United States District Court, Southern District of New York
December 3, 1990
IN THE MATTER OF THE ARBITRATION BETWEEN MARCO BARBIER, SILVANA BARBIER, AND STEPHANIA BARBIER, PETITIONERS, AND SHEARSON LEHMAN HUTTON, INC., SUCCESSOR-IN-INTEREST TO SHEARSON LEHMAN BROTHERS, INC., AND ROGER BENDELAC, RESPONDENTS.
The opinion of the court was delivered by: Robert J. Ward, District Judge.
Marco Barbier, Silvana Barbier and Stefania Barbier
(collectively, "the Barbiers") have petitioned this Court,
pursuant to section 9 of the Federal Arbitration Act (the
"Act," or the "FAA"), 9 U.S.C. § 9, to confirm an arbitration
award entered by a New York Stock Exchange arbitration panel on
May 18, 1990. Respondent Roger Bendelac ("Bendelac") has moved
to vacate the arbitration award in its entirety. Respondent
Shearson Lehman Hutton, Inc. ("Shearson") has moved to vacate
the punitive damages component of the award against it. For the
reasons that follow, the Barbiers' petition to confirm the
arbitration award is granted, and the motions to vacate the
award are denied.
The relevant facts are not disputed. On or about January 7,
1986, the Barbiers entered into a written agreement with
Shearson (the "Agreement") by which they opened an account for
the purchase and sale of securities.*fn1 In performance of the
Agreement, Shearson directed its employee, Respondent Bendelac,
to service the Barbiers' account as their broker.
The Agreement contained an arbitration provision which
stated, in pertinent part:
This agreement shall . . . be governed by the laws
of the State of New York. Unless unenforceable due
to federal or state law, any controversy arising
out of or relating to [the Barbiers'] accounts, to
transactions with [Shearson, its] officers,
directors, agents and/or employees for [the
Barbiers] or to this agreement or the breach
thereof, 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. as [the Barbiers] may elect. . . .
Judgement upon any award rendered by the
arbitrators may be entered in any court having
Agreement at ¶ 13.
On or about October 19, 1988, a dispute arose between the
parties in which the Barbiers claimed that Bendelac and
Shearson had forged certain agreements and then engaged in
discretionary commodities trading on their account without
their knowledge or authorization, resulting in the loss of
their investment. Respondents maintained that the Barbiers had
executed the agreements and had authorized the discretionary
In accordance with the arbitration clause of the Agreement
the parties, without objection,
submitted their dispute to arbitration before a New York Stock
Exchange ("NYSE") arbitration panel. On or about August 20,
1989, the Barbiers filed an Amended Statement of Claims with
the NYSE, in which they asserted claims for conversion, breach
of fiduciary duty, breach of contract, negligence and/or
recklessness, and assault.*fn2 They demanded an award of,
inter alia, punitive damages. Respondents denied liability and
raised a number of affirmative defenses and counterclaims.*fn3
The arbitration panel conducted several days of hearings,
during which the parties appeared and submitted evidence on the
issues presented. On May 18, 1990, the arbitrators filed their
unanimous award. Their decision stated:
The undersigned arbitrators have decided and
determined in full and final settlement of all
claims between the parties that:
Claimants are awarded the total sum of
$155,645.00, which amount includes: Loss of
principle [sic], interest at 9% from 2/1/87,
attorney fees and punitive damages in the amount
of $25,000. Shearson Lehman Brothers Inc. will be
assessed $31,129.00 of the total award. Roger
Bendelac will be assessed $124,516 of the total
award. Costs of arbitration shall be borne by
Shearson 20% ($2,400) and Roger Bendelac 80%
($9,600) to be paid to the New York Stock
On or about June 12, 1990, the Barbiers filed the instant
petition to confirm the arbitration award. Bendelac now moves
to vacate the award in its entirety. He argues that the
arbitrators exceeded and/or imperfectly executed their powers
by (1) awarding punitive damages, and (2) failing to render an
award on all issues submitted. Shearson, challenging only that
portion of the award which granted punitive damages to
petitioners, contends that the arbitrators' award of punitive
damages is proscribed. Petitioners maintain that the award was
in all respects proper and should be confirmed.
