Book Opener

UNITLandmark CaseMastrobuono v. Shearson Lehman Hutton, Inc.United States Supreme Court514 U.S. 52 (1995)Issue Does a contract that does not address punitive damages authorizesuch damages if the parties agreed to arbitrate controversies under rulesthat allow for such damages, but a conflicting provision in the contractappears to prohibit such damages?FactsAntonio Mastrobuono and his wife startedan investment account at Shearson Lehman Hutton,Inc. When they opened their account, the Mastrobuonossigned a contract provided by ShearsonLehman Hutton. The contract required that the partiesarbitrate any disputes that might arise. The contractalso contained a provision stating that it wouldbe governed by New York state law. In an arbitrationproceeding, the parties present their disputeto an impartial third person or panel and agree toabide by the arbitrator’s lawful decision. Becausearbitration is considered less time consuming andless costly than litigation, many contracts containa provision in which the parties agree that disputesbe resolved through arbitration.For a variety of reasons, the Mastrobuonosbecame dissatisfied with the investment servicesthey received from Shearson Lehman Hutton. Theyclosed their account and sued Shearson LehmanHutton, alleging that their account had been mismanaged.Because of the contract’s arbitration provision,Shearson Lehman Hutton suspended thelitigation and forced the Mastrobuonos to go beforea three-member panel of arbitrators. The panelawarded the Mastrobuonos compensatory damagesof $159,327 and punitive damages of $400,000.Compensatory damages are awarded to compensatean injured party for actual losses. Punitivedamages may be awarded in limited circumstancesto punish a person or company for wrongful conduct.Punitive damages are also awarded to preventother companies from behaving in a similar unlawfulor unethical manner. In many cases, the threatof suffering financial loss by way of punitive damageswill discourage a company or individual fromengaging in unscrupulous behavior.Shearson Lehman Hutton paid the compensatorydamages but obtained a court order vacatingthe award for punitive damages because New Yorklaw permits only courts to award punitive damages.Opinion The Court observed that contractbetween the parties in this case contained noexpress provision about punitive damages.Because the parties agreed to arbitrate a dispute,the Mastrobuonos claimed that the parties werebound by the arbitration panel’s decision. ShearsonLehman Hutton argued that the contract limitsthe matters that may be arbitrated because theparties agreed that the contract would be governed262 Unit 2: Entering Into Contracts