40 N.Y.2d 354 | NY | 1976
Lead Opinion
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
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 puntive 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
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 NY2d 229, 235-236, supra, and cases cited; Matter of Western Union Tel. Co. [Amer. Communications Assn.], 299 NY 177, 187; Matter of East India Trading Co. [Halari], 280 App Div 420, 421, affd 305 NY 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 NY Damages Law, § 81, p 61, n 9; 14 NY Jur, Damages, § 184, p 46; cf. Local 127, United Shoe Workers of Amer. v Brooks Shoe Mfg. Co., 298 F2d 277, 278, 284).
Matter of Associated Gen. Contrs., N. Y. State Chapter (Savin Bros.) (36 NY2d 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
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 NY2d 669, affg on mem at App Div 42 AD2d 535; Van Valkenburgh, Nooger & Neville v Hayden Pub. Co., 33 AD2d 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 NY2d 34 [discussing the facts and particularly the breach of fair dealing in greater detail], cert den 409 US 875; Restatement, Contracts, § 342; 14 NY 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 NY2d 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
"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 NY2d 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
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 AD2d 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 US 697, 704, affg 293 NY 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 NY2d 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.
Dissenting Opinion
(dissenting). 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
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
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 NY2d 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.
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, espedaily 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
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 NY2d 159; Matter of Ruppert [Egelhofer], 3 NY2d 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 prohbited 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 dis
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 NY2d 382, 386, quoting Matter of National Cash Register Co. [Wilson], 8 NY2d 377, 383, and Matter of Exercycle Corp. [Maratta] 9 NY2d 329, 336; see, also, Matter of Spectrum Fabrics Corp. [Main St. Fashions], 309 NY 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.
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).
