Punitive damages, also called exemplary damages, are "sums awarded apart from any compensatory or normal damages, usually because of particularly aggravated misconduct on the part of the defendant". Punitive damages are of ancient origin. Examples can be found particularly in the Code of Hammurabi and in the Bible.

The usual justification for punitive damages is to punish and deter certain conduct, particularly wilful or malicious conduct. Opponents of such relief argue, however, that punitive damages are unfair because they constitute a windfall to the plaintiff. Award of punitive damages may also far exceed the maximum criminal penalty that can be imposed for the same behaviour.

Punitive damages differ from aggravated damages. Aggravated damages are compensatory in nature, and are awarded when high-handed conduct increases the injury to the plaintiff.

The common law tradition of awarding punitive damages traces its roots to England. However, unlike other common law countries, England restricts punitive damages to three categories of cases: (1) suits involving oppressive[Page101:] action by government servants; (2) suits involving conduct calculated to result in profit which may well exceed the compensation payable to the plaintiff; and (3) suits for punitive damages expressly authorized by statute. Recently, there have been efforts both to expand the availability of punitive damages and to limit the size of the awards.

European countries with civil law legal systems generally limit recovery of damages in private actions to an amount that restores a party to its pre-injury condition. In these countries, punitive damages are considered to be a form of punishment that is only allowed in criminal proceedings. The prohibition on punitive damages in private actions reflects the "strict separation of damages in civil law and punishment in criminal law". As said the Swiss Supreme Court in a 1998 decision:

"Le principe indemnitaire dans la répartition du dommage, selon lequel l'allocation de dommages-intérêts ne doit jamais conduire à l'enrichisse-ment du lésé revêt un caractère fondamental en Suisse, aussi bien pour la responsabilité contractuelle que pour la responsabilité délictuelle. La prestation en dommages et intérêts doit être mesurée en ce sens que l'obligation du débiteur ne peut en aucune circonstance être supérieure à ce qui est nécessaire pour le réparation du dommage (Theo Guhl/ Alfred Koller/ Jean Nicolas Druey, Das schweizerische Obligationenrecht, 8e éd., Zurich 1991, p.62). Vu son importance, le principe indemnitaire ou de l'interdiction de l'enrichissement relève de l'ordre public suisse ou interne, tel qu'il est défini par la jurisprudence (ATF 103 la 199 consid. 4a et les arrêts cités, p.204; Christian Lenz, Amerikanische Punitive Damages vor dem Schweizer Richter, thèse, Zurich 1992, p.113 et 143). La doctrine ne propose toutefois pas de le considérer comme un concept appartenant à l'ordre public international; la jurisprudence n'a pas davantage tranché cette question."1

France, Germany and Switzerland are examples of countries in which damages for contract and tort claims are limited to restoring the parties to the position they would have been in had the damaging event not occurred. These countries allow recovery for non-pecuniary loss, which includes damages for pain and suffering, emotional distress, and moral harm, as well as reimbursement for legal fees. Such non-pecuniary damages, however, are not considered to be punitive in nature. This is because these damages are not imposed to deter or punish the wrongdoer, but rather to fully compensate the victim. [Page102:]

One of the basic characteristics of Asia is diversity. This is certainly true with respect to the availability of punitive damages in the region.

Japan, Korea and Taiwan do not permit awards of punitive damages in private actions. These countries, like the European civil law countries upon which their laws are modelled, limit recovery to compensatory damages.

In China, the General Principles of the Civil Law provide for compensatory damages in tort and contract actions, but do not provide for punitive damages.

India and the Philippines allow awards of punitive damages. In India, exemplary relief is limited to tort actions, such as assault, false imprisonment, trespass, negligence, libel and slander. Punitive damages are not available in breach of contract cases.

In sharp contrast to most civil codes, the Civil Code of the Philippines authorizes awards of punitive damages. Contrarily to India, punitive damages may also be imposed in a breach of contract action if the defendant acted in a fraudulent, reckless, oppressive or malevolent manner. Moreover, the Civil Code of the Philippines makes null and void prior stipulations between parties renouncing to punitive damages.

The most widespread use of punitive damages is, of course, in the United States, where the award of exemplary relief is governed both by state and federal law. In the United States, punitive damages typically serve two purposes: (1) to punish a party that has engaged in wrongful, malicious or outrageous conduct, and (2) to deter that party and others from engaging in the prohibited behaviour in the future.

As an illustration of how extensive punitive damages awarded by US Courts can be, let us remember the Loewen case2 which, last year, was heavily discussed in arbitration circles.

