MARCIA M. ROUBIK, Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Appellants.
No. 82752
Supreme Court of Illinois
February 20, 1998
Rehearing denied March 30, 1998
181 Ill. 2d 373
JUSTICE HEIPLE joins in this special concurrence.
Cantwell & Cantwell, of Chicago (Peter A. Cantwell and Stephen F. Boulton, of counsel), for appellants.
Fishman & Merrick, P.C., of Chicago (Paul D. Carrier, of counsel), for appellee.
JUSTICE BILANDIC delivered the opinion of the court:
This appeal arises from a petition filed in the circuit court of Cook County by the claimant, Marcia Roubik, to confirm in part and vacate in part an arbitration award entered by a panel of the National Association of Securi-
FACTS
In October 1985, the claimant and her now deceased mother executed a customer agreement with Merrill Lynch, a securities brokerage firm, opening a joint cash management account. The agreement contained a provision entitled “Agreement to Arbitrate Controversies,” which provided that:
“it is agreed that any controversy between us arising out of your business or this agreement shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Directors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc., as the undersigned may elect.”
The customer agreement also provided that “this agreement and its enforcement shall be governed by the laws of the State of New York.” Respondents Lovitsch and Valaika are employees of Merrill Lynch who handled the claimant‘s account.
On January 14, 1991, the claimant filed a statement
The respondents filed a joint statement of answer and executed NASD uniform submission agreements for the arbitration. The submission agreement provided that the undersigned parties:
“hereby submit the present matter in controversy, as set forth in the attached statement of claim, answers, cross claims and all related counterclaims and/or third party claims which may be asserted, to arbitration in accordance with the Constitution, By-Laws, Rules, Regulations and/or Code of Arbitration Procedure of the sponsoring organization.”
The arbitration proceeded in the Midwest Regional Arbitration Office of the NASD in Chicago. At the request of the arbitration panel, the parties provided briefs on the issue of the authority of arbitrators to award punitive damages. The arbitration panel received exhibits and heard several days of testimony. The panel issued its award on February 5, 1993. The panel found the respondents guilty of: (1) lack of supervision; (2) churning; and (3) violation of suitability rules. The panel awarded the claimant $500,000 in compensatory damages. The award further stated that the arbitrators “find that this misconduct was such that punitive damages should be awarded. However, the panel believes that the law of New York, the forum of the parties, precludes such an award.”
On July 22, 1994, the circuit court issued its order confirming the arbitration award. In particular, the circuit court found that the arbitrators correctly ruled that they did not have the authority to award punitive damages. Further, the court found that Illinois public policy does not favor punitive damages. The court awarded the claimant interest at the statutory rate of 9% on the compensatory damages award from February 5, 1993.
The claimant appealed to the appellate court. The appellate court affirmed the award of compensatory damages and the interest on that award. Relying on the United States Supreme Court decision in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 131 L. Ed. 2d 76, 115 S. Ct. 1212 (1995), the appellate court reversed the circuit court‘s decision confirming the arbitrators’ ruling that they were without authority to award punitive damages. The appellate court remanded the cause to the circuit court with directions to enter an or-
We granted the respondents’ petition for leave to appeal. The parties do not raise any issues in this court regarding the award of compensatory damages or the interest award.
ANALYSIS
The question presented in this appeal is whether the arbitration panel‘s decision on the issue of punitive damages should be set aside. As noted, the parties’ contract provided that it was to be governed by the laws of the State of New York. It is undisputed that New York law prohibits arbitrators from awarding punitive damages. See Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 353 N.E.2d 793, 386 N.Y.S.2d 831 (1976). The respondents argued before the arbitration panel that, pursuant to the explicit terms of the contract, New York law applied and prohibited the arbitrators from awarding punitive damages. The arbitration panel agreed that New York law governed and that they were therefore without authority to award punitive damages. At the time the arbitrators issued their award, several courts had ruled on the effect on the availability of punitive damages of a New York choice-of-law provision in an arbitration agreement, with conflicting results. The United States courts of appeals for the Seventh and Second Circuits had held that the inclusion of a New York choice-of-law clause precluded an arbitration panel from awarding punitive damages. See Fahnestock & Co. v. Waltman, 935 F.2d 512, 517-19 (2d Cir. 1991); Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334, 338-39 (7th Cir. 1984). Other federal courts of appeals, however, had reached the contrary conclusion. See, e.g., Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1387 (11th Cir. 1988); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1062-63 (9th Cir. 1991).
