Arbitration Agreement Punitive Damages

In a three-two decision, the flintlock court found that „only… The fact that an agreement is interpreted and enforced in accordance with the New York law is not sufficient to invoke the garrity rule.`5 On the contrary, „a language must be invoked that explicitly invokes the garrity rule or that expressly excludes the rights to punitive damages.“6 As a result, the majority has ruled in favour of a trial order rejecting an application for a stay of the damages arbitration proceeding. On the other hand, the Flintlock minority found the aforementioned limitation power persuasive and found that a clause providing for the „application“ of an agreement under New York law was sufficient to enforce „restrictions on arbitration under New York State law, „including Garrity`s prohibition against punitive damages.7 This appeal stems from the rejection of an application to stay the punitive damages arbitration claims in a dispute between investors. In 2011, the defendant investor launched arbitration proceedings against the petitioners of the real estate development companies and their sponsors, who accused the fraud and breach of the contract and claimed punitive damages. Relations between the parties were governed by a correspondence agreement and enterprise agreements for petitioners Flintlock Construction Services, LLC (Flintlock) and Basque Construction LLC (Basque). 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 [1995]). 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… In Matter of Flintlock Construction Services, LLC .

v. Weiss, 2014 NY Slip Op 05818 (1:00 August 14, 2014), the Supreme Court dismissed an application to stay the defendant`s claim for punitive damages. The petition was based on the „legal sacrament“ of Garrity v. Lyle Stuart, Inc., 40 N.Y. 2d 35, 386 N.Y. 2d 831 (1976). New York law has long prohibited the award of punitive damages in arbitration proceedings as a public order case. However, the U.S. Supreme Court and a New York Court of Appeals have ruled that punitive damages may be awarded in arbitration under the Federal Arbitration Act („FAA“), unless the parties explicitly exclude such an appeal in the existing compromise clause. Therefore, when drafting a compromise clause, it is appropriate to consider whether to include a language that deprives an arbitrator of the opportunity to attribute such potentially catastrophic damages.