The Timeless Lessons of Perini Corp. v. Greate Bay Hotel & Casino, Inc.

Summary

This article explores the history of Perini Corp. v. Greate Bay Hotel & Casino, Inc. and follows its path from four years of arbitration to its ultimate resolution by the New Jersey Supreme Court. 

Due to Perini’s delayed completion of renovations to an Atlantic City hotel and casino, an arbitration panel concluded that Perini caused the owner to suffer $14.5 million in lost profits and ordered it to pay this amount.

Perini sought to have this awarded vacated in the New Jersey state courts on the grounds that (i) the operative contract did not contemplate the recovery of lost profits; (ii) lost profits could not be awarded after the project was substantially complete; and (iii) the $14.5 million award was grossly disproportionate to the $600,000 fee that Perini was to be paid under the contract. 

In light of the great deference given to arbitration awards, the courts refused to vacate the award on the grounds that even if the panel had made mistakes in applying the law, they were not sufficiently egregious to justify vacating the award.

The court effectively blamed Perini for its predicament noting that as a sophisticated construction company with experience in the casino industry, it should have negotiated better contract terms that detailed and limited the damages for which it could be liable. 

The Perini decision had far-reaching effects with the AIA revising its standard conditions A201 to include a consequential damage waiver and the industry as a whole having a greater appreciation of the finality of arbitration awards as compared to court decisions. 

Introduction

Now nearly thirty years old, Perini Corp. v. Greate Bay Hotel & Casino, Inc.,i[1] remains an important case in the history of construction law, not only for its interesting facts but also the harsh lessons it teaches on both the finality of arbitration decisions and the importance of consequential damage waivers. 

The Story

Central to the story is the Brighton Hotel in Atlantic City, New Jersey.  Built in 1873, it was the first Atlantic City hotel to remain open during the winter.  Touting itself as having the "finest-of-clientele," it was also one of the very few Atlantic City hotels with an outdoor pool.  Still another claim to fame was its potent “Brighton Punch,” which was featured prominently in the hotel’s advertising and was said to be a favorite of frequent hotel guest Ulysses S. Grant.  Of the 1200 hotels in Atlantic City in 1918, only 30 had the prestigious Boardwalk address.  As the main thoroughfare for tourists, the Boardwalk was the most desired location for any hotel.  The Brighton, however, was located one block off the Boardwalk on Indiana Avenue.  And as anyone who’s ever played Monopoly knows, Indiana Avenue is far less valuable than Boardwalk.[2] 

In 1959, when it was one of the last wooden hotels still standing in Atlantic City, the Brighton was torn down and rebuilt as the Colony Motel.  In 1980, three years after the legalization of gambling in Atlantic City, the Colony was briefly reincarnated as the Brighton Casino.  Having experienced steadily-declining revenues for several years, Sands Hotel & Casino (“Sands”) purchased the Brighton in 1981, renamed it “The Sands,” and realized a profit of $8 million during its first year of operation.  Sands recognized that the hotel still had problems.  First, as previously noted, the hotel was a full block from the Boardwalk.  Exacerbating this issue was the fact that there was no entrance to the hotel visible from the Boardwalk.  Finally, the Sands also believe that the hotel had a poor marketing strategy.  To address these problems, the Sands decided to undertake major renovations.   

On July 21, 1983, Sands entered into a construction management agreement with Perini Corporation (“Perini”) for partial renovation of the hotel and casino.  The original guaranteed maximum price (“GMP”) for the project was $16.8 million.  For its construction management services, Perini was to be paid a fee of $600,000 plus an additional 4% fee if costs exceeded $20 million.  The main components of the project were (1) expansion of the gaming areas; (2) creation of a new food court; (3) renovation of the two top floors, plus the addition of a new floor with “high-roller” suites; (4) the addition of a new entrance; and (5) the creation of an ornamental, non-functional glass façade located on the wall which faces the boardwalk.  Sands described this final feature as a “new glitzy glass façade” that would hopefully catch the eye of persons on the boardwalk.[3] 

Incredibly, for a contract of this magnitude, it contained neither a completion date nor a time-of-the-essence clause.  Instead, the contract provided that once the GMP is established, a date of substantial completion would also be established.  The contract defined “substantial completion” consistent with its ordinary meaning as “the date when construction is sufficiently complete … so the [o]wner can occupy or utilize the [p]roject or designated portion thereof for the use for which it is intended.” 