I. The Applicable Law.
The threshold issue for the Court is whether federal, or New
York, arbitration law applies in the instant case. Respondents
maintain, for a variety of reasons, that the New York state law
of arbitration must be applied. The issue assumes primary
importance in the instant case because, under New York law, "an
arbitrator's award which imposes punitive damages, even though
agreed upon by the parties, should be vacated" as contrary to
public policy. Garrity v. Lyle Stuart, Inc., 386 N.Y.S.2d 831,
833, 40 N.Y.2d 354, 353 N.E.2d 793, 795 (1976).
Bendelac asserts that the Federal Arbitration Act does not
apply at all in the instant case. He argues, somewhat
confusingly, that the Act is not "trigger[ed]" because this
Court's jurisdiction is based solely on diversity of
citizenship and because the underlying claims do not raise a
federal question.*fn4 This argument is wholly without merit.
Section 2 of the Federal Arbitration Act, 9 U.S.C. § 2, sets
forth the statutory criteria utilized to determine the scope of
the Act's coverage. It provides:
A written provision in any . . . contract
evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter
arising out of such contract or transaction, or
the refusal to perform the whole or any part
thereof, or an agreement in writing to submit to
arbitration an existing controversy arising out of
such a contract, transaction, or refusal, shall be
valid, irrevocable, and
enforceable, save upon such grounds as exist at
law or in equity for the revocation of any
Commerce is defined in section 1 as "commerce among the several
states or with foreign nations."
There is little dispute as to the interstate nature of the
underlying transactions in the instant case. These involved
Venezuelan investors, a New York financial institution and the
purchase and sale of securities on a national exchange. Thus,
the Act clearly applies to the arbitration provision at
"In enacting the federal Arbitration Act, Congress created
national substantive law governing questions of the validity
and the enforceability of arbitration agreements under its
coverage." Genesco, Inc. v. T. Kakiuchi & Co., Ltd.,
815 F.2d 840, 845 (2d Cir. 1987). See Southland Corp. v. Keating,
465 U.S. 1, 12, 104 S.Ct. 852, 859, 79 L.Ed.2d 1 (1984) (Act
creates a body of federal substantive law which governs
question of arbitrability); Moses H. Cone Memorial Hospital v.
Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74
L.Ed.2d 765 (1983) (federal substantive law created by Act
applicable in both state and federal courts). Thus, once it is
determined that a dispute is covered by the Act, "federal
substantive law as set forth in the Act and federal court
decisions governs the scope and interpretation of the
agreement." Cook Chocolate Co. v. Salomon, Inc., 684 F. Supp. 1177,
1182 (S.D.N.Y. 1988). See also Coenen v. R.W. Pressprich
& Co., 453 F.2d 1209, 1211 (2d Cir.), cert. denied,
406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972) (once a dispute is
covered by the Act, federal law governs all questions of
interpretation, construction, validity, revocability and
Shearson argues that the existence of a choice-of-law clause
in the Agreement alters the above analysis. It maintains that,
because the Agreement provides for the application of New York
law, the Court should look solely to New York state, rather
than federal, arbitration law in this confirmation proceeding.
The Court disagrees.
It is well-settled in this circuit that federal arbitration
law applies to contracts embraced by the Act despite a
contractual New York choice-of-law provision. See, e.g., I/S
Stavborg v. National Metal Converters, Inc., 500 F.2d 424 (2d
Cir. 1974); Ore & Chemical Corp. v. Stinnes Interoil, Inc.,
606 F. Supp. 1510, 1515 n. 5 (S.D.N.Y. 1985); Masthead Mac Drilling
Corp. v. Fleck, 549 F. Supp. 854, 856 (S.D.N.Y. 1982). "New York
courts, in dealing with arbitration disputes where the contract
involves interstate commerce, apply federal, and not state,
arbitration law" notwithstanding a provision in the parties'
agreement that it be governed by New York law. Masthead Mac
Drilling Corp. v. Fleck, supra, 549 F. Supp. at 856 (quoting
Rothberg v. Loeb, Rhoades, & Co., 445 F. Supp. 1336 (S.D.N Y
1978)). See Cone Mills Corp. v. August F. Nielsen Co., 455
N YS.2d 625, 627, 90 A.D.2d 31 (App. Div. 1982) (contractual
stipulation that New York law govern does not displace the
FAA); Bridas Sociedad Anonima Petrolera Industrial y Commercial
v. International Standard Electric Corp., 490 N.Y.S.2d 711,
715, 128 Misc.2d 669 (Sup.Ct. 1985) (same).*fn6
To the extent that these decisions rest upon an assumption
that federal arbitration law must be applied, notwithstanding
a contrary choice by the parties, whenever the FAA comes into
play, they have been undercut by the Supreme Court's decision
in Volt Information Sciences, Inc. v. Board of Trustees of the
Leland Stanford Junior University, 489 U.S. 468, 109 S.Ct.
