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Punitive Damages
in
International
Commercial Arbitration: Much Ado about
Nothing?
by MARKUS A. PETSCHE*
ABSTRACT
This article constitutes an attempt to assess the practical significance of punitive damages
in
the
context of international commercial arbitration.
It
shows
that,
although punitive damages are
regularly awarded
in
domestic arbitrations
in the US,
such awards are quasi-inexistent
in the
international
arena.
As
this article explains, this limited practical
relevance
of punitive damages
is due
to
two factors.
It
results, first of all, from
the
limited availability of punitive
relief,
i.e.
the fact that punitive damages
are
only recognized under
a
small minority of domestic (sub-
stantive and arbitration) laws,
especially
as far as
contract
claims
are
concerned.
Second,
the
lim-
ited practical significance of punitive damages also stems from
the
difficulties
to
enforce
such
awards abroad and the resulting reluctance of arbitral tribunals to grant punitive relief
even
where it
may be available
and
appropriate under the applicable law. While this article is primarily con-
cerned with providing an explanation of
the
current status
quo,
it also
discusses
legal developments
that may lead to punitive damages playing a more significant
role
in thefuture.
I. INTRODUCTION
In recent years, the issue of punitive damages awards in international commercial
arbitration has received increasing attention from legal scholars and practitioners.'
This growing interest stems, at least in part, from the progressive acceptance of
arbitral punitive damages awards in the 'homeland' of punitive damages, the
United States. In fact, as early as 1985 and 1987, the US Supreme Court affirmed
Senior Lecturer, Taylor's University, Malaysia; Adjunct Assistant Professor, SMU School
of
Law,
Singapore;
Adjunct Professor, Sorbonne Assas International Law School, Singapore (mpetsche@smu.edu.sg).
1 See, e.g., M. Scott Donahey, Punitive
Damages in International
Commercial
Arbitration,
10J. Ind.
Arb.
67 (1993);John
Y. Gotanda,
Awarding Punitive Damages
in
International Commercial Arbitrations
in
the
Wake
of
Mastrobuono
v.
Shearson Lehman Hutton, Inc.,
38
Harv.
Ind.
L.
J.
59
(1997); Darlene
S.
Wood,
International Arbitration and
Punitive
Damages:
Delocalization and Mandatory
Rules,
71 Def.
Counsel J.
402
(2004); Kyriaki Noussia,
Punitive
Damages
in
Arbitration:
Panacea
or
Curse?
27 J. Ind. Arb. 277
(2010); Niccolo Pietro Castagno,
International
Commercial Arbitration and Punitive
Damages,
4
Revista
de
Arbitraje Comercial
y de
Inversiones 729 (2011).
ARBITRATION INTERNATIONAL,
Vol.
29, No.
1
©LCIA,
2013
89
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90
Arbitration
International,
Volume
29
Issue
1
the arbitrability of antitrust2 and RICO claims3 and, by the same token, the ability
of arbitral tribunals to award treble damages.4 In 1995, in
Mastrobuono,
the
Supreme Court generally affirmed the ability of arbitrators to grant punitive
relief,5
a right which had historically been considered as incompatible with public
policy.6
These decisions of the US Supreme Court have raised, and continue to raise,
various questions. First of
all,
they have generated renewed interest in the classical
issue of whether American punitive damages awards can be enforced in third
countries. The Court's decision in
Mastrobuono,
which was rendered in relation to
a domestic dispute, raises the question of whether, and under what circumstances,
arbitral tribunals hearing international business disputes should apply the liberal
test formulated by the Court.7 Lasdy, the Court's case law raises the general
question of the role that punitive damages play, or should play, in the area of
international commercial arbitration.
Although punitive damages in international commercial arbitration are a hotly
- and controversially - debated topic, the available empirical data suggests that
such awards are, at best, very exceptional.8 Significantly, there is no reported
International Chamber of Commerce case in which such damages have been
awarded.9 Similarly, although this may not be direcdy relevant for the purposes of
this study, punitive damages awards are virtually inexistent in investment
disputes.10 Punitive damages are sometimes awarded in maritime arbitration
cases,
11
but it is not always clear whether those cases are domestic (US) or
2
Mitsubishi Motors
Corp.
v.
Soler
Chrysler-Plymouth,
Inc., 473 U.S. 614 (1985) (holding that an arbitral tribunal
sitting in Japan may hear a claim for treble damages under US antitrust laws).
3
Shearson/American
Express,
Inc.
v.
MacMahon,
482 U.S. 420 (1987).
4 When a court or tribunal awards treble damages, it awards damages in an amount equal to three times the
actual loss suffered. In other words, treble damages are one-third compensatory and two-third punitive.
5
Mastrobuono
v.
Shearson Lehman
Hutton,
Inc., 115 S. Ct. 1212 (1995).
6 Canity v.
Lyle
Stuart,
Inc., 353 N.E.2d 793, 797-798 (N.Y. 1976) (holding that punitive arbitration awards
violate public policy,
inter alia
because such sanctions are 'reserved to the State' and because 'the power to
punish' constitutes a 'monopoly of the State').
7 For a detailed discussion of this question, see Gotanda,
supra
n. 1.
8 See Karen J. Tolson,
Conflicts presented
by
Arbitral Awards
of
Punitive
Damages,
4 Arb. Intl. 255, 256 (1988),
(observing that 'no record of any international arbitral award of punitive damages exists...'). Although this
statement is somewhat dated, it has lost little of
its
accuracy.
9 To this author's knowledge, the only (limited) exception would be ICC case no. 7453 where the sole
arbitrator granted statutory damages under a Michigan statute which comprise punitive elements. However,
the sole arbitrator qualified those damages as 'primarily compensatory', thus avoiding the question of the
availability of punitive
relief.
See
Agent
v.
(1)
Principal and
others,
Final award in case
no.
7453 of 1994 in 22 Y.B.
