holding that courts may award punitive damages, but arbitrators may notSummary of this case from Earson Lehman v. Neurosurgical Assoc., (S.D.Ind. 1995)
Argued May 6, 1976
Decided July 6, 1976
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, THOMAS C. CHIMERA, J.
Richard Goldsweig and Jack N. Albert for appellant. Donald S. Engel for respondent.
Plaintiff author brought this proceeding under CPLR 7510 to confirm an arbitration award granting her $45,000 in compensatory damages and $7,500 in punitive damages against defendant publishing company. Supreme Court confirmed the award. The Appellate Division affirmed, one Justice dissenting, and defendant appeals.
The issue is whether an arbitrator has the power to award punitive damages.
The order of the Appellate Division should be modified to vacate the award of punitive damages and otherwise affirmed. An arbitrator has no power to award punitive damages, even if agreed upon by the parties ( Matter of Publishers' Assn. of N.Y. City [Newspaper Union], 280 App. Div. 500, 504-506). Punitive damages is a sanction reserved to the State, a public policy of such magnitude as to call for judicial intrusion to prevent its contravention. Since enforcement of an award of punitive damages as a purely private remedy would violate strong public policy, an arbitrator's award which imposes punitive damages should be vacated.
Plaintiff is the author of two books published by defendant. While the publishing agreements between the parties contained broad arbitration clauses, neither of the agreements provided for the imposition of punitive damages in the event of breach.
A dispute arose between the parties and in December, 1971 plaintiff author brought an action for damages alleging fraudulent inducement, "gross" underpayment of royalties, and various "malicious" acts designed to harass her. That action is still pending.
In March, 1974, plaintiff brought a new action alleging that defendant had wrongfully withheld an additional $45,000 in royalties. Defendant moved for a stay pending arbitration, which was granted, and plaintiff demanded arbitration. The demand requested the $45,000 withheld royalties and punitive damages for defendant's alleged "malicious" withholding of royalties, which plaintiff contended was done to coerce her into withdrawing the 1971 action.
Defendant appeared at the arbitration hearing and raised objections concerning plaintiff's standing and the conduct of the arbitration hearing. Upon rejection of these objections by the arbitrators, defendant walked out.
After hearing testimony, and considering an "informal memorandum" on punitive damages submitted by plaintiff at their request, the arbitrators awarded plaintiff both compensatory and punitive damages. On plaintiff's motion to confirm the award, defendant objected upon the ground that the award of punitive damages was beyond the scope of the arbitrators' authority.
Arbitrators generally are not bound by principles of substantive law or rules of evidence, and thus error of law or fact will not justify vacatur of an award (see Matter of Associated Teachers of Huntington v Board of Educ., 33 N.Y.2d 229, 235, and cases cited). It is also true that arbitrators generally are free to fashion the remedy appropriate to the wrong, if they find one, but an authentic remedy is compensatory and measured by the harm caused and how it may be corrected (Matter of Staklinski [Pyramid Elec. Co.], 6 N.Y.2d 159, 163; see Matter of Paver Wildfoerster [Catholic High School Assn.], 38 N.Y.2d 669, 677, and cases cited). These broad principles are tolerable so long as arbitrators are not thereby empowered to ride roughshod over strong policies in the law which control coercive private conduct and confine to the State and its courts the infliction of punitive sanctions on wrongdoers.
The court will vacate an award enforcing an illegal agreement or one violative of public policy (see Matter of Associated Teachers of Huntington v Board of Educ., 33 N.Y.2d 229, 235-236, supra, and cases cited; Matter of Western Union Tel. Co. [Amer. Communications Assn.], 299 N.Y. 177, 187; Matter of East India Trading Co. [Halari], 280 App. Div. 420, 421, affd 305 N.Y. 866). Since enforcement of an award of punitive damages as a purely private remedy would violate public policy, an arbitrator's award which imposes punitive damages, even though agreed upon by the parties, should be vacated ( Matter of Publishers' Assn. of N.Y. City [Newspaper Union], 280 App. Div. 500, 504-506, supra; Domke, Commercial Arbitration, § 33.03; Fuchsberg, 9 N.Y. Damages Law, § 81, p 61, n 9; 14 N.Y. Jur, Damages, § 184, p 46; cf. Local 127, United Shoe Workers of Amer. v Brooks Shoe Mfg. Co., 298 F.2d 277, 278, 284).
