Co written by Judith M. Korcin
In recent years, concerns over punitive damages have occupied a prominent position in courtrooms, journal articles, and legislative debates. To some extent, shock over monumental awards has spurred the modern push toward tort reform as legislators seek to rein in what they see as out-of-control jury verdicts. At the same time, the popularity of arbitration as an alternate form of dispute resolution continues to increase. But with the increased popularity of arbitration controversy has arisen from the tension between the modern doctrine favoring arbitration and perceptions of the limits of the arbitrative process.1 The Uniform Arbitration Act ("UAA") does not mention punitive damages or the availability of summary disposition proceedings. Since its enactment in 1955, the issues of whether arbitrators have the authority to award exemplary damages or conduct summary proceedings have been major areas of dispute. While arbitration today is the "primary mechanism favored by courts and parties to resolve disputes,"2 concerns over public policy issues which stem from the usurpation of judicial power still drive many court decisions limiting arbitrator authority.
Should arbitrators have the power to award punitive damages? Several arguments exist for and against inclusion of this authority in an arbitration proceeding. Two cases aptly set forth the arguments on each side: Garrity v. Lyle Stuart, Inc 3 and Willoughby Roofing & Supply Co. v. Kajima International, Inc.4
In the context of the UAA, New York's highest state court held in Garrity that an arbitrator has no power to award punitive damages, even if agreed upon by the parties. 5 First, after noting that punitive damages act essentially as a punishment, the court concluded that the strong public policy mandating that the State maintain a monopoly over punishment prohibited arbitrators from making punitive awards. 6 Second, the court held that the limited judicial review of arbitration awards, combined with the subjective standards utilized for the correction and reform objectives of punitive damages (as opposed to objective criteria), would make arbitral awards of punitive damages "both unpredictable and uncontrollable." 7
Courts examining arbitration awards are limited in the scope and extent of their review. The 1955 Act permits a court to vacate an arbitration award only where: (1) the award was procured by fraud or corruption; (2) there was evident partiality by a neutral arbitrator or misconduct by any of the arbitrators; (3) the arbitrators exceeded their power; (4) the arbitrators conducted a hearing contrary to the provisions set forth in the Act; or (5) no arbitration agreement existed. 8
Eight years after Garrity, a federal district court in Willoughby held that when the parties' contract places no limits on the remedial authority of the arbitrators, the arbitrators have the authority to award punitive damages under the Federal Arbitration Act ("FAA"). In sharp contrast to Garrity, the court in Willoughby held that strong public policy favors arbitration as a means to resolve disputes. 9 Far from usurping state power, the court reasoned that arbitrators, who likely have knowledge of the particular trade, are often better equipped than a judge to analyze the issues surrounding a punitive damages award:
[A]n arbitrator steeped in the practice of a given trade is often better equipped than a judge not only to decide what behavior so transgresses the limits of acceptable commercial practice in that trade as to warrant a punitive award, but also to determine the amount of punitive damages needed to (1) adequately deter others in the trade from engaging in similar misconduct, and (2) punish the particular defendant in accordance with the magnitude of his misdeed. 10
Moreover, Willoughby recognized a serious problem in disallowing punitive damages in arbitration: either parties entering into an arbitration agreement would contractually waive their right to punitive damages or two trials would be necessary – one before the arbitrator and a judicial trial. If a waiver of punitive damages existed, it would "constitute a total frustration of the public policies and purposes served by punitive damage awards. . . . Moreover, granting such automatic immunity could well encourage grossly unjustified conduct in certain cases by making it more economically feasible."11 Even if the arbitration agreement does not act as a waiver of the right to be heard on punitive damages, where tort and contract claims are mixed, the court observed, separate trials would be required on essentially the same facts – "obviously a wasteful exercise." 12
Since Willoughby a majority of state courts have held that arbitrators have the authority to award punitive damages. 13 The Supreme Court has also sanctioned that authority as it applies to the Federal Arbitration Act. 14 The FAA preempts state arbitration law whenever interstate commerce is involved. Therefore, whenever state law is preempted – and in the many states which now permit arbitrators to award punitive damages 15 – arbitrators already possess the authority to award punitive damages.
