New York law does not allow an arbitrator to award punitive damages in a contract dispute. As the Court of Appeals noted in Garrity v. Lyle Stuart, “[t]he law does not and should not permit private persons to submit themselves to punitive sanctions…[for] freedom of contract does not embrace the freedom to punish even by contract.”1 In contrast, under the Federal Arbitration Act (FAA), an arbitrator may award punitive damages. In Mastrobuono v. Shearson Lehman Hutton, the U.S. Supreme Court ruled that when the FAA applies, the arbitrator can award punitive damages even if the contract states it is governed by New York law.2 But what if the parties broadly draft their choice-of-law clause so that New York law also applies to matters concerning “enforcement” of the agreement? Will that language deprive the arbitrator of the power to award punitive damages?
In Matter of Flintlock Construction Services v. Weiss3 the First Department ruled 3-2 that a choice-of-law clause providing that a contract “shall be construed and enforced in accordance with” New York law did not preclude the arbitrator from considering the issue of punitive damages. Accordingly, counsel needs to consider additional language or choose certain arbitration rules if the parties want to preclude the arbitrator from awarding punitive damages.
