William R. BELKO, Plaintiff and Respondent, v. AVX CORPORATION et al., Defendants and Appellants.
AVX Corporation and AVX–Monolithic Corporation (AVX) appeal from that part of a judgment confirming an arbitrator's award of punitive damages on William R. Belko's complaint for wrongful termination arising from the breach of an employment contract. AVX contends the award of $500,000 in punitive damages is contrary to the “majority” rule an arbitrator can never be empowered to award punitive damages and is beyond the scope of the express language of the arbitration provision of the employment agreement. For the reasons which follow, we conclude exemplary damages may be awarded by an arbitrator of a commercial dispute when expressly provided for in an arbitration agreement or pursuant to an express understanding of the parties reflected in their pleadings and litigation conduct which, as here, establishes they intended to submit that issue. Accordingly, we reject the narrow view prevailing in some jurisdictions that an arbitrator has no power to award punitive damages, even if agreed upon by the contracting parties. We affirm the judgment.1
FACTUAL AND PROCEDURAL BACKGROUND
In late 1981, Belko, an electronic components engineer, and two colleagues founded Monolithic Components Corporation in San Diego, which manufactured sophisticated ceramic chip capacitors. Belko was president, chairman, chief executive officer and principal shareholder. When he sold Monolithic to AVX, the merged corporations became AVX–Monolithic Corporation. AVX's acquisition involved a stock purchase valued at $5.5 million and included a two-year written contract of employment for Belko as vice-president and general manager of AVX–Monolithic. Under the contract, he was responsible for overseeing the company's day-to-day affairs. The contract expressly provided:
“The employment of the Executive hereunder may be terminated forthwith by the Company upon written notice from the Board documenting that, in the opinion of the Board (evidenced by a resolution duly adopted by the Board), the Executive shall have (i) refused or failed, after notice that such refusal or failure would constitute a default hereunder, to carry out any reasonable order of the Board, (ii) been guilty of a material or wilful breach of the terms of this Agreement or any other material legal obligation to the Company, (iii) demonstrated gross negligence or wilful misconduct in the execution of his assigned duties, or (iv) been convicted of a felony or other serious crime.”
During the contract term, Belko was terminated by an action ratified by the board. Belko reacted by suing AVX for breach of contract, breach of the covenant of good faith and fair dealing, breach of statutory obligations, intentional infliction of emotional distress and negligent infliction of emotional distress.2 The complaint requested both punitive and compensatory damages. AVX answered, raising as its sole affirmative defense that Belko was “required by agreement and law to arbitrate the disputes and claims contained [in the complaint].” The answer did not suggest arbitration was limited to compensatory damages.
The parties' contractual agreement provided in paragraph 9 regarding arbitration:
“Any controversy or claim arising out of or relating to this Agreement, or any breach hereof, shall be settled by arbitration by one arbitrator in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall not have the power to direct equitable relief. The arbitration shall be held in the City of San Diego or such other place as may be agreed upon at the time by the parties to the arbitration.” 3
When Belko moved to compel arbitration, the parties agreed to be governed by Code of Civil Procedure section 1280 et seq., rather than the AAA rules, and stipulated to Attorney Michael J. Duckor as arbitrator. Duckor was generally charged with resolving all disputes in accordance with the written employment contract. By agreement, each party submitted a trial brief as to their respective positions on the issues to be resolved by the arbitrator. Significantly, each brief addressed the merits of whether AVX's conduct merited punitive sanctions.
The arbitrator awarded Belko $85,421.72 in compensatory damages for breach of contract, $500,000 in punitive sanctions for wrongful discharge in breach of the implied covenant of good faith and fair dealing and $100,000 in general damages for the tort of intentionally inflicting emotional distress. The court confirmed the award and denied AVX's request to vacate the punitive damages award as exceeding the scope of the arbitrator's jurisdiction. The court interpreted Belko's motion to compel arbitration as a clear request to submit all issues defined in his complaint. It noted the order granting that request after AVX failed to appear or respond; the later stipulation designating the arbitrator expressly reflects “binding arbitration to resolve the dispute between the parties in this action in accordance with the written employment contract”; and the arbitration clause of the agreement expressly calls for the resolution by arbitration of all controversies and claims arising from the employment agreement. The court construed this language to include both torts and contracts. The record before the court shows the issue of punitive damages was placed before the arbitrator by Belko both in writing and by way of evidence and although AVX responded to Belko's trial brief by one of its own, it never objected in writing to submitting the issue of punitive damages until after the arbitrator's adverse ruling. On this record, it concluded punitive damages were within the arbitrator's jurisdiction and confirmed the award.