Matter of Associated Gen. Contrs., N.Y. State Chapter (Savin Bros.) ( 36 N.Y.2d 957) is inapposite. That case did not involve an award of punitive damages. Instead, the court permitted enforcement of an arbitration award of treble liquidated damages, amounting to a penalty, assessed however in accordance with the express terms of a trade association membership agreement. The court held that the public policy against permitting the awarding of penalties was not of "such magnitude as to call for judicial intrusion" (p 959). In the instant case, however, there was no provision in the agreements permitting arbitrators to award liquidated damages or penalties. Indeed, the subject apparently had never ever been considered.
The prohibition against an arbitrator awarding punitive damages is based on strong public policy indeed. At law, on the civil side, in the absence of statute, punitive damages are available only in a limited number of instances (see Walker v Sheldon, 10 N.Y.2d 401, 404). As was stated in Walker v Sheldon (supra): "[p]unitive or exemplary damages have been allowed in cases where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives, not only to punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future." It is a social exemplary "remedy", not a private compensatory remedy.
It has always been held that punitive damages are not available for mere breach of contract, for in such a case only a private wrong, and not a public right, is involved (see, e.g., Trans-State Hay Feed Corp. v Faberge, Inc., 35 N.Y.2d 669, affg on mem at App. Div. 42 A.D.2d 535; Van Valkenburgh, Nooger Neville v Hayden Pub. Co., 33 A.D.2d 766, 767 [breach of contract by book publisher, which failed deliberately and in breach of good faith to use "best efforts" to promote plaintiff's books; punitive damages denied], affd 30 N.Y.2d 34 [discussing the facts and particularly the breach of fair dealing in greater detail], cert den 409 U.S. 875; Restatement, Contracts, § 342; 14 N.Y. Jur, Damages, § 183, pp 45-46).
Even if the so-called "malicious" breach here involved would permit of the imposition of punitive damages by a court or jury, it was not the province of arbitrators to do so. Punitive sanctions are reserved to the State, surely a public policy "of such magnitude as to call for judicial intrusion" ( Matter of Associated Gen. Contrs., N.Y. State Chapter [Savin Bros.], 36 N.Y.2d 957, 959, supra). 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. As was so wisely observed by Judge, then Mr. Justice, BERGAN in Matter of Publishers' Assn. of N.Y. City (Newspaper Union) ( 280 App. Div. 500, 503, supra):
"The trouble with an arbitration admitting a power to grant unlimited damages by way of punishment is that if the court treated such an award in the way arbitration awards are usually treated, and followed the award to the letter, it would amount to an unlimited draft upon judicial power. In the usual case, the court stops only to inquire if the award is authorized by the contract; is complete and final on its face; and if the proceeding was fairly conducted.
"Actual damage is measurable against some objective standard — the number of pounds, or days, or gallons or yards; but punitive damages take their shape from the subjective criteria involved in attitudes toward correction and reform, and courts do not accept readily the delegation of that kind of power. Where punitive damages have been allowed for those torts which are still regarded somewhat as public penal wrongs as well as actionable private wrongs, they have had rather close judicial supervision. If the usual rules were followed there would be no effective judicial supervision over punitive awards in arbitration."
The dissent appears to have recognized the danger in permitting an arbitrator in his discretion to award unlimited punitive damages. Thus, it notes that the award made here was neither "irrational" nor "unjust" (p 365). Standards such as these are subjective and afford no practical guidelines for the arbitrator and little protection against abuse, and would, on the other hand, contrary to the sound development of arbitration law, permit the courts to supervise awards for their justness (cf. Lentine v Fundaro, 29 N.Y.2d 382, 386).
Parties to arbitration agree to the substitution of a private tribunal for purposes of deciding their disputes without the expense, delay and rigidities of traditional courts. If arbitrators were allowed to impose punitive damages, the usefulness of arbitration would be destroyed. It would become a trap for the unwary given the eminently desirable freedom from judicial overview of law and facts. It would mean that the scope of determination by arbitrators, by the license to award punitive damages, would be both unpredictable and uncontrollable. It would lead to a Shylock principle of doing business without a Portia-like escape from the vise of a logic foreign to arbitration law.