Even after a GMP was set, however, no substantial completion date was added to the contract.  The Sands later contended that the parties ultimately agreed to May 31, 1984 as the substantial completion date.  The evidence supporting this was that this was the date submitted to the New Jersey Casino Control Commission for substantial completion of the Project’s three main components: (i) expansion of the casino floor; (ii) construction of the high-roller suites; and (iii) the new entrance.  Also, Sands had told Perini that it would postpone the project until 1985 if Perini was unable to complete it before the start of the 1984 summer season.[4] 

As the summer of 1984 approached, it became clear that the work would not be completed by the Memorial Day target.  Perini performed its work and contended that it achieved substantial completion of (i) the casino and food court (the revenue-producing portions of the project) on April 17, 1984; (ii) the new entrance and façade on August 31, 1984; and (iii) the remainder of the project, including the high-roller suites, on September 14, 1984.  Perini contended that it was entitled to an excusable extension for the completion of the high-roller suites, and the only delay for which it had any responsibility was the four month delay to the glass façade. 

The Sand’s after Perini’s Renovations with its glitzy glass façade facing the Boardwalk.

By letter dated December 21, 1984, the Sands purported to terminate the contract.  This prompted Perini to bring suit in New Jersey state court seeking a declaratory judgment that the Sands could not terminate the contract after the project had reached substantial completion.  Sands counter-claimed, and the court determined that the entire dispute was subject to arbitration under the contract.  Perini and Sands then submitted three issues to a three-person arbitration panel: (1) was Sands entitled to recover lost profits and, if so, in what amount; (2) was Perini entitled to the contract balances it claimed to be owed; and (3) was Sands’ termination of the contract wrongful.[5] 

The arbitration panel consisted of an architect, an engineer and an attorney.  The hearing began in 1985 but, due primarily to the disqualification of Sands’ attorneys in 1987 for misconduct and the amount of expert testimony submitted, the hearing did not conclude until 1989.  This was after more than sixty days of hearings.  By a two-to-one vote (the attorney arbitrator dissented), the panel: (i) awarded Sands over $14,500,000 in lost profits; (ii) failed to decide whether Sands had the power to terminate Perini after substantial completion; and (iii) never had to decide the issue of contract balance owed as the parties stipulated during the proceedings that Perini would receive $300,000 plus interest as its contract balance.  The lost profit award was based on the Sands’ profits in 1985 when it bucked the negative trend that other Atlantic City casinos were suffering.  The award itself consisted of just nine short paragraphs over two pages and included no explanation as to how the lost profits were calculated, nor why the panel ruled as they did.  Nor did the dissenting attorney arbitrator offer any explanation as to the basis for his dissent.[6] 

Perini was stunned.  On a contract in which it was to be paid just $600,000, it was now ordered to pay over twenty-four times this amount.  So when Sands sought confirmation of the award in state court, Perini sought to vacate it.  It argued primarily that: (i) there was no competent evidence to support the award; (ii) the award did not resolve all of the issues; (iii) an award of lost profits contravened the terms of the contract; and (iv) the award would result in manifest injustice in light of the gross disparity between the amount of the award and what Perini was to be paid under the contract. 

In confirming the award of lost profits, the trial court concluded that the arbitrators had not committed “the kind of gross mistake or clear disregard of applicable law that is required to overturn an award.”  The appellate court, in turn, affirmed the trial court’s decision concluding that the arbitrators had not been clearly mistaken as a matter of law as enough evidence had been presented to allow them to conclude that lost profits were reasonably foreseeable in the event of breach and the lost profit calculation was not speculative in nature.[7] 

Perini’s next and last stop was the New Jersey Supreme Court.  There, it argued that: (i) the award of lost profits was not in the contemplation of the parties at the time of the contract; and (ii) no lost profits should have been awarded for the period after substantial completion.  The Court limited its review to the following three issues: (i) whether the claimed mistake of law was reviewable by the courts; (ii) the continued validity of the principle that mistakes of law are the equivalent of undue means; and (iii) the disproportionality of the arbitration award.[8] 

Did it Matter Whether the Arbitration Panel Committed a Mistake of Law?

As to whether the claimed mistake of law was reviewable, the Court first considered New Jersey’s arbitration statute which listed the bases for vacating an arbitration award.  As with most state statutes addressing this point, New Jersey’s statute required serious wrongdoing such as fraud, corruption or undue means on the part of the arbitrator(s) in order to vacate an award.  Notably, a mistake of law was not mentioned in the statute.  In its analysis of the case law, however, the court found that “mistake of law” could be grounds for vacating an award.  At first blush, this might have given Perini hope.  But any such hope was likely dashed when the court described just how egregious the mistake of law would have to be. 