Comm. Arb. 107 (Albert Jan van den Berg ed., 1997).
10 For recent cases, see, e.g.
Ionnasis Kardassopoulos
&
others
v.
The Republic
of
Georgia,
ICSID Cases No. ARB/05/
18 and ARB/07/15, Final award of
Mar.
3, 2010,
§
508 (referring to the Amoco Tribunal's holding that the
unlawfulness of an expropriation does not justify the award of punitive damages and that the actual damage
sustained is the measure of the reparation);
Joseph Charles Lamire
&
others
v.
Ukraine,
ICSID Case No.
ARB/06/18, Final award of Mar. 28, 2011, § 332 (referring to an earlier case where the tribunal held that
punitive damages were 'generally not available except in extreme cases of egregious behavior').
1 See, e.g.,
Society
of
Maritime
Arbitrators,
Triumph Tankers
Ltd.
(Owner)
v.
Defendant:
Kerr McGee Refining
Corp.
(Charterer),
Final award
no.
2642 of 28
March
1990 in 18
Yearbook
Commercial
Arbitration
112 (Albert Jan van den
Berg ed., 1993) (awarding treble damages under RICO on the basis of cargo conversion);
Society
of Maritime
Arbitrators,
Trade
&
Transport,
Inc. as
Owners
of "M/TLAUBERHORN"
(ex
TRADE
ENDEAVOR) (Owners)
v.
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Punitive Damages
in
International Commercial Arbitration
91
international ones.12 Overall,
it
appears that punitive damages awards
in
arbitration
are
essentially
an
American phenomenon.
This article analyses
the
reasons
for the
limited practical relevance
of
punitive
damages
in the
context
of
international commercial arbitration.
It
does
not,
however, elaborate
on the
exceptional nature
of the
punitive damages remedy
as
such,
i.e. on the
threshold applying
to the
'gravity'
of the
defendant's conduct.
While
the
basic empirical observation underlying this study
is
that punitive
damages awards
are
quasi-inexistent
in
international commercial arbitration, this
article nevertheless acknowledges that
a
more widespread recourse
to
this remedy
may
be
possible
in the
future.
Part
One of
this article explains that
in
international commercial arbitration,
punitive damages awards
are
rare because they
are
only available
in
those cases
in
which this remedy
is
recognized under
the
applicable domestic and/or procedural
law.
As
will
be
shown, only very
few
laws authorize
the
award
of
punitive damages,
especially
as far as
contract claims
are
concerned. Part
Two
highlights that punitive
damages awards
are
exceptional because, even where they
are
available under
the
applicable law(s), they are,
in
most countries, considered
to be in
violation of public
policy.
As a
result, there
is a
serious risk
of
annulment
or
refusal
to
enforce such
awards, which,
in
turn, prompts arbitral tribunals
to
refrain from awarding
punitive
relief.
II.
THE
LIMITED AVAILABILITY
OF
PUNITIVE
DAMAGES
IN
INTERNATIONAL COMMERCIAL
ARBITRATION
(a) Law(s)
determining the availability
of punitive
damages
The issue
of the
availability
of
punitive damages
in
international commercial
arbitration raises complex conflict
of
laws questions. Although
it is
impossible
to
discuss those questions
in
detail
in the
context
of
this study,
it is
important
to
highlight that both
the
applicable substantive
law and the
procedural
law of the
arbitral seat
may be
relevant.
As a
result, punitive damages
may not be
available
if
either
of
these
two
laws fail
to
provide
for, or
prohibit, such
relief.
Valero Refining
Company,
Inc.
(Charterer),
Final
award
no.
2699
of 23
August
1990 in 18
Yearbook Commercial
Arbitration
124
(Albert Jan
van den
Berg ed.), (awarding treble damages under RICO
on the
basis
of
cargo
conversion).
See
also Donald
E.
Zubrod,
Punitive and
RICO
Damages in American Maritime
Arbitration,
8
J. Intl.
Arb.l7(1991).
See Society of Maritime Arbitrators Final awards
no.
2642
and
2699,
supra
n.
11.
These cases involve carriage
of
goods
across borders,
but it is not
clear whether
the
relevant contracts
can
adequately
be
characterized
as
'international' ones considering that
it is not
clear whether
the
parties
to
these agreements were established
or domiciled
in
different countries.
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92
Arbitration
International,
Volume
29 Issue 1
(i)
Applicability
of the lex
contractus
The availability of punitive damages affects the substance of the rights and
obligations of the parties. This question should, therefore, be governed by the
applicable substantive law or lex
causae [lex loci delicti
in tort cases; lex
contractus
in
contract cases). In most countries, private international law principles acknowledge
that the lex causae governs the 'matters in respect of which damages may be
recovered'.13 As far as the scope of the lex
contractus
is concerned, the Rome I
Regulation (which is applicable in all Member States of the EU) expressly provides
that this law governs 'the consequences of a total or partial breach of obligations,
including the assessment of damages'.'4
As far as the availability of punitive damages more specifically is concerned, a
number of commentators take the view that the
lex contractus
plays a (decisive) role.
Redfern and Hunter, for example, observe that arbitrators 'should examine the
question of whether or not such damages may be awarded under the law
applicable to the substance of the dispute'.15 Noussia similarly accepts the idea that
'it is necessary to look at the law applicable to the substance of the dispute' in order
to determine whether punitive relief may be granted.16 Farnsworth also seems to
imply that the applicable substantive law governs the availability of punitive
damages.17
Although the case law on this issue is limited, this author is aware of at least two
'international' awards in which the arbitrators recognized the applicability of the
lex
contractus
to the question of the availability of punitive
relief.
In ICC Case no.