In Mastrobuono v. Shearson Lehman Hutton, Inc., the United States Supreme Court held that if contracting parties agree to include punitive damage claims within the issues to be arbitrated the FAA requires that their agreement be enforced, even if a rule of state law would exclude such claims from arbitration. 16 Justice Stevens, writing for the majority, rejected the argument that the arbitration agreement's incorporation of New York law included New York's prohibition on arbitrators awarding punitive damages. The Court noted that the "FAA ensures that [parties'] agreement[s] will be enforced according to [their] terms even if a rule of state law would otherwise exclude such claims from arbitration." 17
Consistent with the case law, Section 21(a) of the Revised Uniform Arbitration Act ("RUAA") expressly allows an arbitrator to award punitive damages if the award would be authorized in a civil action involving the same claim.18 The arbitrator "also must apply the same legal standards to the claim as required in a civil action and the evidence must be sufficient to justify an award of punitive damages."19 Therefore, the RUAA rejects the public policy arguments championed by Garrity for the State to retain the power to correct and punish private behavior, and chooses instead to rely on the modern doctrine favoring arbitration of disputes. The RUAA also attempts to alleviate concerns about the limited amount of judicial review of arbitration awards. The Revised Act requires an arbitrator awarding punitive damages to specify the legal and factual justification for the award, and separately state the amount of punitive damages.20 This safeguard will provide reviewing judges with a "record" on which to rely in examining an arbitration award of punitive damages. Thus, a reviewing court will be able to more closely examine the award for arbitrator misconduct or abuse of power.
The RUAA essentially acts as a default, allowing arbitrators to award punitive damages unless the parties provide otherwise in their arbitration agreement. 21 However, the comment to Section 21 notes that "there is doubt whether one of the parties by contract can eliminate the right to . . . punitive damages or other exemplary relief" where it is allowed by law.22 Courts are particularly reluctant to enforce contractual waivers of statutory rights to punitive damages. For example, in the employment context, courts have been unwilling to enforce otherwise valid waivers of punitive damages.23 Therefore, the effectiveness of a clause limiting or waiving punitive damages is in doubt, at least where punitive damages would be permitted by statute if the dispute were resolved in a court.24
However, Mastrobuono, in holding that the award of punitive damages at issue was permissible, looked directly to the contract. The Supreme Court relied on the fact that the arbitration "agreement contain[ed] no express reference to claims for punitive damages."25 The Court's acknowledgement that the parties' intent as expressed in the arbitration agreement will be enforced suggests that agreements containing express waivers of the right to claim punitive damages may be upheld, where statutory rights are not implicated. Therefore, parties wishing to exclude punitive damages from arbitration should make waivers to that effect clear and conspicuous.
The UAA, enacted in 1955, also does not discuss the availability of summary disposition in arbitration proceedings. Section 5(b) provides that "[t]he parties are entitled to be heard, to present evidence material to the controversy and to cross-examine witnesses appearing at the hearing." 26 While many arbitrators may have been reluctant to summarily dispose of issues in an arbitration proceeding given the UAA's silence on that issue, many courts have allowed summary disposition in appropriate circumstances in arbitration proceedings. Those courts often reason that the "purpose of arbitration . . . is to provide a speedy and relatively inexpensive means of dispute resolution."27 Rejecting the argument that Section 5(b) of the UAA means parties have a right to oral hearings and to put on witnesses for every issue before the arbitrator, courts recognize that parties are only entitled to present evidence material to the controversy. 28 A right to present all evidence through live witness testimony would require full-blown trials even where one, or both, of the parties believes that no material facts are in dispute. That result would defeat the purpose of arbitration.29
However, even those courts concluding that arbitrators may properly decide issues through summary disposition do so with caution. In some cases, courts have been reluctant to confirm the summary disposition but did so because the party asking the court to vacate the award was not prejudiced by the truncated proceeding. 30 In many cases, courts examine whether the summary disposition proceeding afforded the opposing party a fair opportunity to be heard.31 Federal courts interpreting the FAA have also held that summary disposition is not inappropriate where the parties are given a fundamentally fair hearing. 32 "The courts seem to agree that a fundamentally fair hearing requires only notice, opportunity to be heard and to present relevant and material evidence and argument before the decision makers, and that the decision makers are not infected with bias."33
Section 15(b) of the RUAA expressly provides for summary disposition of a claim or a particular issue. Summary disposition is available if: (1) all interested parties agree; or (2) upon request of one party, if the other parties are given notice and a reasonable opportunity to respond. 34 This provision is in line with one of the general principles of the Act, which is that parties choose arbitration for the "relative speed, lower cost, and greater efficiency of the process."35 The comment to the provision suggests proceedings under Section 15 should only be conducted when they provide "for a fair and expeditious disposition of the [arbitration] proceeding."36
Section 15 can be varied by agreement under Section 4(a). Therefore, parties can delineate the methods and procedures for conducting summary disposition hearings, or they can eliminate summary hearings altogether. Parties may therefore tailor the proceedings to their particular tastes. If a party insists on being able to present live witness testimony, it can include that requirement in the arbitration agreement.