In Mastrobuono, the petitioners opened a securities trading account with Shearson Lehman Hutton, Inc. (Shearson), by executing Shearson‘s standard-form client‘s agreement. That agreement contained an arbitration provision, providing that:
“any controversy arising out of or relating to [the petitioners‘] accounts *** shall be settled by arbitration in accordance with the rules then in effect, of the National Association of Securities Dealers, Inc., or the Boards of Directors of the New York Stock Exchange, Inc. and/or the American Stock Exchange as I may elect.”
The agreement in Mastrobuono further provided that it was to be “governed by the laws of the State of New York.” Mastrobuono, 514 U.S. at 58-59, 131 L. Ed. 2d at 85, 115 S. Ct. at 1217. The petitioners subsequently charged Shearson with mishandling their account and sought compensatory and punitive damages. The claims were submitted to arbitration before a NASD panel, which ruled in favor of the petitioners and awarded them both compensatory and punitive damages. Shearson filed a motion in the United States District Court for the Northern District of Illinois to vacate the award of punitive damages. The district court granted the motion (Mastrobuono v. Shearson Lehman Hutton Inc., 812 F. Supp. 845 (N.D. Ill. 1993)) and the court of appeals affirmed (Mastrobuono v. Shearson Lehman Hutton, Inc., 20 F.3d 713 (7th Cir. 1994)). Both courts reasoned that
The Supreme Court reversed. The Court noted that contracting parties have the power to specify in the contract what issues are to be arbitrated. Thus, the parties may limit the issues to be arbitrated by waiving any claim for punitive damages. By the same token, the parties may agree to include claims for punitive damages within the issues to be arbitrated. The Court determined that the dispositive inquiry was therefore what the parties’ contract said about the arbitrability of the petitioners’ claim for punitive damages. In resolving this inquiry, the Court determined that the New York choice-of-law clause was not, in itself, an unequivocal exclusion of punitive damages claims. Further, the arbitration provision “strongly implie[d]” that an arbitral award of punitive damages was appropriate. The arbitration provision explicitly authorized arbitration in accordance with NASD rules, which gave the arbitrators broad power to award “damages and other relief,” and a manual provided to NASD arbitrators specifically provided that arbitrators “can consider punitive damages as a remedy.” The Mastrobuono Court reasoned that, “as a practical matter,” it seemed “unlikely” that the petitioners had any idea that, by signing the standard-form agreement, they might be giving up the right to pursue punitive damages. The Court ultimately concluded that:
“the best way to harmonize the choice-of-law provision with the arbitration provision is to read ‘the laws of the State of New York’ to encompass substantive principles that New York courts would apply, but not to include special rules limiting the authority of arbitrators. Thus, the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other.” Mastro-buono, 514 U.S. at 63-64, 131 L. Ed. 2d at 88, 115 S. Ct. at 1219.
Accordingly, the Court held, the arbitral award of punitive damages should have been enforced as within the scope of the contract. Mastrobuono, 514 U.S. at 64, 131 L. Ed. 2d at 88, 115 S. Ct. at 1219.
The respondents do not attempt to distinguish Mastrobuono from this case, nor do they dispute that it resolves the punitive damages issue in a manner contrary to that of the arbitrators in this case. The respondents nonetheless contend that Mastrobuono does not provide a basis for setting aside the arbitrators’ ruling on the punitive damages issue. Arbitral awards, the respondents argue, are subject to only limited judicial review and may be set aside only on certain limited grounds. The respondents urge that the arbitrators’ resolution of the issue of their authority to award punitive damages, even if erroneous in light of the Supreme Court‘s decision in Mastrobuono, constitutes simply a mistake of law that is not grounds for setting aside the award.