5946,
the sole arbitrator implicidy recognized the relevance of the applicable
substantive law, the law of the state of New York.18 However, he did not examine
whether this law allowed punitive damages awards since he found that such an
award would in any event be contrary to the public policy of the arbitral seat. In
ICC Case no. 8445, the arbitral tribunal rejected a claim for punitive damages,
inter alia
on the grounds that such damages were not generally available under the
applicable (substantive) Indian law.19
13 See, as far as English conflict of
laws
principles are concerned, Adrian Briggs,
The Conflict
of
Laws
39 (2008,
Oxford University Press, 2 edition).
14 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of
17
June 2008 on the law
applicable to contractual obligations (Rome I), Art. 12(l)(c).
15 Nigel Blackaby, Constantine Partasides et al.,
Redfern and Hunter on
International
Arbitration 531
(2009, Thomson
Sweet & Maxwell, 4di edition).
16 Noussia,
supra
n. 1, at 283.
17 E. Allan Farnsworth,
Punitive Damages in
Arbitration,
20 Stetson L. Rev. 395, 398 (1990 1991) (observing that
in a case where California law is the applicable substantive law, the appropriateness of awarding punitive
damages must be determined under that law).
18
Seller
v.
Buyer,
Final award in case
no.
5946 of 1990 in 16 Yearbook Commercial Arbitration 97 113 (Albert Jan
van den Berg ed., 1991), (stating that 'even if an award of punitive damages where not found to be
inconsistent with Swiss public policy [i.e. the public policy of the arbitral
seat],
respondent has not proven
that under New York law [the applicable substantive law] a claim for such punitive or exemplary damages
would lie').
19
Final award
of 1996
in Case
No.
8445 m 26
Yearbook
Commercial
Arbitration
167 178 (Albert Jan van den Berged.,
2001).
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Punitive Damages
in
International Commercial Arbitration
93
(it)
Relevance
of
the procedural
law
of the
arbitral seat
While
the
applicability
of the lex
contractus
is
widely acknowledged, most
commentators also recognize
the
relevance
of the
procedural
law of the
place
of
arbitration. Redfern
and
Hunter,
for
instance, note that
'the
question
of
whether
an arbitral tribunal
has the
power
to
impose penal sanctions depends
on... the
law of the place of arbitration
(lex
arbitri)'.20 Noussia,
who
accepts
the
applicability
of
the lex
contractus,
explains that
the
question
of the
availability
of
punitive
damages
is
sometimes viewed
as a
procedural issue, especially
in the
United
States.21
It
is, in
fact,
not
impossible
to
consider that
the
availability
of
punitive relief
is
a
procedural issue
—
although
one may
wonder
how a
single issue
may
constitute
both
a
substantive
and a
procedural question. Under this approach,
the
possibility
for arbitrators
to
award punitive damages
is
governed
by the
procedural
law
of the
place
of
arbitration.
In the
context
of
international commercial arbitration, this
procedural
law
refers
to the
'arbitration
law' in
force
at the
arbitral seat.22
As a
general rule,
as
will
be
shown, arbitration laws
are
silent with regard
to the
issue
of
remedies
and,
therefore, with regard
to the
availability of punitive damages.23 Still,
US courts have interpreted this silence (specifically
the
silence
of the
Federal
Arbitration
Act) to
constitute
an
implicit authorization
of
arbitral punitive
damages awards.24
Under
a
slighdy different
(and
arguably more convincing approach),
the
procedural
law of the
arbitral seat does
not
govern
the
issue
of the
'availability'
of
punitive
relief, but
rather
the
distinct question
of
whether arbitral tribunals
at all
have
the
'power'
to
award such damages. This approach
is
based
on the
idea that
arbitrators
do not
necessarily have
the
exact same powers
as
courts
and
that
domestic legislators
may
wish
to
restrict
the
ability
to
grant specific categories
of
relief
to
their courts. Several commentators draw such
a
distinction between
'power'
and
'availability'.25
(Hi)
Irrelevance
of
the substantive
law
of
the arbitral seat
The substantive
law of the
arbitral seat
is, as a
matter
of
principle, irrelevant
for
the purposes
of
determining
the
availability
of
punitive
relief.
Indeed,
it
governs
neither
the
substance
of the
parties' agreement,
nor the
procedural aspects
of the
arbitration (including
the
question
of die
arbitrators' 'power'
to
award punitive
damages). However, even
if the
substantive
law of the
seat does
not
determine
the
Redfern
and
Hunter,
supra
n.14, at 530.
Noussia,
supra
n.
I,
at
281.
Ibid,
(expressly equating procedural
law
with arbitration
law).
See infra
at
I.C.I.
See
Mastrobuono
v.
Shearson Leliman
Hutton,
Inc.
115
S. Ct.
1212(1995) (holding that
the
Federal Arbitration Act
ensures that private agreements
to
arbitrate
are
enforced according
to
their terms
and
that
in the
absence
of
contractual intent
to the
contrary, arbitrators
may
award punitive damages even where such awards
are
prohibited under
the
relevant state (arbitration)
law).
See,
e.g., Redfern
and
Hunter,
supra
n.
14,
at
530 (stating that the question of whether arbitrators may impose
penal sanctions depends
on the law of
the place
of
arbitration); Farnsworth,
supra
n.
17,
at 397.
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94
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International,
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29
Issue
1
availability of punitive damages
as
such,
it may
nevertheless have
an
impact
on the
decision
of the
arbitrators.
In
fact,
as
shall
be
explained,
a
punitive arbitral award
may contravene
the
(substantive) public policy
of the
seat
and may
thus
be
annulled
by the
courts
of
that seat.
As a
result, arbitral tribunals
may
refuse
to
award punitive relief even though
it is
otherwise available under
the
lex
contractus.^
(b) limited
recognition
of punitive
damages
in
domestic (substantive)
laws
(i) Limited
recognition
of punitive
damages
in
general
Subject
to a
limited number
of
exceptions, punitive damages
are
only recognized
in common
law
countries. They
are
notably awarded
by the
courts of the
UK, the
US,
Canada, Australia,
and New
Zeeland.27 However,
as
some comparative
law
scholars have righdy pointed
out, the
circumstances
in
which punitive relief
is
available
and the
magnitude
of
punitive damages awards vary gready from
one
jurisdiction
to
another.28
In the
United States,
the
availability
of
punitive relief
is
a
question
of
state
law,
with
a
significant majority
of
states authorizing punitive
damages awards.29
In civil law jurisdictions, punitive damages
are
generally
not
available.30 Hence,
under French
and
German
law, for
example, courts
do not
grant punitive
relief.
