Kent East Commercial, Llc, App./cross-resp. V. Bounce And Lasertag, Llc, Resp./cross-app. ( 2021 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
BOUNCE AND LASERTAG, LLC d/b/a, ) No. 81132-1-I
PUMP IT UP; and MUNNA CHOUDHRI, )
) DIVISION ONE
Respondents/Cross Appellants, )
)
v. )
)
KENT EAST COMMERCIAL, LLC; ) UNPUBLISHED OPINION
SATWANT SINGH; PRADEEP )
RATHINAM, and his marital community; )
and SHARMILA RATHINAM, and her )
marital community, )
)
Appellants/Cross Respondents. )
BOWMAN, J. — Kent East Commercial LLC (KEC) and Bounce and
Lasertag LLC (Bounce) arbitrated a dispute over their commercial lease
agreement. KEC appeals the trial court’s order denying its motion to vacate and
confirming the arbitration award. KEC argues the face of the award shows the
arbitrator erred in awarding Bounce damages for lost profits. Bounce cross
appeals, arguing the trial court erred in striking exhibits offered in opposition to
KEC’s motion to vacate. Because the face of the award shows the arbitrator
exceeded his authority in awarding consequential damages prohibited under the
lease, we reverse the trial court’s order confirming the arbitration award and
remand for the trial court to vacate the award and order a rehearing.
Citations and pin cites are based on the Westlaw online version of the cited material.
No. 81132-1-I/2
FACTS
In March 2017, KEC and Bounce executed a retail lease agreement for
10,000 square feet of commercial space in the city of Kent. Bounce planned to
operate a Pump It Up franchise with “inflatable indoor playgrounds,” laser tag,1
and a pizzeria in the space. The lease included an “Arbitration Rider,” calling for
arbitration over most disputes.
A year and a half after executing the lease, Bounce requested arbitration,
alleging KEC failed to complete tenant improvements and timely tender the
space. Bounce named KEC and its members, Pradeep Rathinam, Sharmila
Rathinam, and Satwant Singh, as parties to the arbitration. KEC alleged, among
other things, that Bounce did not timely pay rent or its security deposit. An
arbitrator held several hearings on the matter. He then issued an interim award,
followed by a final award five months later.
In the final award, the arbitrator determined both parties had breached the
lease. He awarded Bounce2 $858,639 for lost profits and “miscellaneous”
damages. He then reduced the award because the damages were “excessive
and too speculative for a new operation that has not opened for business.” The
arbitrator also reduced the award to reflect that Bounce was 20 percent “culpable
for what occurred.” He settled on $500,000 in damages for Bounce.
The arbitrator awarded KEC $814,842 in damages for completed tenant
improvements, lost rent, common area maintenance charges under the lease,
1 “Laser tag” is a game in which players use toy guns to shoot infrared beams at each
other while wearing specially designed vests sensitive to infrared light.
2The award also named Munna Choudhri, a member of Bounce. Choudhri signed the
lease on behalf of Bounce.
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No. 81132-1-I/3
cost of demolition and disposal, and commissions to release the premises. He
then reduced the award by 80 percent commensurate with KEC’s “degree of
culpability.” The net result of the arbitration award was $337,032 in favor of
Bounce. The arbitrator also concluded that Bounce was the substantially
prevailing party and awarded $80,768 in attorney fees and costs under the lease.
In total, KEC and its members were held jointly and severally liable to Bounce for
$417,800 in damages, attorney fees, and costs.
Bounce petitioned the King County Superior Court to confirm the
arbitration award. KEC moved to vacate the award, arguing that the arbitrator
exceeded his authority in awarding Bounce lost profits and holding individual
members of KEC jointly and severally liable. In the alternative, KEC moved to
modify the award because the arbitrator improperly reduced damages using the
“tort-based concept of comparative fault.” Bounce opposed the motions. It
offered exhibits to show that KEC “was once again trying to game the justice
system.” The trial court granted KEC’s motion to strike the exhibits.
