoption of either the trial court resolution or the Appellate Division resolution might produce an unjust result. Id. at 231, 584 A. 2d 797. We agreed with the Appellate Division that a private right of action could stand under ECRA; however, we found that the problem with that option was that the understanding of the parties had not been taken into account at the time they entered into the contract. Id. at 232, 584 A. 2d 797. Because neither party made an economic choice to assume the market risk  both parties being unaware of the law  an unqualified enforcement of a private right of action would be unfair. Ibid. Under those circumstances, we believed that to mold a remedy in accordance with the economic realities of the situation was appropriate. Ibid. In fashioning a remedy, we instructed the trial court to take into account the assumptions of each party at the time of closing and whether the anticipated costs of ECRA compliance would be so disproportionate to the sale price that it would have altered the economic choices that the seller would have made. Id. at 233. Perini argues that the economic realities of the situation and the assumptions of the parties at the time of contracting should have been considered by the arbitration panel. Specifically, Perini claims that it would not have entered into the contract if it had assumed it would be liable for over $14,000,000 in damages while receiving only a $600,000 management fee. This case is not comparable to Dixon. In Dixon, the seller was not aware of its duties under ECRA, and thus was not aware that it was subject to liability for the cleanup. Also, under the facts in Dixon, the buyer could not be held clearly liable either. The buyer had agreed to purchase the property before the effective date of the Act, but the closing occurred after the effective date. Here, on the other hand, the arbitrators had enough competent evidence to determine that Perini was aware of its exposure to liability for lost profits at the time of contracting. The testimony of Sands's witnesses concerning the seasonal nature of the casino business; the need to finish the project before the start of the summer season; and the fact that Sands would have postponed the project until 1985 if Perini were unable to complete it before the start of the summer season led to the inescapable conclusion that Perini would be liable for failure to complete in a timely fashion. Perini's second disproportionality argument is based on the Restatement (Second) of Contracts § 351(3) (1979) (hereinafter § 351(3)). That section, entitled Unforeseeability and Related Limitations on Damages, states: (3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. [§ 351(3).] Based on that section, Perini contends that the doctrine of disproportionality allows a court to avoid extreme unfairness or injustice, by limiting awards of consequential damages, particularly lost profits, in a breach of contract case even where they are foreseeable. Perini argues that even though a consequence may have been foreseeable at the time of contracting, it does not necessarily mean that the parties intended to allocate the risk of loss to one of the parties. That argument tracks comment f to § 351, which in pertinent part states: It is not always in the interest of justice to require the party in breach to pay damages for all of the foreseeable loss that he has caused. There are unusual instances in which it appears from the circumstances either that the parties assumed that one of them would not bear the risk of a particular loss or that, although there was no such assumption, it would be unjust to put the risk on that party. One such circumstance is an extreme disproportion between the loss and the price charged by the party whose liability for that loss is in question. The fact that the price is relatively small suggests that it was not intended to cover the risk of such liability.         [ Restatement (Second) of Contracts § 351 cmt.f (1979) (hereinafter comment f).] Perini argues that because the award is highly disproportionate to the fee received, the parties did not intend to allocate the risk to it. Thus, Perini urges us to follow the Restatement and limit damages. Although that argument has merit, comment f sets forth several limitations. First, the comment states that damage limitations are more likely to be imposed in connection with contracts that do not arise in a commercial setting. Second, although it does not appear to be a limitation in and of itself, the comment suggests, through the illustrations that follow it, that a limitation on damages is more likely to be applied where there is an informality of dealing, including the absence of a detailed written contract, which indicates that there was no careful attempt to allocate all of the risks. That second limitation does not appear to be applicable here because the parties entered into an extensive written contract containing several provisions that addressed damages under certain circumstances. Finally, the section envisions an  extreme disproportion between the loss and the price charged by the party whose liability for that loss is in question. (Emphasis added). Few cases have mentioned § 351(3) in dicta; fewer still have actually relied on that section in limiting damages. Of those courts that have mentioned § 351(3), the disproportion was substantially greater than that found in this case. We note that no New Jersey court has applied that section. One of the few cases that actually relied on § 351(3) is International Ore & Fertilizer Corp. v. SGS Control Services, Inc., 743 F. Supp. 250 (S.D.N.Y. 1990). That court looked at the several factors mentioned in comment f and concluded that the damages sought by the plaintiff, which were 16,000 times greater than the contract price, were disproportionate. The fee charged by defendant was $150 and the damages sought were $2,400,000. [5] Id. at 257. In reaching its conclusion, the court also relied on the other factors. First, the parties had reached their agreement over the telephone and the conversation was confirmed by a telex that was devoid of any statement of liability. Ibid. Second, the parties' informal dealings and the low contract price indicated that there had been no attempt to allocate all of the risks. Ibid. However, the court did allow recovery of fifty percent of the lost profits on a theory of negligent misrepresentation. Id. at 258-60. Perini contends that the disproportionality doctrine has been discussed implicitly or explicitly by the New Jersey courts. [6] In Seaman, supra, 166 N.J. Super. 467, 400 A. 2d 90, the court refused to allow a damage award that was 207 times greater than the defendant's charge for steel plating. The court reasoned that the loss of profits resulting from the breach had not been foreseeable, explaining that had the defendant anticipated this loss, it would have sought some assurance that they would not be responsible beyond a stipulated sum. Id. at 472, 400 A. 2d 90. Perini argues that this language suggests that the court was articulat[ing] a fundamental principle of disproportionality  allocation of risk. Sands argues that there was no implicit disproportionality argument; that in Seaman the court simply made the usual foreseeability analysis and determined that an award of lost profits was too speculative because the purchaser had conveyed no information to the seller about its use of the steel plate for any particular contract or work. See id. at 472, 400 A. 2d 90. Perini distinguishes Paris of Wayne, Inc. v. Richard A. Hajjar Agency, 174 N.J. Super. 310, 416 A. 2d 436 (App.Div. 1980), certif. denied, 85 N.J. 454, 427 A. 2d 555 (1981). There the Appellate Division affirmed the trial court's award of $58,900 in damages. Those damages were 200 times the real estate agent's fee of $300. Id. at 316, 416 A. 2d 436. Perini asserts that the Paris court distinguished that case from a case that might arise in a strict commercial setting, stating: If this case were strictly in a commercial context, perhaps the disproportionality between defendants' compensation and their exposure might tilt the scales against an award of consequential damages. But defendants are not just businessmen. They are members of a trained and carefully regulated profession affected with a public interest. [ Id. at 320-21, 416 A. 2d 436.] To be sure Perini does not meet that measure. See also Kutzin v. Pirnie, 124 N.J. 500, 518, 591 A. 2d 932 (1991) ([R]etention of the entire deposit would unjustly enrich the [seller] and would penalize the [buyer] contrary to the policy behind our law of contracts.). Although Perini's argument that it would not have accepted such a great risk for a minimal fee is forceful, it was well aware of the high stakes involved in the Atlantic City casino-construction industry. By contracting with Sands, Perini offered its expertise in this risky endeavor. At the time Perini and Sands entered into the contract, Perini had managed a number of construction projects in Atlantic City. Considering the nature of this project, Perini might have bargained for a no damages for delay clause, see Broadway Maintenance Corp. v. Rutgers, 90 N.J. 253, 447 A. 2d 906 (1982), or a liquidated damages clause in the contract. The only plausible conclusion, then, is that Perini left the resolution of a dispute over non-performance to third-party arbitrators. We cannot say that under those circumstances the arbitrators manifestly disregarded any applicable unmistakable principle of New Jersey law.