Opinion
May 1, 1997
Appeal from the Supreme Court, New York County (Jane Solomon, J.).
The motion to stay arbitration of the claims for punitive damages and attorneys' fees was improperly granted because the parties' arbitration agreement did not unequivocally exclude such relief, but rather implied that these claims were arbitrable ( see, Mulder v. Donaldson, Lufkin Jenrette, 224 A.D.2d 125; Matter of Layne Constr. [Stratton Oakmont], 228 A.D.2d 45; Hamershlag, Kempner Co. v. Oestrich, 234 A.D.2d 172; Merrill Lynch, Pierce, Fenner Smith v. Adler, 234 A.D.2d 139). We reject petitioner's unpreserved contention that the parties' explicit acceptance of the rules and arbitration Code of Arbitration Procedure of the National Association of Securities Dealers ("NASD"), which permit such relief, was necessary to a finding of arbitrability ( see, Hamershlag, Kempner Co. v Oestrich, supra).
Contrary to petitioner's assertion the language in the agreement stating that the "rights and liabilities" of the parties shall be determined in accordance with New York law did not amount to such an unequivocal exclusion ( Matter of Layne Constr. [Stratton Oakmont], supra; see also, Mastrobuono v Shearson Lehman Hutton, 514 U.S. 52). Construed against its drafter, petitioner herein, this ambiguous language was insufficient to invoke New York's restrictions on arbitral awards of punitive damages ( see, Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354) and attorneys' fees (CPLR 7513). Accordingly, these claims should proceed to arbitration.
The drafter of the arbitration agreement was actually Bear Stearns Inc., petitioner's clearing agent. However, there is no dispute that petitioner utilized it as its own customer agreement, and that petitioner is the real party in interest here.
An issue of the retroactive application of our recent decisions in this area has been raised. The order appealed from was issued on May 13, 1996, and Mulder v. Donaldson, Lufkin Jenrette (supra), the first of these cases, was decided on October 8, 1996. Respondent moved to reargue the May 13 order in November 1996, and the IAS Court denied the motion on the grounds that Mulder should be applied prospectively only.
Traditionally, cases on direct appeal will be decided in accordance with the law as it exists at the time the appeal is decided ( see, People v. Favor, 82 N.Y.2d 254, 260; Gurnee v. Aetna Life Cas. Co., 55 N.Y.2d 184, cert denied 459 U.S. 837). However, where a new rule of law is announced, courts are empowered to apply it prospectively only ( People v. Favor, supra, at 261-262). When confronted with an appeal involving a new rule of law, an appellate court must consider three factors in determining whether the rule should be given retroactive application: (1) the purpose to be served by the new rule, (2) the extent of reliance on the old rule, and (3) the effect on the administration of justice of retroactive application ( supra, at 262; see also, People v. Mitchell, 80 N.Y.2d 519; People v. Pepper, 53 N.Y.2d 213, 219, cert denied 454 U.S. 967).
Before reaching any of these factors, the threshold question of whether the ruling at issue is really a new rule of law at all must be answered ( People v. Favor, supra, at 262-263). A rule of law will be considered new where it overrules established precedent ( see, Graham v. Collins, 506 U.S. 461), where it constitutes a sharp break in the continuity of the law, whose impact might wreak havoc on society ( see, Gager v. White, 53 N.Y.2d 475, 483, cert denied sub nom. Guertin Co. v. Cachat, 454 U.S. 1086), or where it represents "a dramatic shift away from customary and established procedure" ( People v. Mitchell, 80 N.Y.2d 519, 525, supra). By contrast, a ruling will not be considered new where it "merely applies previously established principles in a new factual setting or settles a question in a manner that was clearly foreshadowed" ( People v. Favor, supra, at 263; see also, Gurnee v. Aetna Life Cas. Co., supra, at 192; Chevron Oil Co. v. Huson, 404 U.S. 97, 106).
Under these principles, we conclude that our recent decisions in this area did not establish a new rule of law. Rather, they were clearly based on the Supreme Court's holding in Mastrobuono (supra), and, thus, we were simply applying the relevant facts to the controlling principle of law in existence at the time. Additionally, although the Garrity rule prohibited arbitrators from awarding punitive damages, the preemptive effect of the Federal Arbitration Act ( 9 U.S.C. § 1 et seq. [FAA]) on inconsistent State rules was clearly foreshadowed in our own case law ( see, Fletcher v. Kidder, Peabody Co., 81 N.Y.2d 623, cert denied 510 U.S. 993 [FAA preempts State public policy of prohibiting arbitration of unlawful discrimination claims]). Even if our decisions were construed as establishing a new rule of law, consideration of the three Pepper-Mitchell factors convinces us that the general retroactivity rule should apply. First, our decisions clearly further the underlying purpose of the FAA, to ensure the enforceability of private arbitration agreements according to their terms ( see, Volt Information Sciences v. Stanford Univ., 489 U.S. 468, 476). In finding arbitrability and enforcing the agreements, we were guided by the principle that in agreements covered by the FAA, "due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration" ( Volt Information Sciences v Stanford Univ., supra, at 476; see also, Mastrobuono v. Shearson Lehman Hutton, supra).
Second, petitioner's reliance on the Garrity rule was unjustified in light of the judicial recognition of the FAA's preemptive effect in Mastrobuono (supra), and in our own decisions ( see, Fletcher v. Kidder, Peabody Co., supra; see also, Matter of Smith Barney, Harris, Upham Co. v. Luckie, 85 N.Y.2d 193). Further undermining petitioner's claim of reliance was the notice given to member brokerages by the Securities and Exchange Commission, and the NASD, that language in customer agreements limiting the right to remedies such as punitive damages was disfavored ( see, Securities and Exchange Act Release No. 26805 [1989]; NASD Notice to Members 95-16, Mar. 1995, at 102).
Third, petitioner's assertion that retroactive application of this rule would have an adverse impact on the administration of justice is not persuasive. Its prediction of "wholesale reversals" is both exaggerated and speculative ( see, People v Favor, supra, at 266).
In sum, nothing justifies a departure from the general rule that cases on direct appeal should be decided in accordance with the law as it exists at the time they are decided. Accordingly, Mulder (supra), Matter of Layne Constr. (Stratton Oakmont) (supra), Hamershlag, Kempner Co. v. Oestrich (supra), and Merrill Lynch, Pierce Fenner Smith v. Adler (supra) are the established precedent and will be followed.
Concur — Ellerin, J.P., Nardelli, Rubin and Mazzarelli, JJ.