Garrity v. Lyle Stuart, Inc.

New York Court of Appeals · Contracts

ContractsArbitrationPunitive DamagesPublic Policyarbitrationpunitive damagespublic policyvacatur

Facts

Plaintiff was the author of two books published by defendant under agreements containing broad arbitration clauses, but neither agreement provided for punitive damages in the event of breach. After earlier litigation between the parties, plaintiff brought a new action alleging defendant had wrongfully withheld $45,000 in royalties; the matter was stayed pending arbitration. In arbitration, plaintiff sought both the withheld royalties and punitive damages for defendant's allegedly malicious withholding of royalties to coerce withdrawal of the earlier action. The arbitrators awarded both compensatory and punitive damages, and defendant objected that punitive damages were beyond the arbitrators' authority.

Issue

Whether an arbitrator has the power to award punitive damages. More specifically, the question is whether a court may confirm an arbitral award imposing punitive damages as a private remedy.

Rule

An arbitrator has no power to award punitive damages, even if the parties agree to such relief or fail to object. Because punitive damages are a public sanction reserved to the State, enforcement of an arbitral punitive award violates strong public policy and that portion of the award must be vacated.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Denver, Nora Kim licensed software manuals to Front Range Learning House under a contract requiring arbitration of "any dispute arising from this agreement." After the company intentionally withheld $60,000 in royalties, the arbitrator awarded Nora $60,000 in actual damages and $20,000 labeled "punitive damages" because the breach was willful and malicious.

If Front Range asks a court to vacate only the punitive portion of the award, how should the court rule?

Explanation. The majority drew a categorical line: arbitrators may fashion compensatory remedies measured by the harm caused, but they have no power to impose punitive damages. Punitive damages are a public sanction reserved to the State, so a court should vacate that portion of the award as contrary to strong public policy while leaving the compensatory portion intact. (Derived from Garrity v. Lyle Stuart, Inc. (n.d.).)