While some authors have suggested that this traditional hostility vis-a-vis punitive
damages
may be
progressively eroding,31
to
date,
no
significant changes have taken
place. There
are,
however,
a few
limited exceptions
to the
unavailability
of
punitive
relief
in
civil
law
countries. Those notably include Norway, Poland, Brazil, Israel,
and
the
Philippines.32
(ii)
Exceptional recognition
of punitive damages for
breach
of contract
As
a
general rule, international commercial arbitration involves disputes based
on
contracts.33
In
fact,
in the
vast majority
of
cases,
the
referral
of an
international
commercial dispute
to
arbitration
is
based
on a
contractual clause providing
for
arbitration
of
disputes arising
in
connection with
the
parties' transaction. Hence,
the availability
of
punitive damages
in
international commercial arbitration
depends
on
whether, under
the
applicable law(s), such damages
are
available
for
breach
of
contract cases.
See
ICC
Case
no.
8445,
supra
n. 19.
See John
Y.
Gotanda,
Punitive
Damages:
A
Comparative
Analysis,
42
Colum.J. Transnatl.
L. 391
(2003).
Ibid, at 443
(concluding that
'we
have
not
witnessed
. .
.
the
harmonization
of the
laws
and
practices
concerning pumtive damages
...').
Ibid,
at
421.
Gotanda,
supra
n. 1, at 66.
See,
as far as
German
law is
concerned, Volker Behr,
Punitive Damages in American and German
Law
-
Tendencies
Towards Approximatimi
of
Apparently Irreconcilable
Concepts,
78
Chi.-Kent
L. Rev. 105
(2003).
Gotanda,
supra
n. 1, at 109.
Castagno,
supra
n. 1, at 729
(observing that international commercial arbitration 'mainly regards contract
liability').
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Punitive Damages
in
International Commercial Arbitration
95
In most countries that recognize punitive
relief,
such relief
may
only
be
granted
in tort claims involving 'exceptionally objectionable conduct'
on the
part
of the
defendant.34
In
those countries, punitive damages
may not be
awarded
in
contract
claims.
In the UK, for
example,
the
unavailability of punitive damages
in
breach
of
contract actions
has
been affirmed
by the
House
of
Lords
as
early
as 1909 35 and
was recently reiterated
in a
report
of
the English
Law
Commission.36
The
courts
in
Australia
and New
Zealand have followed
the
English example.37
It
is
generally acknowledged that punitive damages
in
breach
of
contract cases
are only available
in the
United States
and
Canada.
In the
United States,
the
Restatement Second
of
Contracts expressly provides
for the
availability of punitive
damages when
the
breach
of
contract also constitutes
an
'independent' tort.38
In
addition, under
the
so-called Indiana decisions, punitive relief
may
also
be
awarded where
the
breach
in
question does
not
amount
to an
independent tort,
but
was
fraudulent, malicious, grossly negligent
or
oppressive.39 Punitive damages
for breach
of
contract
are
also awarded
in
Canada, though apparently
to a
more
limited extent.40
(c) Limited
recognition
of punitive damages
in
arbitration laws
and
rules
(i) Silence of most arbitration laws
and
rules
on the
availability of punitive damages
Arbitration laws
do not
generally address
the
question
of
whether arbitrators
may
award punitive
relief. As a
general rule, they
do not
even deal with
the
more
general question
of the
available remedies.41 Thus, arbitration laws
do not, for
example, contain
any
provisions regarding
the
arbitrators' ability
to
order specific
performance. Most arbitration laws
do,
however, include
one or
several provisions
regarding
the
rendering
of
the final award.42 Yet, under most laws, those provisions
merely
set
forth
the
requirements that
the
award shall
be in
writing, reasoned,
and
signed.43
The silence
of
arbitration laws regarding
the
possibility
for
arbitrators
to
award
punitive relief is hardly surprising. First
of
all,
it
reflects
the
idea that
the
question
of
the
available remedies (including
the
availability
of
punitive relief)
is
most
Gotanda,
supra
n. 27, at 440.
Addis
v.
Grammophone
Co. Ltd.
[1909] UKHL
1
(holding that 'exemplary damages ought
not to
be
.. .
recoverable
in
such
an
action
[a
contract action]
as the
present').
English
Law
Commission, Aggravated, Exemplary
and
Restitutionary Damages [1997] EWLC 247, §
5.42.
Gotanda,
supra
n. 27, at
407-420.
Restatement (Second) on
Contract,
§
355
provides: 'Punitive damages
are not
recoverable
for a
breach
of
contract
unless
the
conduct constituting
the
breach
is
also
a
tort
for
which punitive damages
are
recoverable.'
Castagno,
supra
n. 1, at 733.
Ibid.
No section
on
remedies
is
contained,
for
example,
in the
UNCITRAL Model
Law, the
French Code
de
Procedure Civile,
the US
Federal Arbitration
Act, the
German Arbitration
Act, and the
Swiss Private
International
Law
Statute (PILS).
See Art.
31(1) and
(2)
of
the UNCITRAL Model Law, Arts
1480 to 1482 of
the French Code
de
Procedure
Civile (relating
to
domestic arbitration),
ss
1054(1)
and 2 of
the German ZPO, Art. 189(2)
of
the Swiss PILS.
Ibid.