PUNITIVE DAMAGES IN ARBITRATION BY EXPRESS AGREEMENT OF THE PARTIES
Because the parties' contractual arbitration provision neither expressly permits nor specifically prohibits an arbitrator to impose punitive damages, the primary issue before us becomes whether parties can confer jurisdiction on an arbitrator to award punitive damages for tortious conduct stemming from a contractual employment dispute by express agreement. We recognize the following governing principles:
“[A]rbitration has become an accepted and favored method of resolving disputes [citations], praised by the courts as an expeditious and economical method of relieving overburdened civil calendars [citation].” (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 706–707, 131 Cal.Rptr. 882, 552 P.2d 1178.) 4
Consequently, this strong judicial policy favoring arbitration over litigation as a means of settling disputes rests on the former's less expensive and more expeditious character, relieving court congestion. (Baker v. Sadick (1984) 162 Cal.App.3d 618, 624, 208 Cal.Rptr. 676; Hawkins v. Superior Court (1979) 89 Cal.App.3d 413, 416, 152 Cal.Rptr. 491.)5 “However, judicial enthusiasm for alternative methods of dispute resolution must not in all contexts override the rules governing interpretation of contracts.” (Victoria v. Superior Court (1985) 40 Cal.3d 734, 738–739, 222 Cal.Rptr. 1, 710 P.2d 833.) Thus, “ ‘the policy favoring arbitration cannot displace the necessity for a voluntary agreement to arbitrate.’ “ (Id. at p. 739, 222 Cal.Rptr. 1, 710 P.2d 833, quoting Wheeler v. St. Joseph Hospital (1976) 63 Cal.App.3d 345, 356, 133 Cal.Rptr. 775.) Moreover, regardless of the breadth of the terms of the contract, it extends only to matters for which the parties intended to contract. (Victoria v. Superior Court, supra, 40 Cal.3d at p. 739, 222 Cal.Rptr. 1, 710 P.2d 833.) Accordingly,
“[a]n agreement to arbitrate is a contract and an arbitrator may consider only such disputes as are covered by the arbitration agreement. [Citations.] Although awards may be vacated if the arbitrator has exceeded his power, any ambiguities in the scope of arbitration are resolved in favor of coverage. [Citation.] Because arbitration is a favored method of dispute resolution, arbitration agreements should be liberally construed. [Citation.]” (Baker v. Sadick, supra, 162 Cal.App.3d at pp. 623–624, 208 Cal.Rptr. 676.)
“In determining the scope of an arbitration clause, ‘[t]he court should attempt to give effect to the parties' intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made [citation].’ “ (Victoria v. Superior Court, supra, 40 Cal.3d at p. 744, 222 Cal .Rptr. 1, 710 P.2d 833, quoting Weeks v. Crow (1980) 113 Cal.App.3d 350, 353, 169 Cal.Rptr. 830.) Although the law looks with favor upon contracts for arbitration of disputes between parties, public policy does not compel parties to arbitrate controversies which they have not agreed to arbitrate. (Victoria v. Superior Court, supra, 40 Cal.3d at p. 744, 222 Cal.Rptr. 1, 710 P.2d 833; see Pacific Crown Distributors v. Brotherhood of Teamsters (1986) 183 Cal.App.3d 1138, 1143, 228 Cal.Rptr. 645.) Thus, the authority of an arbitrator is limited and circumscribed by the agreement or stipulation of submission. (Delta Lines, Inc. v. International Brotherhood of Teamsters (1977) 66 Cal.App.3d 960, 966, 136 Cal.Rptr. 345.)6
Accordingly, within the context of punitive damages,7 it follows at minimum that exemplary damages may not be awarded by an arbitrator absent an express provision authorizing such relief in the arbitration agreement or pursuant to a stipulated submission order or its legal equivalent. This view is embraced by several courts and jurisdictions. (See, e.g., Howard P. Foley Co. v. Int. Bro. of Elec. Workers (9th Cir.1986) 789 F.2d 1421, 1424; Baltimore Regional Joint v. Webster Clothes (4th Cir.1979) 596 F .2d 95, 98; Westinghouse Elec., etc. v. Intern. Broth., etc. (4th Cir.1977) 561 F.2d 521, 524; Intern. Ass'n of Heat v. General Pipe Covering (8th Cir.1986) 792 F.2d 96, 100; Kennewick Educ. Ass'n v. Kennewick Sch. Dist. (1983) 35 Wash.App. 280, 666 P.2d 928, 930; Sweeney v. Morganroth (S.D.N.Y.1978) 451 F.Supp. 367, 370; Westmoreland Coal Co. v. United Mine Workers, etc. (W.D.Va.1982) 550 F.Supp. 1044, 1048; and, International U. of Op. Eng., Local No. 450 v. Mid–Valley, Inc. (S.D.Tex.1972) 347 F.Supp. 1104, 1109.) Representing perhaps the compromise position of permitting consensual arbitration of punitive damages (infra.), this view recognizes the disfavored character of punitive damages8 in arbitration contracts, but allows the parties by express language to overcome the general prohibition in light of the strong public policies supporting arbitration in the first place (supra ). (See Intern. Ass'n of Heat v. General Pipe Covering, supra, 792 F.2d at p. 100.) Moreover, this view recognizes the express arbitration terms in a contract or submission order control; that the parties' express intent governs; and that “[w]here the parties have called forth such a creature by their contract, they must live with its edicts.” (Intern. Ass'n of Heat & Frost v. Gen. Pipe Covering (D.C.Minn.1985) 613 F.Supp. 858, 861, revd. in part on other grounds; Intern. Ass'n of Heat v. General Pipe Covering, supra, 792 F.2d 96.)
