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When an arbitrator awards punitive damages, the reasoning behind the award is irrelevant and the award will be confirmed, so long as the arbitrator did not manifestly disregard the applicable law or contravene public policy.
In Sarofim v. Trust Company of the West, 440 F.3d 213 (5th Cir. 2006), Trust Company of the West (“TCM”) handled over $12 million of investments from Sarofim. Within three years, the Sarofim portfolio had lost over $6 million due to lack of diversification and other poor investment strategies. Sarofim requested arbitration, and a three-member panel, applying the laws of California, awarded her $6.3 million in actual damages, and $2.9 million in punitive damages.
At the district court’s confirmation proceeding, TCM argued that the punitive damages award was really a disguise for attorney’s fees, and that the award should be vacated for manifest disregard of California law. The district court disagreed and confirmed the arbitration award.
The Fifth Circuit Court of Appeals agreed with the district court and refused to vacate the award because the arbitrator did not “manifestly disregard” the law. Furthermore, the punitive damages award was acceptable given the facts before the arbitrator and the information available to the Court on review. See Brabham v. A.G. Edwards & Sons Inc., 376 F.3d 377, 385 (5th Cir. 2004)(Westlaw registration required).
In California, punitive damages may be awarded when a defendant is proven liable by clear and convincing evidence of malice, oppression, or fraud, which are defined by Cal. Civ. Code §3294(a). Although the arbitral award made no mention of this section, the Fifth Circuit agreed that the decision “contains enough information to infer these things.”
Additionally, the award did not contravene the public policy of the State of California, which has no limit for punitive damages awards in arbitration. Rifkind & Sterling, Inc. v. Rifkind, 33 Cal.Rptr.2d 828, 833 (Cal.Ct.App. 1994)(Westlaw registration required). Rather, the $2.9 million award served California’s twin goals of “punishing” wrongdoers and “deterring” others from engaging in similar conduct.
As the Fifth Circuit emphasized, the arbitrators in this case were not required to give reasons for their award. Parties can require arbitrators to make findings of fact, conclusions of law, and d supporting reasons. This requirement helps the parties understand the decision of the arbitrators and helps courts more easily review awards.
Further, parties can specifically require arbitrators to follow the law, and courts can then determine whether the arbitrators exceeded their power in issuing the award. Parties can include these provisions in their arbitration agreement and reduce the great deference courts have to give arbitrators under the manifest disregard of the law standard. See, e.g., National Arbitration Forum Code of Procedure Rules 20 and 37.
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