Magazine article Dispute Resolution Journal

Consumer: Prohibition on Punitive Damages

Magazine article Dispute Resolution Journal

Consumer: Prohibition on Punitive Damages

Article excerpt

CONSUMER

A divided Supreme Court of Alabama held, in a decision of first impression, that an arbitration clause that expressly forbids the arbitrator from awarding punitive damages is contrary to public policy and is void. Since the arbitration clause contained a severability provision, however, the court held the arbitration agreement was enforceable, but not the prohibition on punitive damages.

The plaintiffs signed an "acknowledgement and agreement" that provided in 10 that any dispute would be subject to arbitration under the Federal Arbitration Act. It also specifically provided that "the arbitrator shall have no power to award punitive damages or other damages not measured by the prevailing party's actual damage."

The trial court held that the arbitration clause was unenforceable because the prohibition on punitive damages violated Alabama public policy. The court reasoned that this prohibition denied the plaintiffs an adequate remedy on their fraud claim.

The Supreme Court of Alabama agreed that the prohibition on punitive damages violated the state's public policy, but because it found the arbitration clause was enforceable, it reversed and remanded.

The court acknowledged that Alabama "disfavors" predispute arbitration agreements and will not enforce them unless required. But it concluded that federal law did not preempt Alabama law on the validity of an arbitration clause with a prohibition on punitive damages. …

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