Are punitive damages available in international arbitration?

The subject of punitive damages in international arbitration is filled with misconceptions.  Some U.S. lawyers assume punitive damages are readily available, much as they are in American courts and domestic arbitrations.  International arbitration practitioners make the opposite assumption.  Because punitive damages are rarely awarded in international arbitrations, they assume arbitrators cannot award them. 

So, when are punitive damages available as a remedy in international arbitrations?

A question of procedure or merits?

Punitive damages in international arbitrations raise complex conflict of laws questions.  There is no consensus as to how international arbitrators should decide them.

Arbitrators can consider whether punitive damages are available as either a procedural or a merits question.  If they decide it is a procedure question, they look to the rules governing the arbitration (lex arbitri).  If they deem it a merits question, arbitrators look to the law of the contract (lex contractus).

The arbitration’s “lex arbitri”

The lex arbitri is the body of rules governing an arbitration’s procedure.  It has two main sources: first, the parties’ arbitration agreement, including any agreed arbitral institutional rules (e.g., the American Arbitration Association (“AAA”) or the London Court of International Arbitration (“LCIA”)); and second, the arbitration laws of the seat of the arbitration. 

Subject to the law of the seat, an arbitrator’s powers are defined by the parties’ agreed procedural rules.  The parties’ rules may dictate whether an arbitrator can award punitive damages.  Although rare, parties may include in their arbitration clause express wording allowing (or disallowing) punitive damages.

Likewise, most arbitral institutional rules are silent on remedies.  A notable exception are the rules of the International Centre for Dispute Resolution – the AAA’s international division.  They expressly foreclose punitive damages. 

Where parties’ agreed procedural rules are silent, an arbitrator may refer to the non-mandatory provisions of the law of the seat to fill any gaps.  But arbitration laws of most modern jurisdictions do not contain any provisions on punitive damages.  Nevertheless, it is always advisable to check, at least to see whether any mandatory rules of the arbitration’s seat render punitive damages unavailable. 

Substantive law of the arbitration

In most cases, the substantive law governing a dispute will be specified by the parties in their contract. 

The United States, and to a lesser extent other common law jurisdictions, allow punitive damages.  But they are outliers.  Many civil law jurisdictions follow the approach that any remedy for a civil wrong should be exclusively compensatory.  Accordingly, most lack any notion of punitive damages.  Some are outright hostile to them.

The type of claim being arbitrated also matters.  Although it is increasingly common for arbitrations to include both contract and related tort claims, most arbitrated disputes are contractual in nature.  Even in the United States, where punitive damages are relatively widely available, many American states’ laws disallow punitive damages for contract claims.  The United Kingdom similarly does not permit punitive damages for breach of contract claims.

Enforcement considerations

Parties usually voluntarily honor international arbitral awards without judicial intervention.  This is due to the robust international regime for enforcement, primarily under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  That same Convention, however, states that a court can refuse to enforce an award for public policy reasons.  Punitive damages awards can thus complicate the enforcement calculus.  

There is a risk that an award including punitive damages could conflict with the public policy of the jurisdiction(s) where the prevailing party intends to enforce it.  Courts of Germany, Italy, and Japan have rendered punitive damage portions of U.S. judgments unenforceable on public policy grounds. 

Losing parties can try to leverage potential policy conflicts to resist award enforcement.  Even if punitive damages are “available” as a matter of law, they may prove illusory as a practical matter. 

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Arbitration ultimately is a creature of contract.  Parties are largely free to structure arbitration agreements to preclude or include potential punitive damages.  But absent agreement, there is no single answer to whether punitive damages are available in international arbitration.  Parties must examine procedural rules governing the arbitration, substantive law governing the dispute, and the law and public policy of jurisdictions where an award would be enforced.  

To learn more about international arbitration, follow us on LinkedIn.  “Brilliant lawyers with courtroom savvy” – Benchmark Litigation.  Copyright MoloLamken LLP 2021. 

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