Arbitrators May Have Ability to Award Punitive Damages Unless Limited by Arbitration Agreement

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March 21, 2005

In Winkelman v. Kraft Foods, Inc., John Winkelman sued to terminate a contract he signed with the Defendant Kraft Foods, Inc. As a condition of entering the contract, a representative from Kraft indicated to Winkelman if milk prices fluctuated, Winkelman would be able terminate the contract by giving Kraft a one-month notice. The contract between the parties contained an agreement to arbitrate any disputes between the parties pursuant to the rules of the American Arbitration Association (AAA). The AAA rules were silent with respect to an arbitrator’s authority to award punitive damages, and allowed an arbitrator to award attorney fees if authorized by law.
 
Early in the contract year, milk prices rose substantially and Winkelman sought to exercise the promised condition to terminate the contract. When Kraft denied his request to terminate the contract, Winkelman continued to produce milk in accordance with the contract, but sued Kraft. The matter went before an arbitrator, where Winkelman sought compensatory damages, punitive damages and attorney fees.
 
The Arbitrator found that Kraft’s agent had, in fact, misrepresented to Winkelman his ability to terminate the contract with one month’s penalty. As a result, the Arbitrator awarded compensatory damages as well as attorney fees and punitive damages. The Arbitrator based the ruling on the AAA rules agreed to by the parties which provided for “an award of attorney fees if . . . it is authorized by law.” The Arbitrator also found that no Wisconsin law prevented an arbitrator from awarding punitive damages, and awarded them to Winkelman.
 
In reviewing the Arbitrator’s decision, the Court of Appeals noted that nothing in the arbitration provision of the parties’ contract limited the relief or remedies an arbitrator may grant. Thus, in that sense, some arbitrators will have the power to award punitive damages and others will not, depending upon the provisions of the parties’ agreement. The Court noted that attorney fees may be granted where they are “authorized by law.” Thus, a party may recover attorney fees, even in an arbitration, where a plaintiff sues under a statute that authorizes attorney fees, or the contract the parties are disputing provides that the prevailing party will be awarded attorney fees.
 
The important lesson to be learned from this case is to include a clear damage limitation provision when drafting arbitration agreements. It is clear that arbitrators and Courts will fill the void left by ambiguous contracts and may award punitive damages to a prevailing party unless specifically limited in the arbitration agreement. It is also important to note that the Court’s ruling is not limited to disputes involving commercial litigation matters, but applies to an arbitrator’s powers generally.
If you have questions regarding the above, please contact any of the attorneys in the Employment, Benefits & Labor Relations Practice Group of Ruder Ware.

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