Punitive damages or exemplary damages are damages intended to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit. Although the purpose of punitive damages is not to compensate the plaintiff, the plaintiff will in fact receive all or some portion of the punitive damage award.
Punitive damages are often awarded where compensatory damages are deemed an inadequate remedy. The court may impose them to prevent under-compensation of plaintiffs, to allow redress for undetectable torts and taking some strain away from the criminal justice system.[1] However, punitive damages awarded under court systems that recognize them may be difficult to enforce in jurisdictions that do not recognize them. For example, punitive damages awarded to one party in a US case would be difficult to get recognition for in a European court, where punitive damages are most likely to be considered to violate ordre public.[2]
Because they are usually paid in excess of the plaintiff's provable injuries, punitive damages are awarded only in special cases, usually under tort law, where the defendant's conduct was egregiously insidious. Punitive damages cannot generally be awarded in contract disputes. The main exception is in insurance bad faith cases in the United States, where the insurer's breach of contract is alleged to be so egregious as to amount to a breach of the "implied covenant of good faith and fair dealing," and is therefore considered to be a tort cause of action eligible for punitive damages (in excess of the value of the insurance policy).[3]
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In Australia, punitive damages are not available for breach of contract,[4] but are possible for tort cases.
The law is less settled regarding equitable wrongs. In Harris v Digital Pulse Pty Ltd,[5] the defendant employees knowingly breached contractual and fiduciary duties to their employer by diverting business to themselves and misusing its confidential information. The New South Wales Court of Appeal held that punitive damages are not available both for breach of contract and breach of fiduciary duty. Heydon JA (as he then was) said there is no power to give punitive damages in respect of a claim in equity, although he was content to decide the case on the narrower ground that there is no power to award punitive damages for the specific equitable wrong in issue. Spigelman CJ concurred, although he emphasized that the contractual character of the fiduciary relationship in question, and refrained from deciding on whether punitive damages would be available in respect of equitable wrongs more analogous to torts. Mason P dissented and opined that there was no principled reason to award punitive damages in respect of common law torts but not analogous equitable wrongs.
In England and Wales, exemplary damages are limited to the circumstances set out by Lord Devlin in the leading case of Rookes v. Barnard:[6]
Rookes v Barnard has been much criticised and has not been followed in Canada or Australia or by the Privy Council.[7]
Another case that could arguably be seen as an example of punitive damages was that of Attorney-General v Blake[8] in which the defendant profited from publishing a book detailing his work for MI5. The details were very old and therefore did not cause loss to the state. The publishing was, however, in breach of the contract of employment (and incidentally criminally in breach of the Official Secrets Act 1911). The defendant was required to give an account of his profits gained from writing the book.
The courts have been very reluctant to follow this approach,[9] emphasising the materiality of the criminal element required for these damages to be considered.
In New Zealand it was held in Donselaar v. Donselaar [10] and confirmed in Auckland City Council v. Blundell [11] that the existence of the Accident Compensation Corporation did not bar the availability of exemplary damages. In Paper Reclaim Ltd v Aotearoa International [12] it was held that exemplary damages are not to be awarded in actions for breach of contract but the Court left open the possibility that exemplary damages might be available where the breach of contract is a tort.
More recently in Couch v Attorney-General the New Zealand Supreme Court barred exemplary damages for cases of negligence unless the defendant acts intentionally or with subjective recklessness [13].
Punitive damages can also be awarded for equitable wrongs. In Acquaculture Corporation v New Zealand Green Mussel Co Ltd,[14] the majority of the New Zealand Court of Appeal held that in addition to compensation, punitive damages could be awarded for breach of confidence, albeit that, on the facts, they were not merited. Similarly, in Cook v Evatt (No.2),[15] Fisher J in the New Zealand High Court added exemplary damages of NZ$5,000 to an account of profits of over NZ$20,000 for breach of fiduciary duty.