We believe the most practical rule consistent with fairness is one which permits the parties to expressly confer the power to award punitive damages upon an arbitrator. In so doing, we reject the narrow view an arbitrator may never award punitive damages expressed in Garrity v. Lyle Stuart, Inc. (1976) 40 N.Y.2d 354, 386 N.Y.S.2d 831, 353 N.E.2d 793. This prohibatory rule has been adopted by many other courts and jurisdictions. (See, e.g., Shaw v. Kuhnel & Associates, Inc. (1985) 102 N.M. 607, 698 P.2d 880, 882; Anderson v. Nichols (W.Va.1987) 359 S.E.2d 117, 121, fn. 1; McLeroy v. Waller (1987) 21 Ark.App. 292, 731 S.W.2d 789, 792; United States Fidelity & Guar. v. DeFluiter (Ind.App.1983) 456 N .E.2d 429, 432; Sch. City of E. Chicago v. E. Chicago Fed. (Ind.App.1981) 422 N.E.2d 656, 663; Matter of Silverberg (1980) 75 A.D.2d 817, 427 N.Y.S.2d 480, 482–483; Brandeis Intsel, Ltd. v. Calabrian Chemicals Corp. (S.D.N.Y.1987) 656 F.Supp. 160, 170; and Shahmirzadi v. Smith Barney, Harris Upham & Co. (D.D.C.1985) 636 F.Supp. 49, 56.)
In Garrity, the New York Court of Appeals, by a four-to-three decision, made a public policy determination that “[a]n arbitrator has no power to award punitive damages, even if agreed upon by the parties [citation].” (Garrity v. Lyle Stuart, Inc., supra, 386 N.Y.S.2d at p. 832, 353 N.E.2d at p. 794.) The court declared:
“Punitive damages is a sanction reserved to the State, a public policy of such magnitude as to call for judicial intrusion to prevent its contravention. Since enforcement of an award of punitive damages as a purely private remedy would violate strong public policy, an arbitrator's award which imposes punitive damages should be vacated.” (Ibid.)
