Brief Fact Summary. Shearson’s (Defendant) standard form client contract contained arbitration and choice-of-law provisions, although neither are explicitly stated, which they allege refused arbitrators the ability to award punitive damages.
Synopsis of Rule of Law. An arbitral award of punitive damages that otherwise would be appropriate may not be impeded by a contractual choice-of-law provision.
Issue. Is an arbitral award of punitive damages that otherwise would be appropriate be impeded by a contractual choice-of-law provision?
Held. (Stevens, J.) No. An arbitral award of punitive damages that otherwise would be appropriate may not be impeded by a contractual choice-of-law provision. The Federal Arbitration Act maintains a national policy preferring arbitration, although parties may stipulate by contract the rules under which the arbitration will be led. If the parties concur to contain claims for punitive damages under the scope of the arbitration, the FAA guarantees that their contract will be imposed as per its terms, even when the law dismisses similar arbitration claims. The client contract concerned here reads that the whole contract shall be regulated by the laws of New York, and â€œany controversyâ€¦shall be settled by arbitration.â€ It fails to explicitly refer to claims for punitive damages. Separately considered, neither provision, expresses an objective to impede awarding of punitive damages. The choice-of-law provision, while vague, is best understood to mean that applicable state law in connection with the contractual rights and duties of the parties should be application, but not special state rules restricting the authority of arbitrators, as seen here, the power to grant punitive damages. Furthermore, the vague language should be seen in opposition of the interest of the party that created it, in this case, Shearson. The punitive damages award should have been enforced. Reversed.
Discussion. The NASD’s Code of Arbitration Procedure specifies that arbitrators are capable of awarding â€œdamages and other relief.â€ While agreeing that this did not demonstrate a blatant right to award punitive damages, the majority found this stipulation expansive enough to consider a remedy like that.