Resolution of this appeal thus turns on the proper standard of review to be applied to the arbitrators’ decision on the punitive damages issue. The respondents are correct in their assertion that an arbitration panel‘s mistake of law will generally not provide grounds to set aside its decision on the merits of a dispute. It is well established that judicial review of an arbitral award is intended to be more limited than appellate review of a trial court judgment. Rauh v. Rockford Products Corp., 143 Ill. 2d 377, 386 (1991); Garver v. Ferguson, 76 Ill. 2d 1, 8 (1979); Merritt v. Merritt, 11 Ill. 565, 567-68 (1850). A long line of precedent has established that an arbitrator‘s award will not be set aside because of errors in judgment or mistakes of law or fact. Rauh, 143 Ill. 2d at 391; Garver, 76 Ill. 2d at 7; White Star Mining Co. v. Hultberg, 220 Ill. 578, 601-02 (1906). The rationale for this deferential standard has been explained as follows:
“‘Arbitrators are judges chosen by the parties to decide the matters submitted to them, finally and without appeal. As a mode of settling disputes it should receive every encouragement from courts of equity. If the award is within the submission, and contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court of equity will not set it aside for error either in law or fact. A contrary course would be a substitution of the judgment of the Chancellor in place of the judges chosen by the parties, and would make an award the commencement, not the end, of litigation.‘” Garver, 76 Ill. 2d at 9, quoting Burchell v. Marsh, 58 U.S. (17 How.) 344, 349, 15 L. Ed. 96, 99 (1855).
The claimant contends, however, that this deferential standard of review is not applicable in this appeal. She argues that the challenged decision of the arbitrators in this case addressed not the merits of her claim for punitive damages, but rather whether her punitive damages claims were arbitrable. “Arbitrability” refers to whether a particular claim or dispute is subject to arbitration under the parties’ agreement. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942, 131 L. Ed. 2d 985, 992, 115 S. Ct. 1920, 1923 (1995). Arbitration is a matter of contract and a party cannot be forced to arbitrate a dispute which the party has not agreed to submit to arbitration. AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648, 89 L. Ed. 2d 648, 655, 106 S. Ct. 1415, 1418 (1986). Thus, the arbitrability question requires an interpretation of the parties’ contract to determine if there was an agreement to arbitrate a particular dispute.
The standard of review applicable to an arbitrator‘s decision on a question of arbitrability differs from that applied to an arbitrator‘s decision on the merits of a dispute. In this case, the parties agree that we must apply federal law to questions concerning arbitrability
We agree with the claimant that the issue of whether the arbitrators had the authority to award punitive damages in this case was a question of arbitrability and, as such, is subject to de novo review. The Supreme Court‘s decisions in Mastrobuono and a subsequent case, First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 131 L. Ed. 2d 985, 115 S. Ct. 1920 (1995), compel this conclusion. As noted, in Mastrobuono, the Court addressed the
The standard of review to be applied to this issue was clarified by the Supreme Court in First Options. In Mastrobuono, the Court expressly deferred resolution of the standard of review issue to First Options, in which it had recently granted certiorari. Mastrobuono, 514 U.S. at 55 n.1, 131 L. Ed. 2d at 83 n.1, 115 S. Ct. at 1215 n.1. In its opinion in First Options, the Court addressed the issue of the proper standard of review to be applied to an arbitrator‘s decision on arbitrability, referring to Mastrobuono as presenting such a question. First Options, 514 U.S. at 943, 131 L. Ed. 2d at 992-93, 115 S. Ct. at 1923. The Court held that where an arbitrator has decided a question of arbitrability, unless the parties clearly agree otherwise, the arbitrator‘s decision is subject to independent review by the courts, without deference to the arbitrator‘s decision. First Options, 514 U.S. at 943, 131 L. Ed. 2d at 993, 115 S. Ct. at 1924.