Loewen, a Canadian company operating funeral homes, had a business dispute with a competitor in the US state of Mississippi. The amount of the dispute was about US$ 4 million. During the trial before the Mississippi State Court, Loewen was subjected to a constant barrage of xenophobic and racist attacks by opposing counsel, without the presiding judge interfering. [Page103:]

The jury rendered a verdict in the amount of US$ 500 million, including US$ 74 million for emotional distress suffered by Loewen's competitor and US$ 400 million in punitive damages.

Mississippi law required an appeal bond of 125 percent of the judgement as a condition of staying execution, and Loewen could not comply with that. Finally, one day before the start of the forced execution, Loewen settled with the opposite party for US$ 175 million. Then Loewen filed an investment arbitration claim against the United States under Chapter Eleven of the North American Free Trade Agreement (NAFTA). In the end, their claim was turned down by the NAFTA tribunal.

1. Punitive damages in arbitration

In the United States, there are different views, varying from state to state, as to whether an arbitrator has the authority to award punitive damages. The first of these views is that arbitrators do not have the power to award punitive damages. This view has become known as the "Garrity rule" after being set forth initially in the New York Court of Appeal's decision in Garrity v. Lyle Stuart, Inc.3 The rationale is that a punitive damages award is a socially exemplary remedy that can be imposed only by a judicial authority that is an instrumentality of the state.

The second view is that arbitrators may not award punitive damages absent an express provision in the arbitration agreement authorizing this relief. Courts following this view argue that, because punitive damages are an extraordinary remedy, the authority to award such damages cannot be implied from broad language providing for the arbitration of all disputes.

The third view is that arbitrators may award punitive damages unless the parties expressly prohibit the award of this relief in the arbitration agreement. Courts adopting this view reject the premise that an arbitrator has no power to award punitive damages; they presume that the scope of arbitral issues includes claims for exemplary relief.

As far as interstate and foreign commerce is concerned, a federal statute allows arbitral awards of punitive damages. The controlling legislation is the Federal Arbitration Act (FAA), which applies to actions involving[Page104:] interstate commerce and to international arbitrations. The Supreme Court has interpreted the FAA to provide arbitrators with the power to award punitive damages if the arbitration agreement authorizes such an award.

With respect to domestic arbitration, conflict between federal and state law arises when a contract governed by the FAA contains both an arbitration clause that is broad enough to permit punitive damages and a choice-of-law clause designating the application of a state law that prohibits arbitrators from awarding exemplary relief. The United States Supreme Court addressed this issue in its 1995 decision Mastrobuono v. Shearson Lehman Hutton, Inc.

In Mastrobuono, the Supreme Court ruled that parties are generally free to define the scope of their arbitration agreement and that the FAA ensures that such an agreement will be enforced according to its terms notwithstanding state law limits on arbitrability. Thus, when the parties expressly provide in the arbitration agreement that the arbitrators shall have the authority to award punitive damages, the FAA will pre-empt state laws prohibiting arbitrators from awarding such relief. Conversely, when the parties exclude such claims from arbitration, that agreement will operate to preclude an award of exemplary relief. If an agreement is ambiguous on the issue of arbitrator-awarded punitive damages, the Court ruled that the arbitrator will be deemed to have the authority to award such damages.

The Mastrobuono decision also implicitly addressed the issue of whether United States courts will enforce foreign arbitral awards of punitive damages. Before this decision, a few federal courts either refused to enforce or showed a reluctance to enforce foreign arbitral awards containing punitive sanctions because they viewed these awards as violating public policy. Because the Court in Mastrobuono explicitly approved arbitral awards of punitive damages, it seems clear that foreign arbitral awards granting exemplary relief can no longer be denied recognition.

The cases where arbitrators have awarded punitive damages in US arbitral proceedings are few. However, some SMA5 panels have awarded punitive damages in certain limited circumstances.

The decision in Octonia trading, Ltd v. Stinnes Interoil GmbH was the first SMA arbitration to award punitive damages. In Octonia6 the claimant sought, inter alia, punitive damages on the ground that the respondent wrongfully[Page105:] stole its petroleum cargo from the ship's bunkers and used it to fuel the ship. The tribunal awarded the claimant US$ 100,000 in punitive damages, ruling that the governing law permitted arbitrators to award punitive damages and that the reprehensible conduct of the owner justified such extraordinary relief.