1248, 103 L.Ed.2d 488 (1989) ("Volt"). In Volt, the Supreme
Court held that the parties to an arbitration agreement
otherwise governed by the FAA were entitled to specify
that state arbitration rules would apply to disputes under
their agreement. Accepting on its face the highest state
court's determination that, based upon a choice-of-law
provision in their contract, the parties had indeed intended
that their contract be governed by state arbitration
procedures,*fn7 the Supreme Court found that such a choice was
permissible and should be enforced.
However, contrary to Shearson's assertions, Volt does not
stand for the proposition that any time a choice-of-law
provision is included in an arbitration agreement, such a
provision necessarily requires the application of state, rather
than federal, arbitration law. Rather, the Court merely held
that where such a result is intended by the parties, that
intention should be carried out by a court enforcing the
arbitration agreement. The Court determined that:
There is no federal policy favoring arbitration
under a certain set of procedural rules; the
federal policy is simply to ensure the
enforceability, according to their terms, of
private agreements to arbitrate.
Id. at 476, 109 S.Ct. at 1254.
The primary question for this Court therefore is whether the
parties to the Agreement at issue in the instant case intended,
by their inclusion of a New York choice-of-law clause, that New
York arbitration law (including the New York prohibition on
arbitral punitive damage awards) govern disputes between them.
To resolve this question, the Court must apply general state
law principles of contract interpretation to the choice-of-law
provision, giving due regard to the federal policy favoring
arbitration and resolving any ambiguities as to the scope of
the arbitration clause itself in favor of arbitration.
Id. at 475-76, 109 S.Ct. at 1254-1255. See Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1,
24-25, 103 S.Ct. 927, 941-942, 74 L.Ed.2d 765 (1983);
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985);
Perry v. Thomas, 482 U.S. 483, 493 n. 9, 107 S.Ct. 2520, 2527
n. 9, 96 L.Ed.2d 426 (1987).
In construing the contractual provision at issue, the first
step is to determine whether the language is ambiguous. This
determination is one of law. Curry Road Ltd. v. K Mart Corp.,
893 F.2d 509, 511 (2d Cir. 1990). If it is unambiguous, the
Court must of course enforce the provision as clearly written,
without resort either to extrinsic evidence of intent, see
Burger King Corp. v. Horn & Hardart Co., 893 F.2d 525, 527 (2d
Cir. 1990), or to rules of construction. See American Home
Products Corp. v. Liberty Mutual Ins. Co., 748 F.2d 760 (2d
Cir. 1984). However, where contract language "is reasonably
susceptible of more than one interpretation," Burger King Corp.
v. Horn & Hardart & Co., supra, 893 F.2d at 527, it is
ambiguous and consideration of extrinsic evidence of intent or,
if necessary, rules of construction, is appropriate.
In the context of the entire agreement between the parties,
the Court finds the choice-of-law provision contained in the
arbitration clause of the Agreement to be ambiguous. The clause
admits of two possible readings, neither of which is patently
unreasonable: the choice-of-law clause might on the one hand be
read to require only the application by the arbitrators of New
York substantive law to disputes between the parties, or on the
other to mandate that New York substantive law, as well as New
York arbitration law, apply to the arbitration proceeding.*fn8
Because the parties have submitted no extrinsic evidence
concerning the intent of the contractual language at issue, it
is appropriate for the Court to construe the contract as a
matter of law. See e.g., Schering Corp. v. Home Ins. Co.,
712 F.2d 4, 9 (2d Cir. 1983) (where contract language not wholly
unambiguous, parties have a right to present extrinsic evidence
of their intent at the time of contracting, and trial is
required if conflicting evidence adduced); Alfin, Inc. v.