After oral arguments, the court entered an order confirming the arbitration
award. The court denied KEC’s motions to vacate or modify. It entered a joint
and several judgment against KEC, Pradeep,3 Sharmila, and Singh.
KEC, Pradeep, Sharmila, and Singh (collectively KEC) appeal and Bounce
cross appeals.
3 We refer to Pradeep Rathinam and Sharmila Rathinam by their first names for clarity
and intend no disrespect by doing so.
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ANALYSIS
KEC argues that the trial court erred in confirming the arbitration award
and entering judgment. Bounce cross appeals the trial court’s order striking its
exhibits offered in response to KEC’s motions to vacate or modify the award.
Arbitration Award
KEC contends the trial court should have vacated the arbitration award
because the face of the award shows that the arbitrator exceeded his authority in
awarding Bounce its lost profits. According to KEC, lost profits are consequential
damages, which the lease excludes. We agree.
Our courts encourage arbitration as a simpler, faster, and less expensive
alternative to litigation. Mainline Rock & Ballast, Inc. v. Barnes, Inc., 8 Wn. App.
2d 594, 608, 439 P.3d 662, review denied, 193 Wn.2d 1033, 447 P.3d 158(2019). To prevent parties from frustrating this goal by relitigating arbitration
awards, we afford significant deference to arbitrators. Boyd v. Davis, 127 Wn.2d
256, 263, 897 P.2d 1239 (1995). Our review of an arbitrator’s award is limited “to
that of the court which confirmed, vacated, modified, or corrected that award.”
Cummings v. Budget Tank Removal & Envtl. Servs., LLC, 163 Wn. App. 379,
388, 260 P.3d 220 (2011). We review only whether one of the statutory grounds
to vacate an award exists. Salewski v. Pilchuck Veterinary Hosp., Inc., PS, 189
Wn. App. 898, 903-04, 359 P.3d 884 (2015). The party challenging the award
has the burden of proving the existence of one of the grounds to vacate under
RCW 7.04A.230(1). Salewski, 189 Wn. App. at 904.
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No. 81132-1-I/5
KEC contends that the arbitration award here should be vacated under
RCW 7.04A.230(1)(d). That section requires vacation of an award if the
“arbitrator exceeded the arbitrator’s powers.” RCW 7.04A.230(1)(d).
In considering a motion to vacate an award because the arbitrator
exceeded his powers, we examine whether the arbitrator decided a nonarbitrable
issue, or whether there is an error of law on the face of the award. Agnew v.
Lacey Co-Ply, 33 Wn. App. 283, 288, 654 P.2d 712 (1982); Broom v. Morgan
Stanley DW Inc., 169 Wn.2d 231, 239, 236 P.3d 182 (2010).
The “facial legal error standard is a very narrow ground for
vacating an arbitral award.” It does not extend to a potential legal
error that depends on the consideration of the specific evidence
offered or to an indirect sufficiency of the evidence challenge.[4]
Salewski, 189 Wn. App. at 904 (quoting Broom, 169 Wn.2d at 239). Instead, the
error must be recognizable from the “ ‘face of the award.’ ” Salewski, 189 Wn.
App. at 904 (quoting Federated Servs. Ins. Co. v. Pers. Representative of the
Estate of Norberg, 101 Wn. App. 119, 123, 4 P.3d 844 (2000)). When a final
award sets forth the arbitrator’s reasoning along with the amount awarded, “any
issue of law evident in the reasoning may also be considered as part of the face
of the award.” Cummings, 163 Wn. App. at 389.
KEC contends the arbitrator exceeded his authority by awarding Bounce
lost profits as damages for KEC’s breach. To address KEC’s claim, we first “look
to the contract to identify the issues the parties agreed to arbitrate and, therefore,
4 Bounce invites us for the first time on appeal to abandon the facial legal error doctrine
and “articulate a new standard that supports the policy underlying the 2005 Legislative changes
to Washington’s Arbitration Act,” chapter 7.04A RCW. See LAWS OF 2005, ch. 433. We decline
the invitation. We note, however, that we have continued to apply the facial legal error standard
even after the 2005 amendments to the arbitration act. See Salewski, 189 Wn. App. at 904
(citing Broom, 169 Wn.2d at 239).
