Punitive Damages And Summary Disposition In The Revised Uniform Arbitration Act

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...

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