Arbitration Agreement: Understanding Punitive Damages

An arbitration agreement is a legally binding contract between two parties which stipulates that any disputes between them shall be resolved through arbitration instead of going through the court system. While arbitration usually provides a faster and more cost-effective way of settling disputes, it can also pose certain challenges when it comes to recovering punitive damages.

Punitive damages are damages awarded to a plaintiff in a civil lawsuit as a way of punishing the defendant for their misconduct and deterring such behavior in the future. Unlike compensatory damages, which are designed to compensate the plaintiff for actual losses incurred, punitive damages are meant to punish the defendant for malicious or intentional behavior.

In an arbitration agreement, the parties can agree to either allow or prohibit punitive damages. If punitive damages are allowed, then the arbitrator is authorized to award them if they find that the defendant’s behavior warrants such an award. However, many arbitration agreements expressly prohibit punitive damages, which means that the arbitrator has no authority to award them even if they believe that the defendant’s behavior warrants such an award.

The enforceability of arbitration agreements which prohibit punitive damages has been a contentious issue in recent years. Some courts have held that such agreements are unenforceable on public policy grounds, as they effectively shield defendants from liability for egregious behavior. However, other courts have held that such agreements are enforceable, as the parties voluntarily agreed to forego their right to punitive damages in exchange for the benefits of arbitration.

In light of this uncertainty, it is important for parties to carefully consider the inclusion of punitive damages provisions in their arbitration agreements. If punitive damages are desired, then the agreement should explicitly provide for them and specify the conditions under which they may be awarded. On the other hand, if punitive damages are not desired, then the agreement should clearly prohibit them.

In conclusion, arbitration agreements can be a useful tool for resolving disputes, but they can also pose challenges when it comes to recovering punitive damages. Parties should be aware of the implications of including or omitting punitive damages provisions in their agreements and should seek guidance from legal professionals experienced in arbitration and SEO.