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the scope of the arbitrator’s authority.” Morell v. Webush Morgan Sec. Inc., 143
Wn. App. 473, 485 n.4, 178 P.3d 387 (2008). Here, the parties executed an
Arbitration Rider to their lease that subjects all claims “[o]ther than an action by
Landlord against Tenant for nonpayment of Rent or for unlawful detainer” to
arbitration. This includes “any controversy or claim arising out of or relating to
the Lease, or the breach thereof.” The parties agreed that they would conduct
the arbitration “pursuant to the American Arbitration Association . . . Commercial
Arbitration Rules with Expedited Procedures in effect on the date the parties
entered into the Lease.” They also agreed that the arbitrator “shall apply
substantive law of the state in which the Premises are located and may award
any remedy available at law or equity.”
From the face of the arbitration award, we can determine that paragraph
21 of the lease provides, in part, “ ‘If [KEC] fails to cure any such default within
the allotted time, [Bounce]’s sole remedy shall be to seek actual money damages
(but not consequential or punitive damages) for loss arising from [KEC]’s failure
to discharge its obligations.” Under Washington law, “actual damages,”
otherwise known as “general damages,” are awarded to compensate for actual
and real loss or injury. Ellingson v. Spokane Mortg. Co., 19 Wn. App. 48, 57, 573
P.2d 389 (1978). General damages flow from the breach of a contract “in the
ordinary course of events.” RESTATEMENT (SECOND) OF CONTRACTS § 351(2)(a)
(AM. LAW INST. 1981). In contrast, “consequential damages” are “[l]osses that do
not flow directly and immediately from an injurious act but that result indirectly
from the act.” BLACK’S LAW DICTIONARY 472 (10th ed. 2014).
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No. 81132-1-I/7
Lost profits may be awarded as damages “when (1) they are within the
contemplation of the parties at the time the contract was entered, (2) they are the
proximate result of [a party]’s breach, and (3) they are proven with reasonable
certainty.” Tiegs v. Watts, 135 Wn.2d 1, 17, 954 P.2d 877 (1998). Lost profits
are consequential damages “when they would have been generated by
transactions that were separate from, but depended upon, the contract that was
breached.” 25 DAVID K. DEW OLF ET AL., W ASHINGTON PRACTICE: CONTRACT LAW &
PRACTICE § 14:8, at 411 (3d ed. 2014).
The arbitrator awarded Bounce lost profits because “if the pizzeria had
been able to open within a reasonable time frame, Claimant would have been
able to make money from its operations.” Profits generated from Bounce’s
operational pizzeria would be separate from, but depend on, the timely
completion of tenant improvements under the lease. As a result, they are
consequential damages disallowed under paragraph 21 of the lease.
Bounce contends the arbitrator “awarded lost profits based on his
assessment of the Lease terms and the Parties’ intent,” which is not subject to
review under the facial legal error doctrine. But the arbitrator’s reasoning in the
award does not support Bounce’s argument. The arbitrator did not find that the
terms of the lease reveal an intent by the parties to include lost profits as
available damages. Rather, the arbitrator relied on New York case law to
reclassify summarily the lost profits as actual damages.5 He reasoned that the
lost income “fall[s] naturally and necessarily from a breach of the Lease,” was
5As much as the arbitrator relied on New York case law to reach this conclusion, he
exceeded his powers. The Arbitration Rider called for resolving disputes using only Washington
law.