Punitive damages are a settled principle of common law in the United States.[16] They are a matter of state law, and thus differ in application from state to state. In many states, including California and Texas, punitive damages are determined based on statute; elsewhere, they may be determined solely based on case law. Many state statutes are the result of insurance industry lobbying to impose "caps" on punitive damages; however, several state courts have struck down these statutory caps as unconstitutional.[17]
The general rule is that punitive damages cannot be awarded for breach of contract. But if an independent tort is committed in a contractual setting, punitive damages can be awarded for the tort.[18] Punitive damages are usually reserved for when the defendant has displayed actual intent to cause harm (such as purposefully rear-ending someone else's car), rather than in cases of mere negligence.[19]
Punitive damages are a focal point of the "tort reform" debate in the United States, where numerous highly-publicized multi-million dollar verdicts have led to a fairly common perception that punitive damage awards tend to be excessive. However, statistical studies by law professors and the Department of Justice have found that punitive damages are only awarded in two percent of civil cases which go to trial, and that the median punitive damage award is between $38,000 and $50,000.[17]
There is no maximum dollar amount of punitive damages that a defendant can be ordered to pay. In response to judges and juries which award high punitive damages verdicts, the Supreme Court of the United States has made several decisions which limit awards of punitive damages through the due process of law clauses of the Fifth and Fourteenth Amendments to the United States Constitution. In a number of cases, the Court has indicated that a 4:1 ratio between punitive and compensatory damages is high enough to lead to a finding of constitutional impropriety, and that any ratio of 10:1 or higher is almost certainly unconstitutional.
In Liebeck v. McDonald's Restaurants (1994), a very high and therefore often criticized amount of damages were awarded to a woman who burned herself with hot coffee she purchased from McDonald's.
In BMW of North America, Inc. v. Gore (1996), the Court ruled that an excessive punitive award can amount to an arbitrary deprivation of property in violation of due process. The Court held that punitive damages must be reasonable, as determined by the degree of reprehensibility of the conduct that caused the plaintiff's injury, the ratio of punitive damages to compensatory damages, and any comparable criminal or civil penalties applicable to the conduct. In State Farm Auto. Ins. v. Campbell (2003), the Court held that punitive damages may only be based on the acts of the defendants which harmed the plaintiffs. The Court also elaborated on the factors courts must apply when reviewing a punitive award under due process principles.
Most recently, in Philip Morris USA v. Williams (2007), the Court ruled that punitive damage awards cannot be imposed for the direct harm that the misconduct caused others, but may consider harm to others as a function of determining how reprehensible it was. More reprehensible misconduct justifies a larger punitive damage award, just as a repeat offender in criminal law may be punished with a tougher sentence. Dissenting in the Williams case, Justice John Paul Stevens found that the "nuance eludes me," suggesting that the majority had resolved the case on a distinction that makes no difference.
In very few industries, punitive damages could be awarded in either contractual or tort case, except a tort relevant to product defraud or defect. Article 49 of the PRC Law on Protection of Consumer's Rights and Interests enacted on October 31, 1993 provides the rule that any consumer is entitled to a recovery of double the purchase price of products or service from the seller or service provider against their defraud. Successful cases have been reported in wide in this regard.
Article 96 of the PRC Law on Food Safety adopted on February 28, 2009 raises the punitive damages to ten times the purchase price additional to the compensatory damages that the victim has already claimed from the producer or seller for food with poor quality not compliant to food safety standards. Such a huge statutory amount considered by the legislative organ is based on several extremely serious food quality incidents in the past two years, such as the notorious Sanlu tainted milk powder case.
Application of the punitive damage rule is further expanded with the enactment of the PRC Law on Tort Liability effective as of July 1, 2010. This new law sets forth that a victim is entitled to claim punitive damages from any manufacturer or seller expressly aware of the defects in products but still produces or sells them if the it results in death or heavy injuries. Since this is a rather new law so far, no further explanatory regulation regarding a detailed amount and applicable scope is promulgated guiding the application of this rule, so a court judge may have discretional power to decide punitive damages case by case under this new law.
Japanese courts do not award punitive damages as a matter of public policy, and Japanese law prohibits the enforcement of punitive damage awards obtained overseas.[20]
In Japan, medical negligence and other species of negligence are governed by the criminal code, which may impose much harsher penalties than civil law. For instance, many causes of action which would subject a defendant to a potential punitive damage award in the U.S. would subject the same individual to prison time in Japan.