In imposing penal sanctions in private arrangements, a tradition of the rule of law in organized society is violated. One purpose of the rule of law is to require that the use of coercion be controlled by the State (Kelsen, General Theory of Law and State, p 21). In a highly developed commercial and economic society the use of private force is not the danger, but the uncontrolled use of coercive economic sanctions in private arrangements. For centuries the power to punish has been a monopoly of the State, and not that of any private individual (Kelsen, loc. cit., supra). The day is long past since barbaric man achieved redress by private punitive measures.
The parties never agreed or, for that matter, even considered punitive damages as a possible sanction for breach of the agreement (see dissenting opn below by Mr. Justice CAPOZZOLI, 48 A.D.2d 814). Here there is no pretense of agreement, although plaintiff author argues feebly that the issue of punitive damages was "waived" by failure to object originally to the demands for punitive damages, but only later to the award. The law does not and should not permit private persons to submit themselves to punitive sanctions of the order reserved to the State. The freedom of contract does not embrace the freedom to punish, even by contract. On this view, there was no power to waive the limitations on privately assessed punitive damages and, of course, no power to agree to them by the failure to object to the demand for arbitration (cf. Brooklyn Sav. Bank v O'Neil, 324 U.S. 697, 704, affg 293 N.Y. 666 ["waiver" of right "charged or colored with the public interest" is ineffective]; see, generally, 6A Corbin, Contracts, § 1515, pp 728-732 [e.g., "waiver" of defenses to an usurious agreement is ineffective]).
Under common-law principles, there is eventual supervision of jury awards of punitive damages, in the singularly rare cases where it is permitted, by the trial court's power to change awards and by the Appellate Division's power to modify such awards (see Walker v Sheldon, 10 N.Y.2d 401, 405, n 3, supra). That the award of punitive damages in this case was quite modest is immaterial. Such a happenstance is not one on which to base a rule.
Accordingly, the order of the Appellate Division should be modified, without costs, to vacate so much of the award which imposes punitive damages, and otherwise affirmed.
Although espousing a desire to obviate a "trap for the unwary" and a "Shylock principle of doing business without a Portia-like escape" (p 359), the majority reaches a result favoring a guileful defendant and voids a just and rational award of punitive damages to a wholly innocent and deserving plaintiff. Stripped to its essence the defendant, by willful and fraudulent guises, refused to pay plaintiff royalties known to be due and owing to her; forced her to commence actions claiming fraudulent acts and to enforce arbitration to redress the wrongs done to her and to collect the sums rightfully due; and, finally, defendant waived any objection to the claim for punitive damages, deliberately refused to participate in the arbitration hearing and abruptly left the hearing without moving against the claim for punitive damages or even so much as offering any countervailing evidence or argument on the merits of plaintiff's claims. I cannot, therefore, join with the majority and conclude, as they now do, that the ultimate limit of the damages awardable to plaintiff is that sum which was unquestionably due and owing to her in any event under the royalty agreement.
The basic issue presented for our determination is whether, in an arbitration proceeding brought pursuant to a contract containing a broad arbitration clause, an award of punitive damages is violative of public policy.
Plaintiff, the author of The Sensuous Woman and The Sensuous Man, entered into agreements with the defendant to publish the two books. The agreements contained identical, broad arbitration clauses which provide:
"Any controversy or claim arising out of this agreement or the breach or interpretation thereof shall be determined by arbitration in accordance with the rules then obtaining of the American Arbitration Association, and judgment upon the award may be entered in the highest court of the forum, State or Federal, having jurisdiction."
A dispute arose between the parties and in December, 1971 plaintiff commenced an action for damages against defendant alleging that defendant and its principal officer, Lyle Stuart, committed fraud in inducing her to enter into the agreements, substantially underpaid her royalties then due, and engaged in nefarious business activities calculated to harass and annoy her. Defendant moved for a stay of the action pending arbitration. The decision on the motion has been held in abeyance pending trial of the fraudulent inducement issue, which as yet has not been held due to protracted pretrial discovery proceedings.
In March, 1974 plaintiff commenced a new and separate action asserting that defendant had wrongfully withheld an additional $45,000 in royalties during the first half of 1973. Defendant obtained a stay of that action pending arbitration and plaintiff subsequently served a demand for arbitration. The demand restated the claim made in the March, 1974 complaint and also contained an additional claim for punitive damages allegedly resulting from defendant's maliciously withholding royalties due plaintiff who charged that it was done for the unjustifiable and vindictive purpose of coercing plaintiff to withdraw the pending 1971 action.