[T]he arbitrators must have clearly intended to decide according to law, must have clearly mistaken the legal rule, and that mistake must appear on the face of the award.  In addition, the error, to be fatal, must result in a failure of intent or be so gross as to suggest fraud or misconduct.[9] 

With this high and nearly insurmountable standard of review in mind, the Supreme Court considered the issues.

Were Lost Profits Recoverable?

Citing the English case of Hadley v. Baxendale,[10] the court noted the standard common law rule that a party who is the victim of a breach of contract is entitled to recover those damages that were reasonably foreseeable to the parties at the time the contract was entered.  In other words, those damages that would arise naturally as a result of the contract’s breach.  Perini contended that lost profits were not contemplated by the parties at the time of the contract because the contract specified the remedies available in the event of either party’s breach.  The Court disagreed, noting that Perini was aware of: (i) Sands’ motive of increasing its profits; (ii) Sands’ need to have the project completed by Memorial Day; and (iii) the fact that the summer was the busiest and most profitable season.[11]  The Court, accordingly, found that lost profits were recoverable under these circumstances.

Could Lost Profits Be Awarded After Substantial Completion?

The $14.5 million award of lost profits covered alleged lost profits from May 31 to the date of termination in December, 1984.  Perini claimed and Sands appeared to agree that substantial completion of the project occurred on September 15, 1984.  Perini argued that under extensive and well-recognized case law, a party cannot continue to collect liquidated damages or lost profits after substantial completion.  The Court appeared to agree with this basic principle and cited many cases in which this rule was applied.  But yet again the Court back-pedaled.  It noted that this rule arises from the doctrine of substantial performance which in turn rests on principles of fairness, and is intended to protect the right of compensation of those who have performed “in all material and substantive particulars” notwithstanding the existence of “mere technical or unimportant omissions for defects.”[12] 

Focusing on the importance of the “glitzy glass façade” in attracting people to the casino, the Court concluded that it “might be inequitable” to apply the substantial performance doctrine against Sands as the façade was not completed by September 15.  Because the Court had virtually no indication of the bases for the arbitrators’ award, it was left to speculate.  And it did so in concluding that the arbitrators “could have found that that the uncompleted work was not a mere technical or unimportant omission or defect” and they “may have considered it fair to award damages even though the entrance could be used in its uncompleted state.”[13]  

Accordingly, the Court upheld the arbitrators’ award of lost profits after the date of substantial completion. 

Did the Disproportionality of the Award to the Contract Value Matter?

With a near exhausted quiver of arrows, Perini next argued that the disproportionality doctrine, which can limit awards that are grossly disproportionate with the contract value, should preclude the award of $14.5 million considering Perini’s fee under the contract was only $600,000.  Perini cited to several cases in which the doctrine had been applied, as well as a reference to it in the Restatement (Second) of Contracts. 

The Court distinguished this authority noting that application of the disproportionality doctrine is generally limited to contracts in which some public interest is involved as opposed to contracts of a purely commercial nature.  After acknowledging the merit of Perini’s argument that it would never have accepted such a great risk for such a minimal fee, the Court nevertheless rejected its disproportionality argument.

[Perini] 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…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.[14]

In short, the Court said you, Perini, are a sophisticated commercial entity and as such you could and should have protected yourself from this outcome by negotiating better contract terms.  Furthermore, you assumed the inherent risks of arbitration, the most significant of which is the exceedingly difficult standard for overturning an arbitrator’s award. 

The Impact of Perini v. Greate Bay Hotel and Casino.

The shock-waves of Perini extended beyond New Jersey to the entire U.S. construction industry.  The American Institute of Architects (AIA) responded by including, for the first time, in its 1997 update of its General Conditions (A201), a mutual waiver of consequential damages clause.  That clause also clarified that it did not preclude the award of liquidated damages. 

Perini also made clear that arbitration is not simply a private trial with hand-picked judges learned in construction law and practices.  Rather, in light of the very narrow and strictly-applied bases for overturning an arbitration award, the parties are far more dependent on the fairness, intelligence and focus of the arbitrator(s) than they would be with a judge in a trial.  This is because whatever the ultimate award, the parties will almost always be stuck with it.  All the more reason to be exceedingly careful in agreeing to arbitration provisions, selecting arbitrators and detailing in the contract the scope of their authority. 

Finally, as for broader life lessons, Perini teaches us to never underestimate the importance of a “glitzy glass façade.”