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appropriately regarded
as a
substantive issue which,
by
implication, falls outside
of
die scope
of
arbitration laws. Under such
an
approach, arbitration laws
are
'procedural' laws which provide
a
normative framework
for the
various stages
of
the arbitral procedure
(e.g.
arbitration agreement, arbitral proceedings, award,
enforcement
and
means
of
recourse). Accordingly, substantive questions such
as
the validity
of
die underlying contract
or the
consequences
of a
breach
of
contract
are
not
addressed
in
arbitration laws.
Second, assuming that
the
availability of punitive damages
may be
considered
as
a procedural issue governed
by die
applicable arbitration
law, it
must
be
remembered that arbitration laws generally
do not
establish
a
detailed regulatory
framework,
but
merely
lay
down basic guidelines.
In
fact, arbitration laws
are
essentially based
on the
principles
of
party autonomy
and
arbitral discretion. Also,
in
the
specific context
of
international arbitration,
it
would hardly make sense
to
expressly provide
for the
availability
of a
remedy that
is
unheard
of in the
vast
majority
of
countries. Conversely,
for the
reasons mentioned above,
it is
neither
necessary
nor
appropriate expressly
to
exclude punitive damages awards.
Like arbitration laws, institutional arbitration rules
are
generally silent with
regard
to
available remedies
and,
more specifically, with regard
to the
availability
of punitive damages. Section
4 of the
UNCITRAL Rules (entided
'The
award'),
for example, contains
no
provision pertaining
to
remedies. Article
31 of the ICC
Arbitration Rules, which relates
to die
'making
of the
award', similarly fails
to
address this issue. Article
26 of
the LCIA Rules also remains silent
on the
question
of remedies, even though
it
specifies that
the
tribunal
'may
order simple
or
compound interest...
at
such rates
as the
Arbitral Tribunal determines
appropriate'.44
The absence
of
provisions concerning
the
availability
of
punitive damages
in
institutional arbitration rules
is
unsurprising. First
of all,
given that arbitration
rules
are of a
procedural nature,
it is not, in
principle, their function
to
define
the
types
of
remedies that
may be
granted
by
arbitrators. Second, since institutional
rules,
like arbitration laws,
are
based
on the
idea
of
party autonomy,
a
rule
authorizing
or
proscribing
the
award
of
punitive relief would
be
either
an
undue
interference with such autonomy
or
unnecessary.
(ii)
Express prohibition
of punitive
damages
in
selected instruments
In those rare instances where arbitration laws
or
rules discuss
the
availability
of
punitive
relief,
this possibility
is
usually precluded. Admittedly, Section
21(a) of the
United States Uniform Arbitration
Act
recognizes
the
right
of
arbitrators
to
award
punitive damages.45 However,
in
reality, this provision only implies that arbitrators
are
not
prevented from granting such
relief,
provided
it is
available under
the
LCIA Arbitration Rules,
Art.
26(6).
Uniform Arbitration
Act,
Section
21(a)
provides:
An
arbitrator
may
award punitive damages
or
other
exemplary relief
if
such
an
award
is
authorized
by law in a
civil action involving
the
same claim
and the
evidence produced
at the
hearing justifies
the
award under
the
legal standards otherwise applicable
to the
claim.'
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Punitive Damages
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97
applicable substantive or procedural law. Hence, it would be erroneous to say that
the Uniform Arbitration Act 'empowers' arbitrators to grant punitive damages.
Also,
and very significantly, the Uniform Arbitration Act constitutes a piece of
legislation on domestic arbitration and is thus not direcdy relevant for the purposes
of international commercial arbitration.
The International Mediation and Arbitration Rules of the AAA expressly
exclude punitive
relief.
Article 28(5) of those Rules provides that, '[ujnless the
parties agree otherwise, the parties expressly waive and forego any right to
punitive, exemplary or similar damages...' In other words, the parties may
expressly authorize punitive damages awards but if they fail to do so, such awards
will be excluded under the Rules.
Punitive damages awards are also expressly excluded under a number of public
international law instruments. Under the Draft Model Agreement on International
Investment prepared by the International Institute for a Sustainable Development,
arbitral tribunals hearing investor—state disputes 'may not award punitive
damages'.46 Likewise, arbitral tribunals constituted under the Dominican
Republic-Central America Free Trade Agreement are 'not authorized to award
punitive damages'.47 In a similar vein, Section 1606 of the US Foreign Sovereign
Immunities Act 1976 provides that 'a foreign state... shall not be liable for
punitive damages'. While these provisions are not directly relevant for the
purposes of international commercial arbitration, they nevertheless suggest that
punitive damages awards are generally perceived as inappropriate in an
international context.
III.
THE LIMITED ENFORCEABILITY OF PUNITIVE
DAMAGES AWARDS IN INTERNATIONAL
COMMERCIAL ARBITRATION - INCOMPATIBILITY
OF PUNITIVE DAMAGES WITH THE PUBLIC POLICY
OF MOST JURISDICTIONS
(a) Reasons for this
incompatibility
(i)
Incompatibility
of punitive
damages
with the
basic distinction between private
and
criminal
law
In most legal systems, punitive damages are considered incompatible with the
basic distinction between private and criminal law. According to this distinction,
private law governs the relationships between (private) legal subjects and involves
exclusively private interests. Criminal law, however, involves matters of'general' or
'public' interest pertaining,
inter
alia,
to the punishment and deterrence of criminal
International Institute for a Sustainable Development, Draft Model Agreement on International Investment,
Annex A. Investor-State Dispute Settlement, Art. 13(3).
Dominican Republic-Central America Free Trade Agreement, Ch. 10, Sec. A: Investment, Art. 10.26(3).