Defendant participated in the selection of the arbitrators and appeared at the hearing. Represented by counsel and two corporate officers, defendant promptly entered objections concerning the standing of plaintiff to bring the proceeding and certain administrative matters. No objection was addressed to the demand for punitive damages. The objections were overruled, and defendant's representatives walked out of the hearing and refused to participate any further in the arbitration proceeding. None of the objections raised at the hearing have ever been renewed.
Following the departure of defendant's officers and counsel, the arbitrators heard extensive and, of course, unchallenged evidence from plaintiff. As a result, the arbitrators awarded plaintiff $45,000 on her claim for royalties and $7,500 in punitive damages plus interest and fees. When plaintiff moved to confirm the award, defendant objected, for the first time, that an award of punitive damages is violative of public policy and beyond the scope of the authority of the arbitrators. Special Term confirmed the award and the Appellate Division upheld that determination. I would affirm.
In doing so, I would reject the notion that this award of punitive damages is violative of public policy. We have only recently treated with a somewhat similar argument in Matter of Associated Gen. Contrs., N.Y. State Chapter (Savin Bros.) ( 36 N.Y.2d 957). There we considered the effect of a public policy argument against penalty awards with respect to an arbitration commenced by a national trade association in the construction industry against one of its employer-members pursuant to the provisions of a broad arbitration clause contained in the association agreement. Specifically at issue was whether an arbitration award of treble liquidated damages, assessed in accordance with the express terms of the agreement, was enforceable. We held that since the arbitration was in consequence of a broad arbitration clause and concerned no third-party interests which could be said to transcend the concerns of the parties to the arbitration, there was present (p 959) "no question involving public policy of such magnitude as to call for judicial intrusion" (see, also, Matter of Riccardi [Modern Silver Linen Supply Co.], 36 N.Y.2d 945; cf. Hirsch v Hirsch, 37 N.Y.2d 312). The Associated Gen. Contrs. case may be contrasted with Matter of Aimcee Wholesale Corp. (Tomar Prods.) ( 21 N.Y.2d 621) where the issue to be arbitrated concerned the enforcement of State antitrust law, a matter which was, as we said in Aetna Life Cas. Co. v Stekardis ( 34 N.Y.2d 182, 186, n), "of overriding public policy significance such as to call for judicial intervention dehors the provisions of CPLR 7503". Other policies, "especially those embodied in statutory form" (Matter of Aimcee, supra, at p 629), have also been accorded similar significance (see Matter of Knickerbocker Agency [Holz], 4 N.Y.2d 245 [liquidation of defunct insurance companies]; Durst v Abrash, 17 N.Y.2d 445 [usury law]; Wilko v Swan, 346 U.S. 427 [Securities Act of 1933 violation]; American Safety Equip. Corp. v Maguire Co., 391 F.2d 821 [Federal antitrust law]).
The agreement provided that where an arbitrator found that a member had violated the terms of the agreement, damages were to be awarded "'in an amount no less than three (3) times the daily liquidated damage amount provided for in each * * * heavy and highway construction contract to which the undersigned firm is a party within the geographic area of the applicable labor contract * * * for each * * * day the firm complained of is found by the arbitrator to have been in violation of its obligations'" (Matter of Associated Gen. Contrs., supra, p 958).
The case at bar falls within the rationale and rule of the Associated Gen. Contrs. case. Controlling here, as there, is the fact that the arbitration clause is broad indeed; there are no third-party interests involved; and the public policy against punitive damages is not so commanding that the Legislature has found it necessary to embody that policy into law, especially one that would apply to all cases involving such damages irrespective of the amount sought, the relative size of the award, or the punishable actions of the parties. Or, put another way, the public policy which "favors the peaceful resolutions of disputes through arbitration" (Associated Gen. Contrs., supra, at p 959) outweighs the public policy disfavoring the assessment of punitive damages in this instance, where the unjustifiable conduct complained of is found to be with malice. I would conclude, therefore, that any public policy limiting punitive damage awards does not rise to that level of significance in this case as to require judicial intervention.