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No. 81132-1-I/8
“certainly foreseeable to the Landlord,” and “[f]or the Tenant operating a small
business, loss of income is about the only meaningful remedy available.” He
noted that the lease does not define “consequential damages”—“[there is]
nothing that says lost income is a component of consequential damages or that
lost income is prohibited as damages under the Lease.” But the parties agreed
to resolve their disputes under Washington law. And lost profits as awarded here
are consequential damages under Washington law. On the face of the arbitration
award, the arbitrator exceeded his authority in awarding lost profits as damages
for KEC’s breach of the lease.
When an arbitrator exceeds their authority in issuing an arbitration award,
the court “shall vacate” the award. RCW 7.04A.230(1)(d). Upon vacating an
arbitration award, “the court may, in its discretion, direct a rehearing either before
the same arbitrators or before new arbitrators to be chosen in the manner
provided in the agreement.” Davidson v. Hensen, 135 Wn.2d 112, 120, 954 P.2d
1327 (1998). Because the arbitrator exceeded his authority by awarding Bounce
lost profits, we remand to the trial court to vacate the arbitration award and order
a rehearing.6
Order Striking Exhibits
Bounce cross appeals the trial court’s order striking several exhibits
offered in response to KEC’s motions to vacate or modify the arbitration award.
6 KEC also argues that the arbitrator exceeded his authority in naming individual
members of KEC as parties to the arbitration and holding them jointly and severally liable. We do
not reach this issue as we conclude that the trial court must vacate the arbitration award on
separate grounds. Additionally, KEC contends that the arbitrator exceeded his authority by
“importing the tort-based concept of comparative fault into an action for breach of a lease.” We
also do not reach this issue but note that the Arbitration Rider affords the arbitrator broad
discretion to fashion damages in equity, so long as they are not contrary to Washington law.
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No. 81132-1-I/9
According to Bounce, the court should have considered the exhibits in response
“to the opposing party making false statements of fact about the substance of the
underlying arbitration.” We disagree.
We review a trial court’s ruling on a motion to strike evidence for abuse of
discretion. Southwick v. Seattle Police Officer John Does #s 1-5, 145 Wn. App.
292, 297, 186 P.3d 1089 (2008). All relevant evidence is admissible. ER 402.
“Relevant evidence” is “evidence having any tendency to make the existence of
any fact that is of consequence to the determination of the action more probable
or less probable than it would be without the evidence.” ER 401. Evidence that
is not relevant is not admissible. ER 402.
In opposition to KEC’s motions to vacate or modify the arbitration award,
Bounce offered several exhibits to “counter KEC’s false statements and claims.”
The exhibits included the arbitrator’s biographic information, evidence of
discovery violations and sanctions incurred during arbitration, e-mails between
Bounce and KEC members, and a summary letter from the arbitrator detailing a
telephonic conference. But the trial court can determine any legal error in the
arbitration award from only the face of the award. See Salewski, 189 Wn. App.
at 903-04. As a result, evidence outside the confines of the face of the arbitration
award was not relevant. The court did not abuse its discretion in striking
Bounce’s exhibits.
Attorney Fees
KEC argues that the trial court erred by confirming the attorney fees
awarded to Bounce in the arbitration agreement. Because we vacate the
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No. 81132-1-I/10
arbitration award, KEC’s claim is moot. See Spokane Research & Def. Fund v.
City of Spokane, 155 Wn.2d 89, 99, 117 P.3d 1117 (2005) (“A case is moot when
it involves only abstract propositions or questions, the substantial questions in
the trial court no longer exist, or a court can no longer provide effective relief.”).
KEC also requests attorney fees on appeal under RAP 18.1, the terms of
the lease, and RCW 4.84.330 (prevailing party in any action to enforce a contract
or lease, which provides for attorney fees and costs, entitled to reasonable fees
and costs). The lease agreement provides for an award of attorney fees to the
prevailing party. We award KEC its fees on appeal as the prevailing party,
subject to compliance with RAP 18.1(d).
Because the arbitrator exceeded his authority in awarding Bounce lost
profits as damages for KEC’s breach of the lease, we reverse and remand for the
trial court to vacate the arbitration award and order a rehearing.
WE CONCUR:
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