Focusing on the selection of an arbitrator as often restricted and manipulatable by the party in a superior bargaining position, the court stated the evil of permitting an arbitrator to award punitive damages is that it removes the court and the jury, and essentially the State, as “the engine for imposing a social sanction.” (Id. 386 N.Y.S.2d at p. 833, 353 N.E.2d at p. 796.) Noting that judicial review of arbitration awards is limited to whether the award was authorized by the contract, complete and final on its face, and the result of fairly-conducted proceedings, the court found such limited inquiry suitable to determine actual damages which are measurable against some objective standard, but entirely inappropriate for determining punitive damages which take shape from subjective criteria involving attitudes concerning correction and reform. (Ibid.) Finally, it reasoned “the power to punish wrongdoers is a nondelegable monopoly possessed by the sovereign” (Kanowitz, Alternative Dispute Resolution and the Public Interest: The Arbitration Experience (1987) 38 Hastings L.J. 239, 266). The court speculated:
“If arbitrators were allowed to impose punitive damages, the usefulness of arbitration would be destroyed. It would become a trap for the unwary given the eminently desirable freedom from judicial overview of law and facts. It would mean that the scope of determination by arbitrators, by the license to award punitive damages, would be both unpredictable and uncontrollable. It would lead to a Shylock principle of doing business without a Portia-like escape from the vise of a logic foreign to arbitration law.” (Garrity v. Lyle Stuart, Inc., supra, 386 N.Y.S.2d at p. 834, 353 N.E.2d at p. 796.) 9
We believe the Garrity rule is unduly restrictive. It has been characterized as “an anomaly, frustrating the goals of fairness and finality that are the essence of arbitration and undermining the valuable role that punitive damages play in deterring fraudulent or malicious conduct.” (Punitive Damages in Arbitration, supra, at p. 959.) We find no public policy significant enough to restrict the right of contracting parties to vesting agreed upon arbitrators with the authority to consider and resolve claims for punitive damages.10 Indeed, a contrary holding violates those strong public policy considerations supporting arbitration as an alternative dispute resolution mechanism, requiring the courts to liberally construe the contractual language within the arbitration clause and recognize the remedial flexibility of arbitrators' authority. (Rodgers Builders, Inc. v. McQueen (1985) 76 N.C.App. 16, 331 S.E.2d 726, 733–734; Willoughby Roofing & Supply v. Kajima Intern. (N.D.Ala.1984) 598 F.Supp. 353, 360–365; see Notes, Punitive Damages in Arbitration: The Search for a Workable Rule, 63 Cornell L.Rev. 272, 285–289 (1978); see also Willis v. Shearson/American Express, Inc. (Md.N .C.1983) 569 F.Supp. 821, 824; see generally, Baker v. Sadick, supra, 162 Cal.App.3d at pp. 623–624, 208 Cal.Rptr. 676.)11 Moreover, it conflicts with the legislative and judicial policy favoring judicial deference and limited judicial review, as it encourages greater judicial encroachment upon an arbitrator's award by allowing the reviewing courts to surmise the essential character of the award—whether it is compensatory or punitive. (Punitive Damages in Arbitration, supra, at pp. 987–988; Note, Punitive Damages in Arbitration: The Search for a Workable Rule, supra, 63 Cornell L.Rev. at pp. 285–289.)12 To deny the parties the right to confer upon arbitrators the full range of remedial tools generally available within litigation at law would be “to hamstring arbitrators and to lessen the value and efficiency of arbitration as an alternative method of dispute resolution.” (Willoughby Roofing & Supply v. Kajima Intern., supra, 598 F.Supp. at p. 362.) We believe an award of punitive damages under a broad-form arbitration agreement does not implicate the public interest to an extent sufficient to warrant judicial intrusion where no third party interests are involved and the public policy against punitive damages is not so compelling as to make the Legislature determine it necessary to enact such policy into law. (See Garrity v. Lyle Stuart, Inc., supra, 386 N.Y.S.2d at p. 836–837, 353 N.E.2d at p. 799.)13
Nor are we persuaded by AVX's argument that because an award of punitive damages serves to punish the present wrongdoer and to deter others from committing such willful or wanton misconduct, the power to award such damages should not be exercised by one other than a judge or jury. Although we recognize the possibility of a biased arbitrator,
“[t]he mere possibility of bias or corruption no more justifies a wholesale withdrawal of the authority of arbitrators to make an award of punitive damages than it would a wholesale withdrawal of their authority to resolve disputes at all. If corruption or evidence of partiality in fact surfaces, naturally an award of punitive damages emanating from such circumstances should be set aside. Clearly, however, the possibility of an occasional abuse of power is no grounds for an absolute bar on the award of punitive damages by arbitrators.” (Willoughby Roofing & Supply v. Kajima Intern., supra, 598 F.Supp. at p. 362.)
Moreover, Code of Civil Procedure section 1286.2 expressly authorizes the trial court to vacate an arbitration award if it was “procured by corruption, fraud or other undue means” (subd. (a)); “[t]here was corruption in any of the arbitrators” (subd. (b)); and specifically “[t]he rights of such party were substantially prejudiced by misconduct of a neutral arbitrator” (subd. (c)).
As to the claim it is improper to permit arbitrators to displace courts and juries when imposing social sanctions designed to punish and deter, there appears to be no reason to conclude the purposes of punitive damages of punishing the wrongdoer and deterring others from engaging in similar conduct will be less served when such awards are made by arbitrators as by the judicial process.
“Indeed, an arbitrator steeped in the practice of a given trade is often better equipped than a judge not only to decide what behavior so transgresses the limits of acceptable commercial practice in that trade as to warrant a punitive award, but also to determine the amount of punitive damages needed to (1) adequately deter others in the trade from engaging in similar misconduct, and (2) punish the particular defendant in accordance with the magnitude of his misdeed. [Citation.]” (Willoughby Roofing & Supply v. Kajima Intern., supra, 598 F.Supp. at p. 363.)