Pacific Ins. Co., 735 F. Supp. 115, 118 (S.D.N.Y. 1990) (where
no extrinsic evidence of intent presented, court should apply
canons of construction to insurance contract, and construe
contract as a matter of law). Applying general state law
principles of contract interpretation, and giving due regard
for the federal policies which underlie the FAA, the Court
finds that the parties did not intend, through the inclusion of
a choice-of-law clause in the Agreement, that New York
arbitration law be applied to disputes under the Agreement.
As Justice Brennan pointed out in his dissent in
Volt, it is "beyond dispute that the normal purpose of such
choice-of-law clauses is to determine that the law of one State
rather than that of another State will be applicable; they
simply do not speak to any interaction between state and
federal law." Volt, supra, 489 U.S. at 488, 109 S.Ct. at 1260
(Brennan, J., dissenting).*fn9 Other federal courts which have
interpreted contractual language in contexts similar to that at
issue here have held that:
a choice of law provision in a contract governed
by the [Federal] Arbitration Act merely designates
the substantive law that the arbitrators must
apply in determining whether the conduct of the
parties warrants an award of punitive damages; it
does not deprive the arbitrators of their
authority to award punitive damages.
Bonar v. Dean Witter Reynolds, Inc., supra, 835 F.2d at 1387;
Raytheon Co. v. Automated Business Systems, Inc., 882 F.2d 6,
11 n. 5 (1st Cir. 1989) (citing federal cases)*fn10;
Willoughby Roofing & Supply Co., Inc. v. Kajima International,
Inc., 598 F. Supp. 353 (N.D.Ala. 1984), aff'd on opinion below,
776 F.2d 269 (11th Cir. 1985) (per curiam).
In Bonar, the Eleventh Circuit noted that where the scope of
a contractual arbitration provision is sufficiently broad to
authorize punitive damages in arbitration, and yet where the
contract also provides for the application of the law of a
state which disallows punitive awards, a court should resolve
the ambiguity thus created by reference to the following "rule
. . in light of the federal policy that "any
doubts concerning the scope of arbitral issues
should be resolved in favor of arbitration,"
Moses H. Cone Memorial Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24-25 [103 S.Ct. 927, 941-942,
74 L.Ed.2d 765] . . . (1983), we must give
precedence to the contract provisions allowing
Bonar v. Dean Witter Reynolds, Inc., supra, 835 F.2d at 1387.
Even absent a rule of construction giving precedence to that
interpretation which favors arbitrability of claims, this Court
would find that under general principles of contract
interpretation the choice-of-law clause was intended to refer
only to the substantive law to be applied by the arbitrators.
It is a "basic tenet of contract law [that] where two seemingly
conflicting contract provisions reasonably can be reconciled,
a court is required to do so and give
both effect." Proyecfin de Venezuela v. Banco Industrial,
760 F.2d 390, 395-96 (2d Cir. 1985) (citing 3 Corbin on Contracts §
547, at 172-72 (1960)). Here, the two seemingly conflicting
provisions can reasonably be reconciled by interpreting the
choice-of-law clause to refer to the substantive law to be
applied in the arbitration proceeding. Because the arbitration
clause in the Agreement authorizes an award of punitive
damages, see discussion, infra, it would directly conflict with
the choice of New York arbitration law which precludes punitive
awards. However, no conflict is present if the parties intended
merely to designate the substantive state law to be applied by
Finally, under New York contract law, "[i]t is well settled
that contracts made by private parties must necessarily be
construed in the light of the applicable law at the time of
their execution." Goldfarb v. Goldfarb, 450 N.Y.S.2d 212, 214,
86 A.D.2d 459 (App. Div. 1982) (quoting 10 N.Y.Jur., Contracts,
§ 204, at 112). It was clear at the time that the Agreement was
entered into that New York courts, as well as federal courts in
this Circuit, considered choice-of-law provisions in
arbitration agreements to designate only the substantive law to
be applied by the arbitrators and not to override application
of federal arbitration law in contracts governed by the FAA.
This prevailing standard should be considered in an evaluation
of the intent of the provision.