We note that the Seventh Circuit Court of Appeals has applied the Supreme Court‘s decision in Mastrobuono to reverse a district court holding that punitive damages were not available in an arbitration proceeding. Although not directly addressing the standard of review issue, the court of appeals implicitly held that the issue of whether the arbitrators could award punitive damages was a matter properly decided by the courts, rather than left to the arbitrators. See Smith Barney Inc. v. Schell, 53 F.3d 807, 809 (7th Cir. 1995).
Here, as in Mastrobuono, the issue presented is whether the claimant‘s punitive damages claims are arbitrable under the parties’ agreement. The arbitrators determined that the claimant‘s punitive damages claims were not subject to arbitration under the agreement. This was not a determination of the merits of a dispute, but was a determination of the arbitrability of a dispute. The rationale of the federal courts for providing a judicial forum for resolution of arbitrability questions is that the arbitrator should not have the power to determine his or her own jurisdiction. AT&T, 475 U.S. at 651, 89 L. Ed. 2d at 657, 106 S. Ct. at 1419; John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 547, 11 L. Ed. 2d 898, 903, 84 S. Ct. 909, 913 (1964); Smith Barney, Inc. v. Sarver, 108 F.3d 92, 96 (6th Cir. 1997). Here, in resolving the punitive damages issue, the arbitrators were called upon to determine the scope of their own authority. Federal law and policy therefore requires that the arbitrators’ decision on this issue be subject to independent review by the courts.
The respondents do not contend that the parties in
The dissent also finds that a provision of the NASD Code evidences the parties’ intent in this case to submit arbitrability questions to arbitration. Again, the dissent‘s superficial reasoning misses the mark. Section 35, the NASD Code provision relied upon by the dissent,
The respondents contend that, even if the issue in this case is properly characterized as one of arbitrability, deferential review of the arbitrators’ decision is still required because the issue involves “procedural arbitrability,” not “substantive arbitrability.” The Supreme Court has held that, while issues of “substantive arbitrability” are to be decided by the courts, issues of “procedural arbitrability” are generally to be left to the arbitrators. The Court has stated that, “[o]nce it is determined *** that the parties are obligated to submit the subject matter of a dispute to arbitration, ‘procedural’ questions which grow out of the dispute and bear on its final disposition should be left to the arbitrator.” Wiley & Sons, 376 U.S. at 557, 11 L. Ed. 2d at 909, 84 S. Ct. at 918. In Wiley & Sons, the procedural question the Court held should be left to the arbitrator was whether certain procedural prerequisites to arbitration, required by the parties’ collective-bargaining agreement, had been satisfied. Other courts have held that the issue of a party‘s compliance with time limits for submitting a claim to arbitration is a procedural matter properly left to the judgment of the arbitrator. See, e.g., Local 285 v. Nonotuck Resource Associates, Inc., 64 F.3d 735, 739-41 (1st Cir. 1995); but see Smith Barney Inc. v. Schell, 53 F.3d 807, 809 (7th Cir. 1995) (whether claimants’ arbitration claims are time-barred is to be decided by the courts).
Respondents argue here that the question of whether the New York choice-of-law clause precludes the arbitrators from awarding punitive damages is simply a matter
Accordingly, we find that, because the issue presented in this case is a matter of arbitrability, and the parties did not clearly agree to allow the arbitrators to decide arbitrability, the arbitrators’ decision on this issue is subject to independent review by the courts. The appellate court therefore properly applied Mastrobuono to set aside the arbitrators’ determination that the claimant‘s punitive damages claims were not arbitrable. The judgment of the appellate court affirming in part and reversing in part the circuit court‘s judgment and remanding with directions to the circuit court to order further NASD arbitration on the issue of punitive damages is affirmed.
Appellate court judgment affirmed.