So long as the parties are capable of selecting arbitrators familiar with the practices and customs of the trade who, as in this case, possess the knowledge and expertise to understanding the dispute and the applicable legal principles to resolve them, the parties can be confident their dispute will be resolved competently and fairly. (Punitive Damages in Arbitration, supra, at p. 1002.)
Finally, the practical effect of the Garrity rule is unsatisfactory where both tort and contract claims arise from the same facts and punitive damages are sought. In this not uncommon circumstance, the Garrity rule of absolute prohibition would require two proceedings—one before the arbitrator and then another separate adjudication before a court or jury—on the same facts, a clear waste of resources, offsetting the chief public policy considerations supporting arbitration of relieving congestion in the courts and obtaining a quick, inexpensive and binding resolution of all disputes that arise between the parties to an agreement. (Willoughby Roofing & Supply v. Kajima Intern., supra, 598 F.Supp. at p. 364; Rodgers Builders, Inc. v. McQueen, supra, 331 S.E.2d at p. 734.) We do not accept Garrity 's reasoning that allowing arbitrators to award punitive damages will erode confidence in arbitration and discourage its use where that power is limited to cases where the parties of equal bargaining strength expressly agree to that course. Rather, the immediate practical benefits of recognizing an arbitrator's authority to impose punitive damages when expressly provided for in the parties' agreement include punishing the wrongdoer, deterring others from committing similar wrongful conduct, defraying the expenses of arbitration and encouraging victims to seek redress for commercially reprehensible behavior. (Dyna–Med, Inc. v. Fair Employment & Housing Com., supra, 43 Cal.3d at pp. 1402–1403, 241 Cal.Rptr. 67, 743 P.2d 1323; Mallor & Roberts, Punitive Damages: Toward a Principled Approach (1980) 31 Hastings L.J. 639, 649–650; Punitive Damages in Arbitration, supra, at p. 1006–1010.)
Moreover, California courts have interpreted legislative guidelines for arbitration as granting the arbitrator almost unrestricted authority. In fact, “[t]he entire statutory arbitration scheme is designed to give the arbitrator the broadest possible powers. Among these, clearly, is the power to pass upon legal, as distinct from factual, issues so long as they are a part of the ‘controversy’ which is subject to arbitration.” (Marcus v. Superior Court (1977) 75 Cal.App.3d 204, 210, 141 Cal.Rptr. 890.) This court in Baker v. Sadick, supra, 162 Cal.App.3d at pages 623–624, 208 Cal.Rptr. 676, essentially declared that under the law of this state any ambiguities in the scope of arbitration are resolved in favor of coverage consistent with this state's compelling policy in support of arbitration as an alternative means of settling disputes. Consequently, prohibiting arbitrators from awarding punitive damages would contradict the legislatively implied, if not declared, strong public policy favoring the uninhibited use of arbitration. (See Comment, Awarding Punitive Damages in Medical Malpractice Arbitration, 20 Cal. Western L.Rev. 312, 328 (1984).) Further, such a policy might often result in “automatic immunity” for the wrongdoer, thus frustrating the penal and deterrent purposes underlying punitive damages. (Willoughby Roofing & Supply v. Kajima Intern., supra, 598 F.Supp. at p. 363.) In summary, given the strong public policies in this state favoring arbitration expressed both judicially and legislatively (see Marcus v. Superior Court, supra, 75 Cal.App.3d at p. 210, 141 Cal.Rptr. 890; see also Rodgers Builders, Inc. v. McQueen, supra, 331 S.E.2d at p. 734), given that the penal function of punitive damages will remain effective, especially against the specific wrongdoer, within an arbitration setting (see Comment, Awarding Punitive Damages in Medical Malpractice Arbitration, supra, 20 Cal. Western L.Rev. at p. 328), and given the consideration parties of equal bargaining power can contractually waive procedural safeguards such as judicial review in favor of arbitration, we conclude the Garrity rule should not be followed .14 To conclude otherwise would frustrate the ability of an arbitrator to obtain complete justice between the parties, require parties to undergo the expense of multiple adjudications and promote judicial review of the characterization of arbitration awards.15
THE RECORD SUPPORTS THE TRIAL COURT'S CONCLUSION THE PARTIES SUBMITTED THE ISSUE OF PUNITIVE DAMAGES TO THE ARBITRATOR 16
Our factual inquiry is to determine AVX's intent since Belko's intent to submit the issue of punitive damages for arbitration is unmistakably manifest. His complaint specifically requests punitive damages for the causes of action sounding in breach of the covenant of good faith and fair dealing, intentional infliction of emotional distress and fraud and deceit. In response, AVX's answer asserts in all-inclusive language that Belko was “required by agreement and law to arbitrate the disputes and claims contained [in Belko's complaint].” In context of these pleadings, the written trial briefs and the parties' conduct, our independent review of the record persuades us the trial court correctly determined the parties jointly submitted the issue of punitive damages to the arbitrator.