In light of the above discussion, the Court concludes that,
unlike the situation in Volt, the parties in the instant case
did not agree that arbitration proceedings under their
Agreement were to be governed by New York arbitration
rules.*fn11 Accordingly, the Court must apply federal
standards governing the confirmation and vacation of
arbitration awards, and look to the body of federal substantive
law created by the Act, Southland v. Keating, supra, 465 U.S.
at 12, 104 S.Ct. at 859, to determine whether the arbitration
clause in the Agreement empowered the arbitration panel to
award punitive damages.
II. Standards for Confirmation or Vacation of Award.
Sections 9 and 10 of the Act, 9 U.S.C. § 9 & 10, set forth
the governing standards to be applied in a proceeding to
confirm or to vacate an arbitration award. A court must confirm
an arbitration award unless the award is vacated, modified, or
corrected as provided for under sections 10 and 11 of the
Act.*fn12 9 U.S.C. § 9. See Ottley v. Schwartzberg,
819 F.2d 373, 375 (2d Cir. 1987).
Courts may vacate an arbitration award only upon a
showing of one of the statutory grounds listed in
the Arbitration Act, 9 U.S.C. § 10, if the
arbitrators acted in manifest disregard of the law
. . . or if the award is incomplete, ambiguous, or
contradictory, Bell Aerospace Co., Div. of Textron
v. Local 516, 500 F.2d 921, 923 (2d Cir. 1974)
Transit Casualty Co. v. Trenwick Reinsurance Co., Ltd.,
659 F. Supp. 1346, 1350-51
(S.D.N.Y. 1987), aff'd without op., 841 F.2d 1117
Section 10 of the Act provides that the award may be vacated
upon the following grounds:
(a) Where the award was procured by corruption,
fraud, or undue means.
(b) Where there was evident partiality or
corruption in the arbitrators, or either of them.
(c) Where the arbitrators were guilty of
misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the
controversy; or of any other misbehavior by which
the rights of any party have been prejudiced. (d)
Where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final,
and definite award upon the subject matter
submitted was not made.
(e) Where an award is vacated and the time within
which the agreement required the award to be made
has not expired, the court may, in its discretion,
direct a rehearing by the arbitrators.
The confirmation of an arbitration award is a summary
proceeding that merely makes what is already a final
arbitration award a judgment of the court. Florasynth, Inc. v.
Pickholz, 750 F.2d 171
, 176 (2d Cir. 1984) (citation omitted).
The grounds for vacation of an award are strictly limited in
order to avoid frustrating the basic purposes of arbitration:
disposing of disputes quickly and avoiding the expense and
delay of litigation. Transit Casualty Co. v. Trenwick
Reinsurance Co., Ltd., supra, 659 F. Supp. at 1351. Respondents,
as the parties moving to vacate the award, bear the burden of
proof. Andros Compania Maritima, S.A. v. Marc Rich & Co., A.G.,
579 F.2d 691
, 700 (2d Cir. 1978). The showing required to avoid
summary confirmation is high. Ottley v. Schwartzberg, supra,
819 F.2d at 376.
Respondents, by arguing that the arbitrators exceeded their
powers, are relying solely on section 10(d) of the Act.*fn13
The Second Circuit, however, has consistently accorded the
narrowest of readings to the Act's authorization to vacate
awards based upon this section. See, e.g., Andros Compania
Maritima, S.A. v. Marc Rich & Co., A.G., supra, 579 F.2d at
703. Respondents seek to fit within the limited scope of the
section primarily by maintaining that arbitrators are not
empowered, under New York law, to award punitive damages.
A. The Award of Punitive Damages —
The powers of an arbitrator are derived generally from the
parties' contractual agreement to arbitrate. An arbitrator's
award settling a dispute with respect to the interpretation or
application of an agreement must draw its essence from the
contract and cannot simply reflect the arbitrator's own notions
of justice. See United Paperworkers International Union v.
Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364, 370, 98 L.Ed.2d
Consequently, in order to determine whether the arbitrators
exceeded their powers by awarding punitive damages to the
Barbiers, the Court must first determine whether the Agreement
itself grants the arbitrators authority to award punitive
damages, mindful of the federal policy that "any doubts
concerning the scope of arbitrable issues should be resolved in
favor of arbitration, whether the problem at hand is the
construction of the contract itself, or an allegation of
waiver, delay or a like defense to arbitrability." Moses H.