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behaviour. Therefore, the objectives of punishment and deterrence are, or should
be,
absent from the sphere of private law. In continental European countries, this
strict distinction between the respective objects and purposes of private and
criminal law is viewed as 'an achievement of modern legal culture'.48
The confinement of punishment and deterrence to the field of criminal law is
based on the idea that penalties should only be imposed if the legal subjects
concerned are afforded specific fundamental protections. The most basic of these
protections consists of the principle of the 'legality' of sanctions according to which
sanctions must be provided for by law [nullum
crimen,
nulla poena sine lege).i9 In
addition, the legal subjects must also benefit from procedural guarantees such as,
for example, the double jeopardy principle and the 'beyond reasonable doubt'
standard of
proof.
Even in the United States, courts and commentators accept the idea that
punitive damages awards may, in certain cases, be unconstitutional. In BMW of
North
America,
Inc. v. Gore,50 the US Supreme Court acknowledged that 'grossly
excessive' punitive damages awards 'transcend the constitutional limit' established
by the Due Process Clause of die Fourteenth Amendment.51 A few years later, in
State Farm Mutual
Automobile Insurance
Co. v. Campbell,52 the Court clarified under
what circumstances punitive damages awards may be regarded as 'grossly
excessive' when it observed that 'few awards exceeding a single digit ratio between
punitive and compensatory damages, to a significant degree, will satisfy due
process... '53 Some commentators question the constitutionality of punitive
damages more generally.54
In most civil law jurisdictions, however, the sole purpose of damages (whether
for tort or breach of contract) is compensation. In Germany, for example, the
statutory provisions on damages contained in the Civil Code, while addressing
restitution and compensation, are silent with regard to the availability of punitive
damages. More importandy, Article 40, Section 3 of the EGBGB
(Einfiihrungsgesetz zum Biirgerlichen Gesetzbuch, Introductory Act to the Civil
Code) provides that '[cjlaims governed by the law of another country cannot be
raised insofar as they... go substantially beyond what is necessary for an adequate
compensation of the injured party'.
Like its German counterpart, the French Civil Code provides that damages for
tort and breach of contract are exclusively compensatory in nature.55 French law
of obligations adheres to the principle of full compensation whereby the actual loss
Helmut Koziol, Punitive Damages -A European Perspective, 68 La. L. Rev. 741, 755 756 (2008).
Ibid,
at 756.
517 U.S. 559(1996).
Ibid,
at 586.
123 S. Gt. 1513(2003).
Ibid,
at 1524.
Thomas B. Colby,
Beyond the Multiple Punishment
Problem:
Punitive Damages
as Punishment for
Individual,
Private
Wrongs,
87 Minn. L. Rev. 583, 650 (2003) (stating that 'a number of commentators (along with two Justices)
have noted that punitive damages . .. clearly appear to meet the test for requiring criminal procedure
protections').
See Arts 1382 (relating to tort liability) and 1149 (relating to contract liabilty) of the Civil Code.
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Punitive Damages
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suffered is the sole measure for the damages to be awarded. Damages must
compensate for 'all the damage' and 'nothing but the damage'. The reprehensibility
of the conduct of the tortfeasor or breaching party (e.g. his gross negligence,
maliciousness etc.) is irrelevant. In a decision rendered on
3
July 2006, the Court
of Appeal of Paris confirmed the principle that the gravity of the tortfeasor's fault
does not affect the amount of damages to be awarded to the victim.56
Considering that in civil law countries, the award of punitive damages is
incompatible with the basic function assigned to the law of obligations, it is hardly
surprising that such damages should be regarded as contrary to public policy.
Although the relevant case law is limited, die highest courts of at least two
countries have expressly held that foreign punitive damages awards are contrary to
domestic public policy and, therefore, unenforceable. In a 1992 landmark decision,
the German Supreme Court refused enforcement of the punitive damages portion
of a California judgment on the grounds that such damages were contrary to
German public policy.57 More recently, on
19
January 2007, the Italian Supreme
Court handed down a similar decision.58
As far as other civil law jurisdictions are concerned, there are, with one
exception, no reported cases in relation to the enforcement of foreign punitive
damages awards. However, in light of the fact that such damages are contrary to
the prevailing perceptions of the basic function of private law, it is reasonable to
assume that the courts of those countries would follow the German and Italian
examples. To this author's knowledge, the only exception to this general rule
consists of the position taken by the Spanish Supreme Court in a decision rendered
on 13 November 2001 in which the Court held that punitive damages awards are
not as such contrary to Spanish public policy.59
Some authors have pointed out that the incompatibility of punitive damages
awards with continental European public policy may be exaggerated, if not
erroneous. Behr, for example, has shown that despite the formal exclusion of
punitive damages under German law, German courts increasingly award non-
compensatory damages in cases involving pain and suffering60 and infringement of
intellectual property rights.61 In addition, recent developments indicate that civil
law attitudes towards punitive damages may be evolving. In France, for example,
a recent proposal to reform the French Civil Code suggests introducing punitive
damages into French tort law.62 Regardless of whether such a proposal will
ultimately be adopted, it is in itself a reflection of a changing mindset.
Court of Appeal of Paris, decision of
3
July 2006 reported by Thomas Rouhette,
The Availability
of Punitive
Damages in
Europe:
Growing Trend or Nonexistent Concept?
74 Def. Counsel J. 320, 323 (2007).
Bundesgerichtshof [BGH] [Federal Court of Justice] June 4, 1992, 118 Entscheidungen des
Bundesgerichtshofes in Zivilsachen [BGHZ] 312 (F.R.G.).
Italian Supreme Court, decision of Jan. 19, 2007, No. 1183/2007 reported by Rouhette,
supra
n. 56, at 331.
Ibid,
at 332.
Behr,
supra
n. 31, at 130-136.
Ibid,
at 137-139.
Proposal to reform the law of obligations and the law of prescriptions, 22 Sep. 2005, Art.
1371:
'One whose
fault is manifestly premeditated, particularly a fault whose purpose is monetary gain, may be ordered to pay
punitive damages in addition to compensatory damages. ..'