AVX's answer acknowledged all claims and disputes set forth in Belko's complaint were subject to arbitration pursuant to [its understanding] of the employment agreement without reserving an exception for the claim for punitive damages subject to arbitration. Although Belko's later motion to compel arbitration failed to list punitive or exemplary damages as a claim when summarizing its prayer for general, special and consequential damages, Belko restated his intent to arbitrate the tort claims breach of the covenant of good faith and fair dealing, intentional infliction of emotional distress, negligent infliction of emotional distress, and fraud and deceit in addition to the contract breach.17 In the “Stipulation and Order Re: Appointment of Arbitrator and Arbitration,” the parties appointed an experienced lawyer as arbitrator and expressly charged him with “resolv[ing] the dispute between the parties in this action, in accordance with the written employment agreement of May 29, 1984․” Finally, Belko's arbitration brief expressly sought an award of punitive damages, summarized the law in point and expressly requested punitive damages for specified egregious tortious conduct. AVX affirmatively responded to this contention in its arbitration brief by stating, “Mr. Belko has no proof of an AVX intent to inflict emotional distress or conduct of an outrageous, extreme nature such as to invoke punitive sanction.” Consequently, consistent with the trial court's ruling, the parties' pleadings clearly establish their mutual intent to arbitrate Belko's entire case, including his claim for punitive damages. AVX's affirmative defense to Belko's complaint expresses its understanding of the terms of the contractual arbitration agreement, i.e., that it requires the parties to arbitrate all those issues set forth in Belko's complaint without exception. In light of this history, AVX's failure to file a written challenge to the arbitrator's authority to address punitive damages until after receiving the adverse arbitration award is consistent with the trial court's finding its conduct shows it intended to submit the issue to arbitration.
The judgment is affirmed.
1. Because we find the parties here expressly conferred upon the arbitrator the authority to impose punitive damages by their pleadings and conduct throughout the litigation, we need not determine whether an arbitrator's authority to impose punitive damages can be implied solely from broad language in contractual agreements not providing expressly for their arbitration.
2. The complaint further alleged a fraud cause of action which, however, was never litigated.
3. The arbitration clause expressly provides that any controversy or claim arising out of or relating to the contract shall be settled by arbitration by one arbitrator in accordance with the rules of the American Arbitration Association. However, the 1978 Employment Dispute Resolution Rules originally proffered by AVX which expressly exclude punitive damages were not in effect on May 29, 1984, the date of the employment agreement. Our contact with the AAA headquarters in New York revealed the employment dispute arbitration rules had been superseded by the Expedited Employment Arbitration Rules. The version in effect on May 29, 1984, was promulgated on June 1, 1981, and the version in effect at the time of the arbitration was promulgated on July 1, 1986. The 1981 rules expressly provide in rule 1 that “[t]hese Rules shall apply whenever the parties have agreed to arbitrate under them, in the form obtaining at the time the arbitration is initiated.” The 1986 rules are, however, silent with regard to the scope of the arbitrator's award and specifically punitive damages. Accordingly, if these were the proper governing rules, their silence is of little help in determining whether the parties intended the arbitrator be empowered to award punitive damages.Moreover, in light of the fact there are several other sets of AAA rules the parties could have intended to apply, the reference to AAA rules has no evidentiary value on the question of intent to submit future claims for punitive damages to arbitration.
4. “Arbitration is currently the most popular formal alternative to civil litigation. Although parties to commercial agreements have been arbitrating disputes for many centuries, arbitration now flourishes as never before under favorable federal and state legislation. Responding to legislative mandates, the judiciary has given increasing recognition to the valuable role of arbitration as an economical and efficient process for resolving disputes. Liberal judicial interpretation and enforcement of contractual agreements to arbitrate have channeled an extraordinary range of claims and controversies into arbitration, supplanting a system built on established rules of precedent and procedure with a less formal and more flexible process aimed at doing justice in the individual case. Arbitral remedies, largely immune from judicial review, are limited only by the agreement of the parties and by broad concepts of fairness and justice. [Fns. omitted.]” (Stipanowich, Punitive Damages in Arbitration Garrity v. Lyle Stuart, Inc. Reconsidered, 66 B.U.L.Rev. 953, 953–955 (1986), hereinafter Punitive Damages in Arbitration.)