Cone Memorial Hospital v. Mercury Construction Corp., supra,
460 U.S. at 24-25, 103 S.Ct. at 941. An examination of the
Agreement quickly reveals that it does authorize the
arbitrators to consider claims for punitive damages.
The arbitration provision found at ¶ 13 of the Agreement
broadly states that "any controversy arising out of or relating
to my accounts . . . shall be settled by arbitration. . . ."
(emphasis added). The provision cannot reasonably be restricted
to questions of breach of contract, since by its
terms the Agreement covers any controversy arising out of or
relating to petitioners' accounts, transactions between the
parties, the Agreement, "or the breach thereof." Since
agreements to arbitrate are generously construed,
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
supra, 473 U.S. at 626, 105 S.Ct. at 3353, it is sensible to
interpret the provision to indicate "an intention to resolve
through arbitration any dispute that would otherwise be settled
in a court, and to allow the chosen dispute resolvers to award
the same varieties and forms of damages or relief as a court
would be empowered to award." Raytheon Co. v. Automated
Business Systems, Inc., supra, 882 F.2d at 10. See Willis v.
Shearson/American Express, Inc., 569 F. Supp. 821, 823 (M.D.N.C.
1983) (interpreting arbitration provision identical to
provision in instant case).
In addition, the arbitration clause provides that petitioners
may elect to proceed under the rules either of the National
Association of Securities Dealers, or the NYSE. As noted above,
the parties submitted their dispute without objection to a NYSE
arbitration panel. Although the NYSE rules do not address the
issue of punitive awards, the NYSE award form utilized by the
Exchange explicitly provides for awards of punitive damages.
See Notice of Petition to Confirm Arbitration Award, Exh. C.
This suggests that the arbitration body chosen by the parties
contemplates punitive awards where warranted by applicable law.
Cf., e.g., Raytheon Co. v. Automated Business Systems, Inc.,
supra, 882 F.2d at 9-10 (clause requiring arbitration to be
conducted under rules of American Arbitration Association,
which rules empower arbitrator to grant any relief which is
just and equitable, authorized award of punitive damages).
In sum, it is clear that the parties by their contract have
authorized the arbitrators to award punitive damages. The
contract purports to place no limits on the remedial authority
of the arbitrators, nor should one be implied to exclude the
authority to award punitive damages. See Willoughby Roofing &
Supply Co. Inc. v. Kajima International Inc., supra, 598
F. Supp. at 357. Since, as noted above, the parties intended
that the arbitrators apply substantive New York law to the
resolution of their dispute, and New York courts are empowered
to award punitive damages with respect to certain of the claims
asserted by petitioners, the arbitrators, if they believed such
damages to be an appropriate remedy under New York law, would
be equally empowered. Therefore, any contention that the
contract itself denied the arbitrators the power to award
punitive damages must fail.
Inasmuch as the Agreement authorized the arbitrators to award
punitive damages, respondents must demonstrate that, as a
matter of law, such an award is improper. Respondents rely
heavily on Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386
N YS.2d 831, 353 N.E.2d 793 (1976), in which the New York
Court of Appeals held that "[a]n arbitrator has no power to
award punitive damages, even if agreed upon by the parties."
Garrity v. Lyle Stuart, Inc., supra, 40 N.Y.2d at 356, 386
N YS.2d at 832, 353 N.E.2d at 795. The Garrity Court reasoned
that punitive damages are a form of sanction reserved to the
State alone, one which was inapplicable in purely private
The Garrity decision, however, dealt only with the powers of
arbitrators under state law and state public policy.*fn14 As
previously discussed, however, federal law and federal policy
under the FAA apply to the instant case. Thus, to the extent
respondents urge the Court to apply the state law rule against
punitive damage awards by arbitrators based upon the
choice-of-law provision in the Agreement, their arguments must
There remains the crucial issue whether, under the applicable
federal substantive law of arbitration, punitive damage awards
by arbitrators are permitted. The only Circuit Courts of
Appeals which have directly considered the issue have adopted
a rule endorsing the arbitrability of punitive damages claims.
See Raytheon Co. v. Automated Business Systems, Inc.,
882 F.2d 6 (1st Cir. 1989); Bonar v. Dean Witter Reynolds, Inc.,
835 F.2d 1378 (11th Cir. 1988). A similar view has been embraced by
virtually every federal district court which has considered the
issue. See, e.g., Dugall International, Inc. v. Sallmetall, B.