The ability of arbitrators to award punitive damages and summarily dispose of issues is necessary for the continued effectiveness of arbitration. For arbitration to remain a valuable alternative method of dispute resolution, arbitrators should have all available remedies at their disposal. Arbitrators should also be able to quickly and efficiently decide minor or factually undisputed issues through summary disposition. By expressly allowing punitive damages and summary disposition in arbitration, the drafters of the RUAA codified a general trend in arbitration law. Most courts have already recognized that without that authority, arbitration would lack practical usefulness and the policy favoring arbitration would be undermined.
1
Thomas J. Stipanowich, Punitive Damages in Arbitration Garrity v. Lyle Stuart, Inc. Reconsidered, 66 B.U. L. Rev. 953, 970 (1986).2
R.U.A.A. Prefatory Note (2000).3
353 N.E.2d 793 (N.Y. 1976).4
598 F. Supp. 353 (N.D. Ala. 1984), aff'd, 776 F.2d 269 (11th Cir. 1985).5
Garrity, 353 N.E.2d at 795.6
Id. at 796 ("The evil of permitting an arbitrator whose selection is often restricted or manipulatable by the party in a superior bargaining position, to award punitive damages is that it displaces the court and the jury, and therefore the State, as the engine for imposing a social sanction.").7
Id. (holding that authorizing awards of punitive damages with limited judicial review "would lead to a Shylock principle of doing business without a Portia-like escape from the vise of a logic foreign to arbitration law.").8
U.A.A. § 12(a) (1955).9
Willoughby, 598 F. Supp. at 362 ("To deny arbitrators the full range of remedial tools generally available under the law would be to hamstring arbitrators and to lessen the value and efficiency of arbitration as an alternative method of dispute resolution."). The court thus had little trouble with the State relinquishing some measure of the power of punishment.10
Id. at 363.11
Id.12
Id. at 364 (The court summarized its reasoning in this way: "The principles of arbitral flexibility, judicial deference to an arbitrator's superior knowledge of a given business, and extreme skepticism of judicial intrusion into the disputes parties have agreed to arbitrate all militate in favor of the simpler, more efficient and less costly option of allowing the arbitrator to handle 'any and all disputes that arise under the agreement,' including claims for punitive damages.").13
See R.U.A.A. § 21, cmt. (2000). See also, e.g. Baker v. Sakick, Cal. Rptr. 676, 680-84 (Cal. Ct. App. 9184) (concluding, in a medical malpractice action, "punitive damages which may be asserted in a court of law may also be asserted under the arbitration clause here under scrutiny where the issue is submitted by the patient or as here with the consent of both parties."); Richardson Greenshields Sec., Inc. v. McFadden, 509 So. 2d 1212, 1213 (Fla. Dist. Ct. App. 1987) ("claims for punitive damages are subject to arbitration."); Bishop v. Holy Cross Hosp., 410 A.2d 630, 632 (Md. Ct. App. 1980) (holding that a statutory medical malpractice panel has statutory authority to award punitive damages); Rodgers Builders, Inc. v. McQueen, 331 S.E.2d 726, 731-34 (N.C. Ct. App. 1985) (rejecting Garrity and stating: "We believe the Willoughby position the better reasoned one."); Kline v. O'Quinn, 874 S.W.2d 776, 783-84 (Tex. Ct. App. 1994) (rejecting appellants' contention that it had insufficient notice that arbitrator could award punitive damages, where arbitration provision "provided for arbitration of 'any and all controversies or claims arising out of or related to the agreement.'"); Anderson v. Nichols, 359 S.E.2d 117, 121 (W.Va. 1987) (holding that "[a]rbitrators, like courts, are entitled to award punitive