## Facts

- Antonio and Diana Mastrobuono opened a securities trading account with Shearson Lehman Hutton, Inc. in 1985 and signed a standard-form client agreement drafted by Shearson.
- The agreement included (1) an arbitration clause requiring arbitration before NASD arbitrators under the Federal Arbitration Act (FAA) and (2) a choice-of-law clause stating the account “shall be governed by the laws of the State of New York.”
- The Mastrobuonos sued Shearson and their account manager in federal court in Illinois, alleging mishandling of the account under state and federal theories.
- The district court stayed the litigation and compelled arbitration under FAA §§ 3–4.
- A three-member NASD arbitration panel awarded the Mastrobuonos $159,327 in compensatory damages and $400,000 in punitive damages.
- Shearson paid compensatory damages but sought to vacate punitive damages, arguing New York law bars arbitrators from awarding punitive damages and that the contract’s New York choice-of-law clause incorporated that rule.

## Issues

1. Whether a securities arbitration conducted under the FAA permits arbitrators to award punitive damages when the parties’ contract contains a generic New York choice-of-law clause and New York law restricts arbitral punitive damages.
2. Whether the choice-of-law clause should be read to incorporate New York rules limiting arbitrators’ remedial authority, thereby excluding punitive damages from arbitration absent explicit authorization.

## Decision

- The Supreme Court reversed the Seventh Circuit and held that the punitive-damages award was within the scope of the arbitration agreement and must be enforced.
- The Court ruled that the contract’s generic New York choice-of-law clause did not clearly exclude punitive damages from arbitration or strip arbitrators of authority to award them.
- Reading the arbitration clause and choice-of-law clause together, the Court interpreted “laws of the State of New York” to incorporate New York substantive law governing the parties’ rights and duties, not special rules limiting arbitral remedies.
- Any contractual ambiguity was construed against Shearson as drafter of the standard-form agreement.
- Justice Thomas dissented, concluding the choice-of-law clause incorporated New York’s restriction and barred punitive damages in arbitration.

## Legal Principles

- Under the FAA, courts must enforce arbitration agreements according to their terms, including agreed-upon remedies, even if state law would otherwise restrict arbitration of those remedies.
- Contract interpretation of arbitration provisions applies a presumption favoring arbitration; doubts about the scope of arbitral authority are resolved in favor of arbitration.
- A generic choice-of-law clause typically adopts the chosen state’s substantive law for the parties’ rights and obligations, but does not, without clear language, incorporate state rules that limit arbitrators’ powers or the arbitral forum’s remedial authority.
- Ambiguities in a standard-form contract are construed against the drafter (contra proferentem), including ambiguity about whether punitive damages are excluded from arbitration.

## Conclusion

The Court held that a standard New York choice-of-law clause, without explicit exclusionary language, does not bar arbitrators from awarding punitive damages in an FAA-governed arbitration; the punitive-damages award was reinstated and enforced as within the parties’ agreement.


Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995)