V., supra, No. 84 Civ. 7170, slip op. at 6 (S.D.N.Y. May 8,
1986) ("no reason, contractual or in law to take the issue of
punitive damages from the arbitrator"); Ehrich v. A.G. Edwards
& Sons, Inc., 675 F. Supp. 559, 565 (D.S.D. 1987) (allowing
arbitrators to award punitive damages is consistent with the
strong federal policy in favor of upholding an arbitrator's
ability to fashion appropriate remedies); Willis v.
Shearson/American Express, Inc., 569 F. Supp. 821, 824 (M.D.N.C.
1983) (no reason persuasive enough to justify prohibiting
arbitrators from resolving issues of punitive damages submitted
by the parties); Singer v. E.F. Hutton & Co., Inc., 699 F. Supp. 276,
278-79 (S.D.Fla. 1988) (same). See also Willoughby Roofing
& Supply Co. v. Kajima International, Inc., supra, 598 F. Supp. 353;
Peabody v. Rotan Mosle, Inc., 677 F. Supp. 1135 (M.D.Fla.
Further, it is well-settled that, unless limited by the
agreement, arbitrators have broad discretion to fashion
remedies, and a court may overturn an award only when it
clearly goes beyond the substantive issues submitted by the
parties. See, e.g., York Research Corp. v. Landgarten, No. 89
Civ. 5556, 1990 U.S. Dist. LEXIS 4016 (S.D.N.Y. 1990). This
certainly did not occur here.
The First Circuit in Raytheon, after a rigorous analysis of
the issue, determined that where an arbitration provision in a
commercial context*fn16 broadly authorizes
arbitrators to resolve a wide range of disputes and to accord
appropriate relief, federal policy requires that punitive
damage awards be confirmed. The court rejected contrary
approaches taken by various state courts, which either
disallowed punitive awards altogether, e.g., Garrity v. Lyle
Stuart Inc., supra, 386 N.Y.S.2d 831, 353 N.E.2d 793; Anderson
v. Nichols, 359 S.E.2d 117 (W. Va. 1987); Shaw v. Kuhnel &
Assoc., Inc., 102 N.M. 607, 698 P.2d 880 (1985), or required a
specific provision in the parties' contract allowing punitive
damages to be awarded, see Belko v. AVX Corp., 204 Cal.App.3d 894,
251 Cal.Rptr. 557 (1988), review denied and op. withdrawn
by order of court, 1988 WL 96821 1988 Cal.LEXIS 862 (1988).
Finding no federal authority to the contrary in the commercial
context, the court determined that there existed "no reasoned
justification for departing from the rule," adopted by every
federal court which had thus far considered the issue, that
arbitrators are empowered under federal law to award punitive
damages under a broad arbitration agreement. Raytheon Co. v.
Automated Business Systems, Inc., supra, 882 F.2d at 11-12.
Respondents urge the Court to follow Fahnestock & Co., Inc.
v. Waltman, supra, No. 90 Civ. 1792 (S.D.N.Y. August 22, 1990),
a case decided while the instant petition was pending before
this Court. In Fahnestock, a court in this district held that
the Garrity doctrine mandated vacation of an arbitration
panel's award of punitive damages. The court first held that
Garrity was not preempted by the FAA, a conclusion with which
this Court disagrees. See supra at 160 n. 15. The court then
declined to follow Bonar and Raytheon, determining that it was
bound to apply Garrity in light of Second Circuit precedent
"implicitly" affirming the Garrity decision.