5. In addition, the arbitration approach offers the advantages of relative privacy of the proceedings and practical expertise of the decision-maker. (Stanley D. Henderson, Contractual Problems in the Enforcement of Agreements to Arbitrate Medical Malpractice, 58 Virginia L.Rev. 947, 997 (1972).)
6. Pursuant to Code of Civil Procedure section 1286.2, subdivision (d), a court may vacate an arbitration award if the arbitrator exceeded his powers. The determination of whether the parties agreed to arbitrate a specific matter may be decided by a court (O'Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482, 491, 30 Cal.Rptr. 452, 381 P.2d 188); however, “[o]therwise courts may not interfere with arbitration awards. Courts may not examine the merits of the controversy, the sufficiency of the evidence supporting the award, or the reasoning supporting the decision. [Citation.] A court may not set aside an arbitration award even if the arbitrator made an error in law or fact. [Citations.]” (Santa Clara–San Benito etc. Elec. Contractors' Assn. v. Local Union No. 332 (1974) 40 Cal.App.3d 431, 437, 114 Cal.Rptr. 909.)
7. “Punitive damages ․ are neither equitable nor corrective; punitive damages serve but one purpose—to punish and through punishment, to deter. ‘Punitive damages by definition are not intended to compensate the injured party, but rather to punish the tortfeasor whose wrongful action was intentional or malicious, and to deter him and others from similar extreme conduct.” ’ (Dyna–Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379, 1387, 241 Cal.Rptr. 67, 743 P.2d 1323, quoting City of Newport v. Fact Concerts, Inc. (1981) 453 U.S. 247, 266–267, 101 S.Ct. 2748, 2759–2760, 69 L.Ed.2d 616.) Simply stated, its purpose by design is to dissuade defendant from recidivism and others from similar misconduct.
8. Indeed, it is a universally recognized principle that punitive damages are disfavored and should be granted only with the greatest of caution. (Dyna–Med, Inc. v. Fair Employment & Housing Com., supra, 43 Cal.3d at p. 1392, 241 Cal.Rptr. 67, 743 P.2d 1323; Beck v. State Farm Mut. Auto. Ins. Co. (1976) 54 Cal.App.3d 347, 355, 126 Cal.Rptr. 602; see also Rosener v. Sears, Roebuck & Co. (1980) 110 Cal.App.3d 740, 750, 168 Cal.Rptr. 237.)
9. Other courts refuse enforcement of punitive damages awards simply on the rationale the contracting parties cannot by their private agreement impose a penalty for its breach. (Sch. City of E. Chicago v. E. Chicago Fed., supra, 422 N.E.2d at p. 663.) They reason that because the law will not enforce a liquidated damages clause or other stipulated penalty, penal sanctions imposed by arbitrators drawing their authority from contract should likewise not be enforced. However, this argument is unpersuasive because it fails to consider the rule prohibiting contractual penalties arose primarily from legitimate concern with desperate bargaining positions leading to oppressive terms and was not designed to inhibit the structuring of remedies following a breach. Unlike penalty provisions, most arbitration clauses simply set forth a resolution mechanism for disputes arising under or relating to the parties' contract and does not specify a particular sum of damages. Rather, it simply provides a procedure under which the parties elect an independent arbitrator who makes a determination consistent with the underlying purposes of punitive damages. Finally, as will be noted shortly, “the rule against contractual penalties does not preclude a victim of tortious breach from seeking and receiving an independent award of punitive damages. [Fn. omitted.]” (Punitive Damages in Arbitration, supra, at pp. 999–1000.)
10. We are not dealing with a contract of adhesion containing arbitration terms foisted on a party of inferior bargaining strength. In this case, Belko and AVX agreed to submit their disputes to an experienced lawyer of the highest professional repute. AVX does not suggest the law of punitive damages and the criteria governing their award was not fully comprehended and applied by their agreed arbitrator.
11. In holding no public policy bar prevents arbitrators from considering punitive damages claims, the Willoughby court noted: “The Supreme Court has emphasized that the arbitration process can be a viable method of dispute resolution only if ‘it serves as a vehicle for handling any and all disputes that arise under the agreement,’ [citation] and only if the arbitrators are given a great deal of flexibility in the fashioning of appropriate remedies. [Citation.]” (Willoughby Roofing & Supply v. Kajima Intern., supra, 598 F.Supp. at p. 361.)