Following the Octonia decision, the SMA panel in Triumph Tankers Ltd v. Kerr McGee Ref. Corp. 7 awarded treble damages of US$ 368,495 to the claimant under RICO on the ground that the respondent had converted part of the claimant's petroleum cargo. The panel reasoned that the parties' agreement, which stated that all disputes arising out of the charter would be submitted to arbitration, was broad enough to encompass an award of punitive damages and that such relief was necessary to punish the egregious conduct of the respondent.

Let us also mention the Sawtelle v. Waddell & Reed, Inc. 8 case of 2003, where an NASD9 arbitration panel had awarded the plaintiff, Steven Sawtelle, a mutual fund broker, US$ 25 million in punitive damages.

The record showed that, immediately after he was terminated by his former firm, Waddell & Reed, Mr Sawtelle found employment with another firm, retained the lion's share of the clients he serviced while at Waddell, and earned as much, if not more, than when at Waddell. Nevertheless, in August 2001, a NASD arbitration panel found that Waddell & Reed had been guilty of unfair trade practices in seeking to retain its clients, and awarded Sawtelle a total of US$ 1.8 million in compensatory damages and US$ 25 million in punitive damages based on the reprehensible nature of Waddell's conduct.

After the panel's award was upheld by the New York Supreme Court, Waddell finally prevailed on its appeal to the Appellate Court, which rendered a decision vacating the award of punitive damages on the grounds that: (1) the US$ 25 million award was irrational; and (2) the panel had manifestly disregarded controlling law by awarding punitive damages in an amount wholly disproportionate to the actual harm suffered by Sawtelle.

The Appellate Court decision in Sawtelle established that arbitrators' remedial powers, though broad, are not unlimited, and that punitive damages awards that are so excessive they defy rational analysis can be set aside by courts. [Page106:]

International tribunals, such as ICSID or the Iran-US claim tribunal, traditionally have not awarded punitive damages in disputes between transnational contracting parties.

Let us mention in this respect the Sedco Inc. v. NIOC10 case. In Sedco, an American company claimed that the Iranian government had wrongfully expropriated its interests in an oil drilling operation. The tribunal awarded the claimant the full value of the expropriated interest. Although the majority did not discuss exemplary relief, in a separate opinion Judge Brower stated that punitive damages may be warranted for an unlawful taking in addition to compensatory damages. In a subsequent case, Amoco Int'l Fin. Corp. v. Iran, 11 the tribunal rejected Judge Brower's suggestion on the availability of exemplary relief. The tribunal stated that punitive damages are inappropriate in cases of unlawful expropriation and that the measure of damages for such claims is limited to the claimant's actual loss.

Several civil law countries also prohibit arbitrators from awarding punitive damages even if the substantive law governing the dispute is a foreign law that allows such relief. The Swedish Arbitration Act expressly prohibits an arbitrator from awarding penalties or fines. In Germany and Switzerland, arbitral awards that are incompatible with domestic public policy may be set aside. Tribunals and commentators have stated that both Germany and Switzerland consider punitive damages to be contrary to public policy and, as a result, an arbitrator sitting in either country would not be able to award punitive damages even if the applicable law would permit exemplary relief.

2. Recognition and enforcement of foreign punitive damages awards

There is little authority on whether, in a country not permitting punitive damages, courts will enforce a foreign arbitral award of such damages. As a general rule, foreign arbitral awards are more readily enforced than foreign court judgements, thanks to the New York Convention, stipulating that arbitral awards rendered in signatory countries are enforceable in all other signatory countries, subject to a narrow list of defences.

Under article V(2)(b) of the New York Convention, a court may refuse to recognize and enforce a foreign arbitral award if it "would be contrary to[Page106:] the public policy of that country". This public policy exception has been read by some countries, such as France, as referring to international public policy, not national public policy. Unlike domestic public policy, which includes all of the imperative rules of the state in which enforcement is sought, international public policy encompasses only those basic notions of morality and justice accepted by civilized countries.

Because international public policy is much narrower in scope than the domestic public policy of the enforcing state, some commentators have argued that civil law countries applying an international public policy standard to New York Convention article V(2)(b) would recognize and enforce arbitral awards of punitive damages. According to these commentators, while such damages may violate a mandatory rule of the enforcing state, they arguably would not be contrary to generally accepted principles of morality and justice. If it is so, foreign arbitral awards of punitive damages could still be denied enforcement on other grounds, such as the amount awarded is "excessively disproportionate to the loss suffered".

Swiss courts have rendered diverging decisions on this, once refusing enforcement, once granting it. 12 Germany will not recognize or enforce a foreign court judgement containing punitive damages. In a case involving an American state court judgement which included punitive damages, the German Supreme Court refused to recognize and enforce the punitive damages award on the ground that it violated German ordre public.