JUSTICE HEIPLE, dissenting:
It is a fundamental rule of contract construction that a judge deciding a commercial dispute should first read the contract establishing the relationship between the parties and then—and only then—think great thoughts. In its misguided disposition of this case, the majority has put the proverbial cart before the horse: the majority opinion fails to recognize that parties to a contract may themselves provide that an arbitrator, and not a
Did the parties agree to arbitrate questions of arbitrability, including the issue of whether the arbitrators had the power to award punitive damages? There are in fact two written agreements between the parties, a “Customer Agreement” and a “Cash Management Agreement,” each of which contains the identical “Agreement to Arbitrate Controversies” clause:
“Except to the extent that controversies involving claims arising under the Federal securities law may be litigated, it is agreed that any controversy between us arising out of your business or this agreement shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Directors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc., as the undersigned may elect.” (Emphasis added.)
These provisions evidence the parties’ intent to arbitrate all issues, including arbitrability. With the stated exception of federal securities claims, the language is all-inclusive, categorical, and unconditional. The word “any” is broad enough to encompass disputes over whether a particular claim is within the scope of arbitration. See 1 Oxford English Dictionary 539 (“In affirmative sentences [‘any‘] asserts concerning a being or thing of the sort named, without limitation as to which, and thus constructively of every one of them“). Thus, an objective reading of the parties’ agreements leads inexorably to the conclusion that the parties intended to arbitrate issues of arbitrability.
Moreover, the plaintiff elected to submit the dispute
The NASD Code itself grants the arbitrators the power to decide issues of arbitrability:
“The arbitrators shall be empowered to interpret and determine the applicability of all provisions under this Code and to take appropriate action to obtain compliance with any ruling by the arbitrator(s).”
NASD Code of Arbitration Procedure, NASD Manual 3735. By adopting the NASD Code to govern their dispute, the parties further agreed to commit all issues, including issues of arbitrability, to the arbitrators. See
The emphatic, all-inclusive language of the arbitration clauses in the instant agreement and the parties’ adoption of the NASD Code are not sufficient to persuade the majority of the parties’ intent and commitment to arbitrate issues of arbitrability. The majority wants more. Here is more. When deciding whether the parties agreed to arbitrate a certain matter including arbitrability, courts should apply ordinary state-law principles that govern the formation of contracts. First Options, 514 U.S. at 944, 131 L. Ed. 2d at 993, 115 S. Ct. at 1924. Here the parties’ agreement and its enforcement is to “be governed by the law of the State of New York.” The highest court in the State of New York has held that parties “clearly and unmistakably” agree to arbitrate arbitrability when the parties have agreed to resolve “any controversy” by arbitration in accordance with the rules of the NASD:
“Coupled with the plain and sweeping language of the arbitration clause in the instant agreements and the analysis of the persuasive authorities, Section 35 of the NASD Code (now Rule 10324) buttresses our conclusion concerning the parties’ intent and commitment to arbitrate the issue of arbitrability.”
Smith Barney Shearson, Inc. v. Sacharow, Nos. 234, 235 cons. (N.Y. December 4, 1997). Thus, under the relevant state law, the language of the arbitration agreement and the provision of the NASD manifest the parties’ intent to submit the arbitrability issue to arbitration.
Thus, the parties agreed to relinquish their right to have a court decide the merits of their dispute, and instead expressly agreed to submit all questions—including arbitrability—to arbitration. A party may still ask a court to review an arbitrator‘s decision, but the court will set that decision aside only where the decision is tainted by corruption, fraud or misconduct, or amounts to a manifest disregard of the law. See First Options, 514 U.S. at 942, 131 L. Ed. 2d at 992, 115 S. Ct. at 1923;
In affirming the appellate court, the majority has dramatically expanded the scope of appellate review of arbitration awards and, in so doing, has grossly misstated the law in at least three respects. (1) The majority writes that “the issue of whether the arbitrators had the authority to award punitive damages in this case was a question of arbitrability and, as such, is subject to de novo review.” 181 Ill. 2d at 383. This is erroneous: if the parties agree to arbitrate issues of arbitrability,
In sum, the majority has misstated the law, misconstrued the facts and has undermined freedom of contract and the public policy favoring arbitration. Arbitration is a matter of consent, not coercion, and parties are free to write their arbitration agreements as they wish. The goal of arbitration is to avoid protracted litigation in the courts, and the parties to an arbitration agreement