Arbitration Agreement Punitive Damages

The federal courts, applying the Federal Arbitration Act, take the view that arbitration panels are empowered to award punitive damages unless the arbitration agreement states otherwise. See Raytheon Co. v. Automated Bus. Sys, Inc., 882 F.2d 6, 10 (1st Cir. 1989) (stating arbitrators should have the same authority as courts to award punitive damages for certain claims);

Willoughby Roofing & Supply Co. v. Kajima Int'l, Inc., 598 F. Supp. 353, 361 (N.D. Ala. 1984) (aff'd, 776 F.2d 269 (11th Cir. 1985) (determining that "there is no public policy bar which prevents arbitrators from considering claims for punitive damages" and quoting United Steelworkers v. American Mfg. Co., 363 U.S. 564, 567, 4 L. Ed. 2d 1403, 80 S. Ct. 1343 (1960)) for the proposition that "the arbitration process can be a viable method of dispute resolution only if 'it serves as a vehicle for handling any and all disputes that arise under the agreement'" and the arbitrators are given flexibility to fashion appropriate remedies).

As the Willoughby court pointed out, the practical effect of precluding arbitrators from awarding punitive damages is either that a plaintiff who submits to arbitration waives his right to punitive damages and thus "the public policies and purposes served by punitive damage awards" would be totally frustrated or that, under the Garrity rule, the wasteful exercise of conducting a separate trial would be required. Willoughby, 598 F. Supp. at 363-64.

Following the federal courts, some states have held that arbitration awards of punitive damages should be upheld when permitted by law and the arbitration agreement.

In Russell v. Kerley, 159 Ore. App. 647, 978 P.2d 446, 449 (Or. Ct. App. 1999), for example, the Oregon Court of Appeals upheld an arbitration award and held that "an arbitrator may award punitive damages if the arbitration agreement permits such an award and if such damages are otherwise recoverable on the underlying claim".

The court noted that, even though Oregon's arbitration statutes are based on New York law, it was not bound by New York law, observing that the rule in Garrity had recently been limited by federal law. Id.

Maryland has also held that punitive damages can be awarded unless the arbitration agreement specifically precludes such an award. Regina Contsr. Corp. v. Envirmech Contracting Corp., 80 Md. App. 662, 565 A.2d 693, 699 (Md. Ct. Spec. App. 1989).

North Carolina has held that claims for punitive damages, which fall within the scope of a broadly written arbitration agreement, were not barred by any public policy. Rodgers Builders, Inc. v. McQueen, 76 N.C. App. 16, 331 S.E.2d 726, 734 (N.C. Ct. App. 1985).

Interpreting broad contract language encompassing an agreement to arbitrate "a dispute that arises among the parties," Texas has upheld an arbitration award of punitive damages, noting that no Texas court had ever set aside a punitive damages award of an arbitrator. Kline v. O'Quinn, 874 S.W.2d 776, 782-84 (Tx. Ct. App. 1994).

Recently, in affirming an arbitration award of treble statutory damages--awarded pursuant to a broadly written arbitration clause that agreed to settle any controversy or claim by arbitration--the Appeals Court of Massachusetts sided with those jurisdictions that permit arbitrators to award punitive damages and held that the "balance of policy considerations" weighed in favor of permitting arbitrators to award punitive damages, in the interests of "speedy and economic resolution of commercial disputes." Drywall Sys., Inc. v. ZVI Constr. Co., 51 Mass. App. Ct. 353, 747 N.E.2d 168 (Mass. App. Ct. 2001).

Still other jurisdictions, recognizing that arbitration functions as a substitute for court proceedings, have simply ruled that when punitive damages may be asserted in a court of law, they may also be awarded in arbitration proceedings.

In Baker v. Sadick, 162 Cal. App. 3d 618, 208 Cal. Rptr. 676, 678 (Cal. Ct. App. 1985), the California Court of Appeals stated that "it strains legal imagination to conclude an agreement to substitute arbitration for litigation results ipso facto in forebearance of a claim which would support an award of punitive damages." Id. at 678. In Faiyaz v. Dicus, 245 Ga. App. 55, 537 S.E.2d 203, 206 (Ga. Ct. App. 2000), the Georgia Court of Appeals ruled that an arbitration panel did not exceed its authority in awarding punitive damages when it found that an agreement had been fraudulently and intentionally breached.