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(ii)
Unjust enrichment
and
unequal treatment
of plaintiffs
Punitive damages are not only contrary to basic views on the object and purpose
of private law, but they also pose two additional problems. First, the award of
punitive damages leads to situations that can be characterized as 'unjust
enrichment'. In fact, punitive damages do not take the form of a fine that the
defendant is ordered to pay to the state;63 rather, they are awarded to the
plaintiff.
As a result, the plaintiff is 'compensated' beyond the actual damage sustained, i.e.
he is enriched. In most countries, such enrichment would be considered as 'unjust'.
Second, punitive damages also lead to unequal treatment of plaintiffs who are
essentially in the same situation. In fact, two plaintiffs who have suffered the same
damage will be 'compensated' differently, depending on whether the defendant's
behaviour justifies the award of punitive
relief.
In many countries, this may be
considered as contrary to the basic principle of equal treatment before the law or
similar notions having constitutional or quasi-constitutional status.
(b)
Consequences
of this
incompatibility
(i) Annulment of, and
refusal to
erf
one,
arbitral punitive
damages awards
The incompatibility of punitive damages with domestic public policy requirements
may have a twofold impact on the enforceability of arbitral punitive damages
awards. First of all, it may lead to such awards being annulled (set aside) by the
courts of the place of arbitration. Under virtually all arbitration laws, as is well
known, arbitral awards may be the subject of setting aside proceedings in those
courts.64 One of the grounds upon which an award may be set aside is the award's
incompatibility with the forum's public policy.65 Therefore, if the courts of the
arbitral seat consider that punitive damages violate public policy, they may annul
punitive arbitral awards.
Second, incompatibility with public policy is also a ground upon which courts
may refuse to enforce foreign arbitral awards. Under the New York Convention,
for example, '[recognition and enforcement of an award may... be refused if the
competent authority in the country where recognition and enforcement is sought
finds that... recognition or enforcement of the award would be contrary to the
public policy of that country. "66 The UNCITRAL Model Law contains a similar
provision regarding the enforcement of foreign arbitral awards.67
To this author's knowledge, there are no reported cases in which courts have
either enforced, or refused to enforce, foreign punitive damages awards under the
New York Convention or domestic legislation based on the UNCITRAL Model
In this respect, it is interesting to note that under the French reform proposal, judges awarding punitive relief
'may direct a part of such damages to the public treasury'. See Art. 1371,
supra
n. 62.
See,
e.g., Arts 1(2) and 34 of the UNCITRAL Model Law.
See,
e.g., Art. 34(2)(b)(ii) of the UNCITRAL Model Law.
Article V(2)(b) New York Convention.
Article 36(l)(b)(ii) of the UNCITRAL Model Law.
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Law. Back in 1987, Karen Tolson attributed this lack of relevant case law to the
fact that 'no record of any international arbitral award of punitive damages
exist
[ed]'.
68
As has been pointed out, to a large extent, this observation remains
accurate today.
Despite the absence of relevant empirical data, most commentators agree that
arbitral punitive damages awards are generally not enforceable in jurisdictions that
do not recognize this remedy. Castagno, for example, observes mat in those
countries, 'the public policy defence... could... represent a strong bias against the
enforcement of punitive damages awards' ,69 As a result, he argues, it is unlikely
that such awards would be enforced in Italy or Germany, for example.70 He also
takes the view that the enforcement of punitive arbitral awards is highly
improbable in the UK, considering that under English law, such relief is not
available in contract cases.71 A number of other writers have acknowledged that
the enforcement of punitive arbitral awards may be problematic.72
Other scholars, however, take a different view.73 They rely primarily on the idea
that under the New York Convention's public policy exception (or similar domestic
provisions), an award will only be refused recognition or enforcement if it violates
'international', rather than 'domestic' public policy.74 They consider, in other
words, that the public policy exception applying to arbitration awards is more
restrictive than the one pertaining to foreign court judgments. Thus, the fact that
a court of country 'A' refuses to enforce a foreign punitive damages
judgment
would
not necessarily imply that another court of country 'A' would deny enforcement of
a punitive
arbitral
award.
Arbitration laws and court decisions confirm the relevance of 'international',
rather than 'domestic' public policy standards for the purposes of assessing the
enforceability of foreign arbitral awards. Although express legislative references to
the concept of international public policy are rare, one such reference can be
found in Article 1520(5) of the French Code of Civil Procedure.75 In other
countries, the courts have reached similar results by relying on the idea that the
New York Convention's public policy exception must be interpreted restrictively.
In the United States, for example, courts generally consider that 'the Convention's
68 Tolson,
supra
n. 8, at 256.
69 Castagno,
supra
n.
1,
at 747.
70
Ibid.
"
Ibid,
at 748.
72 See, e.g., Redfern and Hunter,
supra
n. 15, at 530 531 (referring to '[pjroblems of enforcement of [punitive
damages awards]' and arguing that it is likely that such awards would be denied enforcement in Germany);
Gotanda,
supra
n. 1, at 101 (acknowledging that 'arbitral awards of punitive damages [may] be against the
public policy of countries that do not allow for such relief domestically').
73 See, e.g., Farnsworth,
supra
n. 17.
74
Ibid,
at 407 (pointing out the anecdotal fact that his '[c]olleagues from civil law systems seem to think that an
award of punitive damages would not be against their
international
public policy') (emphasis added). See also
Albert Jan van den Berg, The
Mew
York
Arbitration Convention
of 1958
(1981,
Kluwer Law and Taxation), at 360.
75 French Code of Civil Procedure, Art. 1520(5) provides: 'An award may only be set aside where ...
recognition or enforcement of the award is contrary to international public policy.'
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public policy defense should be construed narrowly'76 and that its application
requires 'supranational emphasis', rather than reliance on 'national political
interests'.77
(ii) Refusal to award punitive
damages
in
light
of
their incompatibility
with
the public
policy of
the place
of arbitration
As has been explained, punitive arbitral awards may be annulled by the courts of
the arbitral seat if they contravene the applicable public policy requirements. This
prospect inevitably influences the arbitral tribunal's decision. In fact, arbitral
tribunals may be reluctant to grant punitive relief if it is probable, or at least
possible, that such an award would be set aside by the courts of the place of
arbitration. Two factors play a role in this respect.