Conclusion

Should an arbitral tribunal deciding a transnational dispute award punitive damages?

Let us return to Professor Gotanda's analysis (I am quoting him from his above draft):

"I believe the answer depends on a number of factors. An arbitrator deciding a transnational dispute in which a claim for punitive damages is raised should first determine if there exists an agreement containing an express clause either including or excluding punitive damages from the issue to be arbitrated. If it does, that clause should be enforced unless it violates an applicable mandatory rule of law. This procedure would[Page108:] respect the principle of party autonomy - the right of parties to define the process by which any future contractual dispute will be settled. It also respects the limits of party autonomy by providing that parties are not permitted to exclude the application of mandatory rules of substantive law.

"In the absence of an express provision, the arbitrator should determine whether the parties intended to give the arbitrator the authority to award exemplary relief. In ascertaining the parties' intent on the issue, the arbitrator may consider (i) whether the parties have explicitly chosen a law to govern the despite that either prohibits or permits awards of punitive damages, (ii) whether awards of punitive damages are customary in the particular trade and (iii) whether other contractual provisions evidence the parties' intent to include or exclude arbitral awards of punitive damages. The purpose of this process is also to effectuate the intent of the parties.

"Even if the arbitrator is satisfied that the tribunal legitimately possesses the authority to award punitive damages, there may be circumstances under which such authority should not be exercised because to do so would jeopardize the enforceability of the award. This procedure would enable the arbitrator to fulfill his or her obligation to the parties to render an enforceable award. And if the arbitrator decides to award punitive damages, the arbitrator should make clear that such an award is separate and distinct from the other damages. This would allow a foreign domestic court that is asked to enforce the award, at a minimum, to recognize and enforce the award of compensatory damages even if it determines that the punitive damages award cannot be enforced because its violates the public policy of the jurisdiction."

Shall a court called upon to enforce a foreign arbitral award of punitive damages do so?

"As noted, there is no consensus on whether a court called upon to enforce a foreign arbitral award of punitive damages should do so. I believe the answer should depend on whether the award violates international public policy. I agree with those who believe that the New York Convention's public policy exception, under which a country has the right to refuse enforcement of an arbitral award on the grounds of public policy, should be constructed narrowly by applying the 'international public policy test'. [Page109:]

Although there is no precise definition of the contents of international public policy, it has often been said to mean that a foreign award should be denied 'only where enforcement would violate the forum State's basic notions of morality and justice'. An International Law Associate Report recommended that international public policy of any State includes: (i) fundamental principles, pertaining to justice or morality, that the State wishes to protect even when it is not directly concerned; (ii) rules designed to serve the essential political, social or economic interests of the State, these being known as 'lois de police' or 'public policy rules'; and (iii) the duty of the State to respect its obligations toward other States or international organizations. I believe that, as a general principle, an award of punitive damages should not violate international public policy because the recognition and enforcement of such an award would not manifestly disrupt the essential political, social or economic interests protected by the rules. The fact that an award of damages may be penal in nature should not in-and-of-itself be grounds to refuse enforcement. Indeed, I suspect that many countries would enforce an award of attorneys' fees and costs event if the tribunal assessed these fees and costs because the party engaged in reprehensible behaviour."

Probably because they are well thought-out and carefully phrased, Professor Gotanda's views will highlight even more what seems here the irreconcilable opposition of common law to civil law, for which the strict differentiation between civil remedies and criminal remedies is intangible. [Page110:]

1
Asmidal decision of 17 July 1998, TF Ière Cour civile, 4P.7/1998.

2
ICSID Case No ARB. (AF) 1998/3, 26 June 2003. See as well MakingInvestment Arbitration More Certain, a modest Proposal, Jacques Werner in The Journal of World Investment, Vol.4 No. 5, October 2003.

3
Garrityv. Lyle Stuart, Inc. (353 N.E. 2nd 793 (N.Y. 1976)).

4
115 S. CT., pp 1215-19.

5
Society of Maritime Arbitrators.

6
Society of Maritime Arbitrators, No. 2424, 1987.

7
Society of Maritime Arbitrators, No. 2642, 1990.

8
N.Y. App. Div. 1st Dept. Feb. 13, 2003.

9
National Association of Securities Dealers.

10
See Sedco, Inc.v. NIOC, 10 Iran-US Cl. Trib. Rep. 180, 1986. 11 See Amoco Int'l Fin. Corp.v. Iran, 15 Iran-US Cl. Trib. Rep. 189, 1987. 12 SJZ 1986, 309 (denied) and BJM 1991, 31 (granted).