Garrity v. Lyle Stuart, Inc.
353 N.E.2d 793, 40 N.Y.2d 354, 386 N.Y.S.2d 831 (1976)
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Rule of Law:
An arbitrator has no power to award punitive damages, as the imposition of such a sanction is a function reserved exclusively to the State and is a matter of public policy that cannot be waived or delegated to a private tribunal.
Facts:
- Plaintiff author entered into publishing agreements with defendant publishing company.
- The agreements contained broad arbitration clauses but did not make any provision for punitive damages.
- A dispute arose, and the author alleged the publisher was underpaying royalties.
- The author later claimed the publisher maliciously withheld an additional $45,000 in royalties.
- The author contended this malicious withholding was intended to coerce her into withdrawing a separate, pre-existing lawsuit against the publisher.
Procedural Posture:
- In 1974, plaintiff author commenced an action in state court alleging defendant publisher wrongfully withheld royalties.
- The trial court granted defendant's motion to stay the action pending arbitration.
- Plaintiff served a demand for arbitration, seeking $45,000 in withheld royalties and punitive damages.
- The arbitrators awarded plaintiff $45,000 in compensatory damages and $7,500 in punitive damages.
- Plaintiff initiated a proceeding in Supreme Court (the trial court) to confirm the arbitration award.
- The Supreme Court confirmed the entire award.
- Defendant, as appellant, appealed to the Appellate Division.
- The Appellate Division affirmed the Supreme Court's order confirming the award.
- Defendant, as appellant, now appeals to the Court of Appeals of New York, the state's highest court.
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Issue:
Does an arbitrator have the power to award punitive damages in a dispute arising from a breach of contract?
Opinions:
Majority - Chief Judge Breitel
No. An arbitrator has no power to award punitive damages, even if agreed upon by the parties, because doing so would violate strong public policy. The court reasoned that punitive damages are a social sanction intended to punish and deter, a power reserved exclusively for the State and its courts, not a private compensatory remedy to be dispensed by a private tribunal. Allowing arbitrators, who are not bound by principles of substantive law and whose decisions receive limited judicial review, to award punitive damages would create an unpredictable and uncontrollable system, displacing the State as the engine for imposing social sanctions. The freedom of contract does not extend to the freedom to be punished by a private party, and this public policy limitation cannot be waived.
Dissenting - Judge Gabrielli
Yes. An arbitrator should have the power to award punitive damages in this instance. The dissent argued that the public policy favoring the peaceful resolution of disputes through arbitration outweighs the public policy disfavoring punitive damages, especially given the defendant's malicious and fraudulent conduct. The dissent distinguished this case from those involving overriding public policy issues like antitrust law, aligning it instead with cases like Matter of Associated Gen. Contrs., where a penalty was upheld. Furthermore, the defendant effectively waived any objection by failing to challenge the demand for punitive damages at the arbitration hearing and then walking out. The arbitrators' award was a rational and just response to the defendant's bad-faith actions.
Analysis:
This decision establishes a significant public policy exception to the broad authority of arbitrators and the general principle of judicial deference to arbitration awards in New York. It carves out punitive damages as a non-delegable power of the state, meaning parties cannot agree, even in a broad arbitration clause, to give an arbitrator this authority. This holding protects parties from potentially large and unpredictable punitive awards in a forum that lacks the procedural safeguards and substantive legal constraints of a court. The case reinforces the distinction between private remedies (compensation) and public sanctions (punishment), solidifying the state's monopoly on the latter.