First, arbitrators have an understandable interest in issuing an enforceable
award. Since the arbitral process is ultimately ineffective if it does not lead to the
rendition of such an enforceable award, arbitrators generally consider
enforceability as a duty owed to the parties. While it may not constitute a 'legal'
duty in the strict sense, some arbitration rules expressly refer to the award's
enforceability as an objective of the arbitral process. Under the ICC Rules, for
example, arbitral tribunals 'shall make every effort to make sure the Award is
enforceable at law'.78
Second, the reluctance of arbitrators to issue an award that is likely to be
annulled by the courts of the seat is reinforced by the fact that the legal
consequences of an annulment are particularly 'drastic'. In fact, as a general rule,
an award that has been set aside at the place of arbitration can no longer be
enforced in a third country. Under the New York Convention, for instance, an
award may be refused recognition or enforcement if it 'has been set aside or
suspended by a competent authority of the country in which... that award was
made'.79 While it is true that the courts of a few countries have occasionally
enforced annulled awards,80 those decisions remain exceptional.
Although, as has been mentioned, the relevant case law is limited, one ICC
award provides a useful illustration. In ICC case no. 5946,81 the respondent
claimed punitive damages on the basis of the claimant's alleged unilateral and
unprovoked termination of the parties' agreement. The sole arbitrator denied the
respondent's claim on the grounds that punitive damages were 'considered
contrary to Swiss public policy, which must be respected by an arbitral tribunal
Parsons
&
Whittemore Overseas
Co.
v.
Soctite Generate de
I'Industrie
du
Papier,
508 F.2d 969, 975 (2d Cir. 1974).
Ibid.
ICC Rules of Arbitration, Art. 35.
New York Convention, Art. V(l)(e).
For a recent discussion of such decisions, see Emmanuel Gaillard,
Legal Theory
of
International Arbitration
135-143 (2010, Martinus Nijhoff Publishers).
Seller v. Buyer, Final award in case no. 5946 of 1990,
supra
n. 18.
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sitting in Switzerland even if the arbitral tribunal must decide a dispute according
to a law that may allow punitive or exemplary damages as such ... '.82
(Hi) Refusal to
award punitive damages
in
light
of
their incompatibility
with
the public
policy qfprobabk enforcement jurisdictions
The concern of arbitral tribunals with the enforceability of their award may
prompt those tribunals to deny a request for punitive relief if it is unlikely that a
punitive award can be enforced in die relevant foreign jurisdictions. An arbitral
tribunal sitting in New York, for example, may be reluctant to award punitive
damages in a case brought by an American claimant against a German
respondent, considering that it would most probably be impossible to enforce such
an award in the respondent's home jurisdiction. To this author's knowledge, there
are no reported cases where arbitral tribunals have expressly adopted this line of
reasoning, but their natural interest in the award's enforceability suggests that it is
likely that arbitral tribunals should take those considerations into account.
Two practical questions arise in this respect. The first one pertains to the
determination of the relevant enforcement jurisdiction(s). When deciding whether
to grant a party's request for punitive damages, arbitral tribunals will seek to
determine whether and, if so, in which jurisdiction(s), such an award could be
enforced. This analysis should take into account both legal factors (such as the
applicable legal framework governing enforcement of foreign arbitral awards) and
matters of fact (notably the localization of the relevant party's assets). Arbitral
tribunals may not necessarily be in possession of all the relevant information and
it is debatable to what extent they should proactively investigate these issues.
The second question relates to the possibility to enforce the non-punitive
portion of an arbitral award. If such a partial enforcement of an arbitral award is
possible, then the incentive for arbitrators to refrain from awarding punitive
damages would be more limited. While this article is not the proper forum for a
detailed comparative study of the possibility of partial enforcement of arbitral
awards, no specific objections to such a possibility come to mind. As a practical
matter, it is thus vital for arbitral tribunals clearly to distinguish between the
amounts of compensatory and punitive damages awarded.
VI.
CONCLUSION
To a large extent, punitive damages in international commercial arbitration
remain a theoretical, as opposed to practical, issue. Depending on the way in
which one defines the 'internationality' of international commercial arbitration,
punitive arbitral awards are eidier inexistent or extremely rare. Doctrinal
contributions focus on punitive arbitral awards in domestic US arbitration; where
they address the availability of this remedy in an international context, they are
largely speculative.
Ibid,
at 113.
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As has been shown, the reasons for the limited relevance of punitive damages for
the practice of international commercial arbitration are essentially twofold. First,
such damages are only recognized in, and available under the laws of, a very
limited number of countries. Second, in most countries, punitive relief is not only
unavailable, but also considered contrary to public policy. Thus, both the
availability and the enforceability of punitive damages awards in international
commercial arbitration are severely restricted.
However, the current status quo should not be viewed as excluding the
possibility for punitive damages to play a more significant role in the future.
Evolutions could take place at two levels. First, as far as the legal status of punitive
damages in civil law countries is concerned, the traditional hostility vis-a-vis this
remedy may be progressively declining. Second, as a matter of arbitration law, the
pro-enforcement bias of the New York Convention and restrictive interpretation of
the public policy exception suggest that domestic courts may, on future occasions,
view punitive arbitral awards more favourably than punitive judgments.
Yet, even if those changes take place, it is undeniable that punitive damages will
necessarily remain an exceptional remedy in the context of international
commercial arbitration. In fact, punitive damages are an inherently extraordinary
remedy requiring conduct of exceptional gravity on the part of the defendant.
Moreover, punitive damages for breach of contract - which is almost always the
type of claim involved in international commercial arbitration - are only
recognized in the US and Canada, and only in limited circumstances.
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