damages in appropriate circumstances as compensation for oppressive conduct," but citing Garrity for the proposition that, "[w]here the damages are genuinely intended to be punitive and bear no reasonable relation to the prevailing party's commercial loss, they are beyond the scope of the arbitrator's power."). However, in the following cases courts have vacated punitive damages awards: Garrity v. Lyle Stuart, Inc., 353 N.E.2d 793 (N.Y. 1976); McLeroy v. Waller, 731 S.W.2d 789, 792 (Ark. Ct. App. 1987) (vacating punitive damages award on the ground that the award required evidence of tortious conduct where Arkansas law did "not permit cases involving torts to be resolved by arbitration."); School City of E. Chicago, Ind. v. East Chicago Fed. Of Teachers, 422 N.E.2d 656, 662-63 (Ind. Ct. App. 1981) (holding an arbitrator's award of punitive damages void on public policy grounds because "when a private contract purports to impose a penalty for its breach, our courts refuse enforcement."); Shaw v. Kuhnel & Assocs., 698 P.2d 880, 882 (N.M. 985) (citing Garrity in determining that "an arbitrator should not be given authority to award punitive damages. This power is reserved to the courts.").14
See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). Interestingly, one year earlier, outside of the arbitration context, the Supreme Court held that a state constitutional amendment severely limiting judicial review of punitive damages awards violated the due process clause. See Honda Motor Co., Ltd. v. Oberg, 512 U.S. 415 (1994). In Mastrobuono, the Court does not discuss Oberg. However, the issue of review of punitive damages was not before the court in Mastrobuono. Therefore, whether the limited amount of judicial review over arbitral punitive awards under the FAA or state statutes creates a due process violation remains an open question. See Davis v. Prudential Securities, Inc., 59 F.3d 1186, 1193 (11th Cir. 1995) (noting that "while the Supreme Court did not discuss the due process issue in Mastrobuono, the Court upheld an arbitration award of punitive damages."); but see In re Knepp, 229 B.R. 821, (Bankr. N.D. Ala. 1999) (following Davis reluctantly after discussing that arbitration does involve state action).15
See note 13.16
The arbitration clause provided that "'any controversy' arising out of the transactions between the parties 'shall be settled by arbitration.'" Mastrobuono, 514 U.S. at 59. The Supreme Court construed this provision as an agreement to arbitrate, inter alia, punitive damage claims. Id. at 60.17
Id. at 58.18
R.U.A.A. § 21(a) (2000).19
R.U.A.A. § 21, cmt 1 (2000).20
R.U.A.A. § 21(e) (2000). However, the "parties can waive the requirements set forth in Section 21(e) by agreement." R.U.A.A. § 21, cmt. 5 (2000).21
R.U.A.A. §4(a) (2000). Section 4(a) provides that parties can vary the effect of most the Act's provisions by agreement. Section 21, dealing with punitive damages, is one of these provisions.22
R.U.A.A. § 21, cmt. 2 (2000).23
See, e.g., Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054, 1062 (11th Cir. 1998) (treating an employment arbitration clause authorizing the arbitrator to award only compensatory damages for breach of contract "as an impermissible waiver of Title VII rights " because it "denies the employee the possibility of meaningful relief in an arbitration proceeding."); Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138, 150 (holding an arbitration clause unconscionable and unenforceable that, inter alia, limited remedy to a money award not to exceed the amount of actual damages for breach of contract). In both of these cases, the courts were concerned with the one-sidedness of the arbitration agreements and the employer's superior bargaining power over the employee.24
