New York law does not allow arbitrators to award punitive damages. (Garrity v Lyle Stuart, Inc., 40 NY2d 354, 356 .) However, in Mastrobuono v Shearson Lehman Hutton, the U.S. Supreme Court, Inc. (514 US 52 ) held that the Federal Arbitration Act (FAA) prejudged the garrity rule for an FAA arbitration agreement, even though the agreement contains a New York legal clause, in the absence of evidence that the parties intended to relinquish their right to punitive damages. A New Jersey appeals court recently ruled that maintaining part of a particular arbitration agreement would be contrary to public policy. Roman v. Bergen Logistics, LLC, included the termination of an employee of her employment at Bergen Logistics, LLC after four months. The employee filed a complaint claiming that the employer`s manager had sexually assaulted her and created a hostile work environment. Contracts for international transactions may include a New York law clause and a compromise clause providing for the seat of arbitration in the United States.
When a claim is invoked under this contract, the Tribunal will apply the Federal Arbitration Act, 9 U.S.C. 1 and below (FAA) and not New York law, to determine whether the arbitrator has the authority to determine an issue. This point becomes significant if New York law and the FAA differ on the issue of the ability to arbitrate. In Garrity, the Court of Appeal ruled that: « The court will issue an arbitration award to enforce an illegal arrangement or violation of public order … Since the enforcement of punitive damages would be contrary to public policy as a purely private remedy, an arbitral award imposing punitive damages, although agreed upon by the parties, should be removed …. Tong`s employment contract with S.A.C., « which is subject to New York State laws, » stated that Fried J. had found that Tong`s claim for compensation had been denied under the agreement. If the parties « are consensually associated with the inclusion of punitive compensation rights in the matters to be placed, the FAA ensures that its agreement is applied on its terms, even if a state right would exclude such claims from arbitration proceedings » (Mastrobuono v Shearson Lehman Hutton, 514 US 52, 58 ). In Mastrobuono, the U.S.
Supreme Court ruled that a New York legal choice clause « subject to the laws of new York State » did not clearly imply an intention to exclude a sanction. The Tribunal justified this decision by the fact that the arbitration provision is the best way to read « the laws of the State of New York » in order to refer to the substantive principles that a New York court would apply, but which does not include rules limiting the authority of arbitrators: « The choice of the law therefore includes the rights and obligations of the parties , while the arbitration clause includes the arbitration procedure; Neither invades the other… The American Arbitration Association (AAA) Commercial Arbitration Rules says nothing about whether punitive damages can be awarded – they do not hold a presumption both ways.