In RV V Lockworks, LLC v. Five Yale & Towne, LLC, 2016 Conn. Super. LEXIS 563 (Conn. Super. Ct. Mar. 16, 2016) an arbitrator awarded punitive damages to the purchaser of a newly-constructed 300-unit apartment complex when it was discovered that the seller had intentionally concealed knowledge of the fact that all 300 balconies attached to the complex were constructed in violation of Connecticut’s state fire and building codes.

In this recent Superior Court decision, Judge Heller held that an arbitrator has the inherent authority to award punitive damages in the absence of an express provision in the arbitration submission to the contrary. The court confirmed an arbitration award where the arbitrator awarded punitive damages based on the defendant’s concealment of construction defects and code violations. This case should serve as a reminder that arbitration is not a safe haven from punitive damages.

In performing its due diligence in connection with the purchase of the complex, Lockworks identified multiple defects and problems with the construction. Five Yale, the seller, agreed to remediate these issues by the closing date, but failed to do so. The parties entered into a holdback escrow agreement to secure the cost of the remaining repairs as well as Five Yale’s representations and warranties under the purchase agreement. This purchase agreement provided for arbitration in the event of a dispute concerning the distribution of the escrowed funds.

Nearly six months later, Lockworks was notified by the Fire Marshal that all of the balconies attached to the complex failed to meet Connecticut state fire code and the state building code because they were constructed with Trex decking, a material not designed as non-combustible. Lockworks was advised that it would either need to install sprinkler coverage for the balconies or replace the decking with a code compliant material. Five Yale informed Lockworks that it was not previously aware of any of the noted code violations, and the purchase agreement contained a statement by Five Yale that it had no knowledge of code violations or defects.

Lockworks demanded arbitration alleging, among other things, that Five Yale had breached its representations and warranties with respect to code violations. The parties engaged in discovery pertaining to all claims and allegations, and Lockworks specifically requested documentation relating to the construction of the balconies and related inspections. After several days of arbitration, Lockworks received documents from a third party that demonstrated Five Yale knew for quite some time that the balconies may not be code compliant. The concealment of this information came out during the questioning of Five Yale’s chief estimator. Thereafter, Lockworks sought leave to amend its arbitration demand to assert a claim for punitive damages.

The arbitrator awarded Lockworks punitive damages in the amount of $210,923.41 after determining that Five Yale sold the complex with knowledge that all 300 balconies were in violation of  the state fire and building codes. The arbitrator found that Five Yale engaged in a conspiracy to conceal that was both egregious and recklessly indifferent to the rights of Lockworks and future tenants of the complex.

Lockworks sought to have the court confirm the arbitration award, and Five Yale objected and moved to partially vacate or modify the award. The Court confirmed the arbitrator’s decision to award punitive damages. The decision noted that arbitration is a creature of contract, and that the parties submission to the arbitrator defines and limits the issues to be decided.  Since the parties did not restrict the arbitration clause in the escrow agreement in any way, the court found that the arbitrator did not exceed his authority in awarding punitive damages. In so finding, the court stated that “in the absence of an express provision in the submission precluding an award of punitive damages, an arbitrator has the inherent authority to award punitive damages where the evidence supports such an award under applicable law.” Citing Med Val USA Health Programs, Inc. v. Member Works, Inc., 273 Conn. 634, 872 A.2d 423 (2005) (arbitration panel found defendant had engaged in unfair and deceptive acts in violation of CUTPA and awarded punitive damages under provision in CUTPA providing for such award).