When there is unequal bargaining power, parties who draft arbitration agreements are most often the parties in danger of being assessed punitive damages. If parties could eliminate the availability of punitive damages simply by including language to that effect in the arbitration agreement, presumably many agreements would contain such language. In fact, clauses withholding authority from the arbitrator to decide claims for punitive damages are §not uncommon." See Willoughby, 598 F. Supp. at 357 n. 6.25
Mastrobuono, 514 U.S. at 59.26
U.A.A. § 5(b) (1955).27
Schlessinger, 47 Cal. Rptr. 2d at 656.28
See, e.g., Prudential Securities, Inc. v. Dalton, 929 F. Supp. 1411, 1417 (N.D. Okla. 1996) (holding that "the arbitration panel was guilty of misconduct in refusing to hear evidence pertinent and material to the controversy" before granting a motion to dismiss, while recognizing that an arbitration panel has the power to grant a motion to dismiss for failure to state a claim in a proper case.). See also, British Ins. Co. of Cayman v. Water St. Ins. Co., Ltd., 93 F. Supp. 2d 506, 516-19 (S.D.N.Y. 2000) ("[A]rbitrators are not required to hear all the evidence proffered by a party...'Oral argument is not a necessary component of due process in all circumstances...As long as an arbitrator's choice to render a decision based solely on documentary evidence is reasonable, and does not render the proceeding "fundamentally unfair," the arbitrator is acting within the liberal sphere of permissible discretion.'") (internal quotations omitted); In the Matter of the Arbitration Between Griffin Ind., and Petrojam, Ltd., 58 F. Supp. 2d 212, 219-20 (S.D.N.Y. 1999) (same); In the Matter of the Arbitration Between Intercarbon Bermuda, Ltd. and Caltex Trading & Transport Corp., 146 F.R.D. 64 (S.D.N.Y.); Stifer v. Seymour Weiner, M.D., P.A., 488 A.2d 192, 194-95 (Md. Ct. App. 1985) (holding in the context of the Maryland Claims Arbitration Act, that "[a]lthough there is no provision in the statute for summary disposition, we see no reason why a claim cannot be adjudicated on that basis in those instances where it may be susceptible to such treatment. If, for example, as here, limitations has clearly run on the claim, there is no reason to waste time, effort, and money on a full-scale trial on the merits of the claim.); Pegasus Constr. Corp. v. Turner Constr. Co., 929 P.2d 1200, 1202-03 (Wash. Ct. App. 1997) (finding no misconduct by arbitrator who refused to hear evidence on an irrelevant issue); Schlessinger v. Rosenfeld, Meyer & Susman, 47 Cal. Rptr. 2d 650 (Cal. Ct. App. 1995).29
Schlessinger, 47 Cal. Rptr. 2d at 657.30
See, e.g., Intercarbon, 146 F.R.D. at 72.31
See, e.g., Schlessinger, 47 Cal. Rptr. 2d at 655.32
See, e.g., Bowles Fin. Group v. Stifel, Nicolaus & Co., 22 F.3d 1010, 1013 (10th Cir. 1994).33
Prudential Securities, 929 F. Supp. at 1417 (emphasis in original) (citing Robbins v. Day, 954 F.2d 679, 685 (11th Cir. 1992)). Because the FAA and UAA are substantially similar, state courts often look to federal cases for guidance in interpreting provisions of the state's act. See, e.g., Masurovsky v. Green, 687 A.2d 198, 204 (D.C. 1996) (holding that "[i]nterpretations of the Federal Arbitration Act are persuasive authority for interpreting the identical provisions of the D.C. Uniform Arbitration Act."); City and County of Denver v. District Court, 939 P.2d 1353, 1363 (Colo. 1997) (following federal precedent to determine the scope of an arbitration clause under the UAA).34
R.U.A.A. § 15(b) (2000).35
R.U.A.A. Prefatory Note (2000).36
R.U.A.A. § 15, cmt. 2 (2000). For a well accepted standard of a "fair hearing" see, Prudential, 929 F. Supp. at 1417.The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