The court in Fahnstock cited John T. Brady & Co. v. FormEze
Systems, Inc., 623 F.2d 261 (2d Cir. 1980), cert. denied,
449 U.S. 1062, 101 S.Ct. 786, 66 L.Ed.2d 605 (1980) and Synergy Gas
Co. v. Sasso, 853 F.2d 59 (2d Cir.), cert. denied,
488 U.S. 994, 109 S.Ct. 559, 102 L.Ed.2d 585 (1988), for the proposition
that the Second Circuit has "implicitly, yet consistently,
affirmed the Garrity decision in determining whether punitive
damages were appropriate." Fahnestock & Co. v. Waltman, supra
at 11. It is unclear from the decision whether the court in
Fahnstock found that the Second Circuit had implicitly accepted
Garrity as a matter of state law, or as a matter of federal law
in this circuit.*fn17 However, after an examination of the
cases relied upon in Fahnstock, this Court is of the view that
the citations to Garrity by the Second Circuit did not
evidence an intention to preclude punitive damage awards in
arbitration as a matter of federal law. Rather, those cases
appear to have applied state law, not reaching the question of
preemption because the awards in those cases were found not to
be punitive. Thus the dicta in Synergy Gas and Brady simply do
not stand for the broad proposition that arbitrators are not
empowered, as a matter of federal law, to award punitive
damages.*fn18 This Court disagrees with the view that Second
Circuit precedent compels federal acceptance of the Garrity
Nor is there any persuasive federal, as opposed to state,
policy prohibiting arbitrators from considering claims for
punitive damages. The federal court decisions under the FAA
upholding arbitrator's awards of punitive damages belie any
claim of such
a policy.*fn19 In addition, the Supreme Court's decision in
Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107
S.Ct. 2332, 96 L.Ed.2d 185 (1987), holding arbitrable RICO
claims for treble damages, which are punitive in nature, lends
support to a federal policy favoring the arbitrability of
punitive damages claims. See Ehrich v. A.G. Edwards & Sons,
Inc., supra, 675 F. Supp. at 564.
Shearson's reliance on cases finding punitive damages
unavailable for violations of the federal securities laws is
misplaced, as the claims in the instant case involve commonlaw
tort causes of action in which punitive damages are, in just
instances, an appropriate remedy.*fn20 As the
Raytheon court noted:
[p]unitive damages can serve as an effective
deterrent to malicious or fraudulent conduct.
Where such conduct could give rise to punitive
damages if proved to a court, there is no
compelling reason to prohibit a party which proves
the same conduct to a panel of arbitrators from
recovering the same damages. Certainly, the fact
that the parties agreed to resolve their dispute
through an expedited and less formal procedure
does not mean that they should be required to
surrender a legitimate claim to damages
Raytheon Co. v. Automated Business Systems, Inc., supra, 882
F.2d at 12.
In sum, the strong federal policies favoring arbitrability of
issues and remedial flexibility of arbitrators govern the
disposition of this case. Accordingly, the arbitrators' award
of punitive damages is confirmed.
B. Rendering award on all issues submitted —
Finally, Bendelac contends that the award must be vacated
because the arbitrators failed to render an award on all of the
issues submitted to them. He essentially argues that since the
award enumerates only three of the five claims initially
submitted by petitioners, the arbitrators have "exceeded their
powers" and "imperfectly executed" their powers in rendering
the award. This argument is not convincing.
Arbitrators are not required to disclose the basis on which
their awards are made. Kurt Orban Co. v. Angeles Metal Systems,
573 F.2d 739, 740 (2d Cir. 1978). If a ground for the
arbitrator's decision can be inferred from the facts of the
case, the award should not be vacated. Id. In the absence of
any indication that an award was made in manifest disregard of
the law, courts will not look beyond even a lump sum award in
an attempt to analyze the reasoning processes of the
arbitrators. Id. Arbitrators need not explain their rationale
for an award to be confirmed. Koch Oil S.A. v. Transocean Gulf
Oil Co., 751 F.2d 551, 554 (2d Cir. 1985).
Bendelac has wholly failed to demonstrate that the facts of
the case did not warrant the award granted or that the award
was made in manifest disregard of the law. After a complete
review of the parties' submissions, the Court finds that the
arbitrators considered all of the claims prior to rendering
their award. While it may have been more satisfying to the
parties if the arbitrators had explained how they disposed of
each claim, such precision is not required. See Svoboda v.
Negey Associates, Inc., 655 F. Supp. 1329, 1333 (S.D.N.Y. 1987).
Moreover, the arbitration award itself expressly states that
it is rendered "in full and final settlement of all claims
between the parties." Since Bendelac has provided no evidence
to the contrary, he has failed to meet his burden with respect
to this issue.
For the foregoing reasons, the Barbiers' petition to confirm
the arbitration award is granted. Bendelac's motion to vacate
the award in its entirety and Shearson's motion to vacate the
punitive damages component of the award are denied.
Settle judgment on notice.