12. “Moreover, a rigid rule against private punishment actually reduces the efficacy of judicial review; an arbitrator may disguise his award by giving no reasons for his decision. Had the arbitrator in Garrity awarded damages without explanation, he would have made, at worst, a nonreviewable mistake of fact. Paradoxically, absolutely prohibiting arbitral punishment actually increases the judicial effort necessary to ferret out those awards that are impermissibly punitive, thereby defeating the very economies that Garrity sought to promote. [Fns. omitted.]” (Note, Punitive Damages in Arbitration: The Search for a Workable Rule, supra, 63 Cornell L.Rev. at p. 300.)
13. “Or, put another way, the public policy which ‘favors the peaceful resolutions of disputes through arbitration’ [citation] outweighs the public policy disfavoring the assessment of punitive damages in this instance, where the unjustifiable conduct complained of is found to be with malice․ [T]herefore, ․ any public policy limiting punitive damage awards does not rise to that level of significance in this case as to require judicial intervention.” (Garrity v. Lyle Stuart, Inc., supra, 386 N.Y.S.2d at p. 836–837, 353 N.E.2d at p. 799 (dis.opn.).)
14. Some commentators have suggested subjecting arbitration decisions involving punitive damages to judicial supervision by permitting review. However, unless expedited procedures are enacted, judicial review will undermine the finality, speed, and inexpensiveness of arbitration threatening to impair its very functional existence. (Comment, Awarding Punitive Damages in Medical Malpractice Arbitration, supra, 20 Cal. Western L.Rev. at p. 329.)
15. We recognize, however, several jurisdictions have confirmed punitive damages awards where contract language is broad enough to authorize arbitration of a punitive damages claim and it is just and equitable to do so. These courts reject the view an arbitrator has no power to award punitive damages absent express authorization because they find overriding principles that any doubts concerning the scope of arbitrable issues or the arbitrator's remedial authority are to be resolved in favor of the arbitrator's exercise of authority. (See, e.g., Rodgers Builders, Inc. v. McQueen, supra, 331 S.E.2d at pp. 731–732; Willoughby Roofing & Supply v. Kajima Intern., supra, 598 F.Supp. at p. 358; Willis v. Shearson/American Express, Inc., supra, 569 F.Supp. at pp. 823–824; Ehrich v. A.G. Edwards & Sons, Inc. (D.S.D.1987) 675 F.Supp. 559, 563–565.) In fact, several of these courts confronted arbitration provisions substantially similar to that in the parties' employment contract here. (See Bonar v. Dean Witter Reynolds, Inc. (11th Cir.1988) 835 F.2d 1378, 1386–1387; Ehrich v. A.G. Edwards & Sons, Inc., supra, 675 F.Supp. at p. 560, fn. 1; Willoughby Roofing & Supply v. Kajima Intern., supra, 598 F.Supp. at p. 358; Willis v. Shearson/American Express, Inc., supra, 569 F.Supp. at pp. 822–823.)Courts that have refused to permit such authorization by implication reason the contracting parties normally do not agree to assess, nor even anticipate assessing, exemplary damages for conduct inconsistent with the contract. Recognizing punitive damages are rare in contract law, these courts hold that contractual consent to so drastic a “remedy” for simple breach cannot be implied and thus an arbitrator's assessment of punitive damages must be grounded in express language. (International U. of Op. Eng., Local No. 450 v. Mid–Valley, Inc., supra, 347 F.Supp. at p. 1109; College Hall Fashions v. Philadelphia, etc. (E.D.Pa.1976) 408 F.Supp. 722, 727–728; see 83 A.L.R.3d 1037, 1042–1043; Circuit Judge Tjoflat's separate opinion in Bonar v. Dean Witter Reynolds, Inc., supra, 835 F.2d at pp. 1388–1389, questioning implication of authorization and recommending its abrogation in favor of one requiring express contractual authorization.)
16. In light of our disposition of this issue, we do not address Belko's related contention that the issue of whether the arbitrator exceeded his authority in awarding punitive damages is not cognizable on this appeal based upon the doctrines of invited error and waiver.
17. AVX emphasizes this oversight by Belko for the first time on appeal, having never argued it in either its application to correct or its motion to vacate the arbitration award. We can only presume it was not a factor which influenced AVX's decision in agreeing to arbitrate or its conduct during arbitration.
WORK, Associate Justice.
WIENER, Acting P.J., and WOODWORTH, J.*, concur.