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When a court interprets choice-of-law provisions in an agreement covered by the Federal Arbitration Act, due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration.
In 1985, petitioners Antonio Mastrobuono and his wife Diana Mastrobuono opened a securities trading account with respondent Shearson Lehman Hutton, Inc. (Shearson), by executing, in Illinois, the dealer's standard-form client agreement. Under the agreement's choice-of-law provision, the agreement was to be governed by the "laws of the State of New York." The agreement's arbitration provision authorized arbitration in accordance with the rules of (1) the National Association of Securities Dealers (NASD), or (2) either of two stock exchanges. The agreement itself contained no express reference to claims for punitive damages. In 1989, the petitioners, alleging that their account had been mishandled and claiming damages under various state and federal law theories, filed an action in the United States District Court for the Northern District of Illinois against the respondent and several individuals. The District Court granted the defendants' motion to stay the court proceedings and to compel arbitration pursuant to the NASD rules. A NASD arbitration panel ruled in favor of the clients and awarded both compensatory and punitive damages. The defendants moved in the District Court to vacate the punitive damages award. The District Court, granting the motion, said that the arbitration panel had not been authorized to award punitive damages under New York case law, which allowed New York courts, but not arbitrators, to enter punitive damages awards. The United States Court of Appeals for the Seventh Circuit affirmed. Petitioners appealed.
Was the arbitral award enforceable as within the scope of the contract between the parties?
The Court held that the arbitral award should have been enforced as within the scope of the contract between the parties. According to the Court, the punitive damages award was enforceable as within the scope of the client agreement, because the agreement's arbitration provision strongly implied that an arbitral award of punitive damages was appropriate. Moreover, the agreement's choice-of-law provision was not, in itself, an unequivocal exclusion of punitive damages claims, but at most introduced an ambiguity into the arbitration agreement. The Court averred that in the face of such doubt, the Supreme Court would be unwilling to impute to the clients an intent to give up an important substantive right. Furthermore, a reading of the choice-of-law and arbitration provisions as together expressing an intent to preclude a punitive damages award would violate the principle that a document should be read to give effect to all of the document's provisions and to render such provisions consistent with each other. Accordingly, the Court reversed the judgment of the lower court.