The majority would distinguish the Associated Gen. Contrs. case (supra) upon the thin ground that the enforcement of a treble liquidated damages clause which was applicable to numerous nationwide contracts that conceivably could have amounted to astronomical sums is not the equivalent of the enforcement of an award of penalty damages. However, as Mr. Justice GREENBLOTT specifically stated for the majority below in that case, and in an opinion expressly approved by this court, the amount of damages therein computed in the arbitration bore "no reasonable relationship to the amount of damages which may be sustained" (emphasis added; 45 A.D.2d 136, 140); and a contract clause which is grossly disproportionate to the presumable damage or readily ascertainable loss is a penalty clause, irrespective of its label (Equitable Lbr. Corp. v IPA Land Development Corp., 38 N.Y.2d 516, 521-522; Ward v Hudson Riv. Bldg. Co., 125 N.Y. 230, 235; see Wirth Hamid Fair Booking v Wirth, 265 N.Y. 214; Uniform Commercial Code, § 2-718, subd ; Restatement, Contracts, § 339; 3 Williston, Contracts [rev ed], § 779). In short, Associated Gen. Contrs. is not only apposite but is controlling. Conversely, Matter of Publishers' Assn. of N Y City (Newspaper Union) ( 280 App. Div. 500, 504-506), decided in 1951, and a predicate for the majority holding, has been seriously questioned and said to be of "doubtful validity" (8 Weinstein-Korn-Miller, N Y Civ Prac, par 7510.07) due to the subsequent enactment of CPLR 7501 which intentionally broadened the scope of arbitration and made awards therein enforceable "without regard to the justiciable character of the controversy". Even the court which authored Publishers' Assn. now agrees that the issue there considered was not properly framed (see Associated Gen. Contrs., 45 A.D.2d, at p 142, supra).
An affirmance here would do no violence to precedents in this court. In at least two varied circumstances we have held that although public policy would bar a civil suit for relief, that same public policy was not of such overriding import as to preclude confirmation of an arbitration award (Matter of Staklinski [Pyramid Elec. Co.], 6 N.Y.2d 159; Matter of Ruppert [Egelhofer], 3 N.Y.2d 576). In Ruppert was permitted the enjoining of a work stoppage in a labor dispute by arbitration despite the fact that the issuance of such relief by a court was prohibited by statute (then Civil Practice Act, § 876-a). Similarly, in Staklinski, citing Ruppert, we upheld an arbitration award of specific performance of an employment contract in the face of the public policy against compelling a corporation to continue the services of an officer whose services were unsatisfactory to the board of directors. The rule to be distilled from these cases, therefore, is that only where the public interest clearly supersedes the concerns of the parties should courts intervene and assert exclusive dominion over disputes in arbitration (see Comment, Judicial Review of Arbitration: Role of Public Policy, 58 Nw U L Rev 545, 554-555; see, also, McLaughlin, Supplementary Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR 7501, Supp, p 164; Note, 52 Col L Rev 943, 945).
Nor can we hold, as defendant also urges, that the arbitrators exceeded their authority in awarding punitive damages to plaintiff. Arbitrators are entitled to "do justice. It has been said that, short of 'complete irrationality', 'they may fashion the law to fit the facts before them'" (Lentine v Fundaro, 29 N.Y.2d 382, 386, quoting Matter of National Cash Register Co. [Wilson], 8 N.Y.2d 377, 383, and Matter of Exercycle Corp. [Maratta], 9 N.Y.2d 329, 336; see, also, Matter of Spectrum Fabrics Corp. [Main St. Fashions], 309 N.Y. 709, affg 285 App. Div. 710). The award made here was neither irrational nor unjust. Indeed, defendant has not denied that its actions were designed to harass and intimidate plaintiff, as she claimed and the arbitrators obviously concluded. Hence, the award was within the power vested in the arbitrator.
As we have noted, plaintiff sought punitive damages as listed and set forth in the demand for arbitration, presenting of course a threshold question to which defendant failed to respond and, in fact, summarily refused to address himself. In effect, therefore, defendant's failure to act, respond or contest the claim is tantamount to a waiver of any objection thereto and, indeed, is equivalent to an agreement to arbitrate the allegation now complained of.
Accordingly, the order of the Appellate Division should be affirmed.
Judges JASEN, FUCHSBERG and COOKE concur with Chief Judge BREITEL; Judge GABRIELLI dissents and votes to affirm in a separate opinion in which Judges JONES and WACHTLER concur.
Order modified, without costs, in accordance with the opinion herein and, as so modified, affirmed.