On August 14, 2014, in Flintlock Constr. Servs. v. Weiss, in New York Supreme Court Appellate Division, First Department, affirmed an order of the trial court denying a motion to stay arbitration of claims for punitive damages in a dispute among investors in a real estate development company (991 N.Y.S.2d 408 (1st Dep't 2014)).

The respondent investor commenced an arbitration proceeding against real estate development companies and their principals, alleging fraud and breach of contract, and requested punitive damages. The petitioners asked the arbitrators to make a preliminary ruling that punitive damages could not be awarded in the arbitration, relying on Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 356 (1976) (see Practice Note, Choosing an Arbitral Seat in the US: New York: Components of an Award). The arbitrators refused to dismiss the punitive damages claim.

The petitioners then brought a special proceeding under the New York Civil Practice Law and Rules (CPLR) to stay the arbitration under CPLR § 7503(b). The lower court denied the petition, finding that:

(Flintlock Const. Services, LLC v. Weiss, No. 156278/12, (Sup Ct. N.Y. Co. Oct. 24, 2012).)

The petitioners appealed, raising two issues for the Appellate Division:

Regarding the first issue, the petitioners argued and the dissent agreed that:

(For a more detailed explanation of the relationship between the FAA and state laws, see Practice Note, Understanding US Arbitration Law.)

The Appellate Division disagreed. The court held that the statement in Diamond Waterproofing that a clause stipulating that New York law is to govern the contract "and its enforcement" calls for the application of New York arbitration law was dictum and involved only consideration of statute of limitations issues. Instead, the court held that precedent from the US Supreme Court holds that arbitrators have the authority to award punitive damages unless the parties unequivocally demonstrate intent to preclude an award of punitive damages (Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 60 (1995)). Under Mastrobuono, the mere choice of New York law is insufficient to demonstrate that intent.

The court refused to stay arbitration for the further reason that petitioners participated in the arbitration. CPLR § 7503(b) authorizes motions to stay arbitration by "a party who has not participated in the arbitration." The petitioners participated in the arbitration process for nearly eight months before registering an objection to the arbitrability of respondent's claim for punitive damages.

This decision demonstrates that the New York courts increasingly accept the application of the FAA to domestic arbitration seated in New York (see, for example, Legal Update, New York Court Holds that FAA Applies to Local Family Business and Compels Arbitration). Practitioners should no longer assume that a New York court will not find the FAA applicable when the choice of law clause calls for the contract "and its enforcement" to be governed by New York law. Given the sharp split on the court, it is likely that this issue will not be finally resolved until the New York Court of Appeals decides it.