Punitives – To Be or Not to Be

Punitive damages: legalese meaning punishment by money. For such a simple definition, there swirls a multitude of different perceptions on who, what, where, when, why and, most importantly, how much.

Generally, in the course of a lawsuit, punitive damages are assessed against a defendant when a plaintiff suffers some type of injury – monetary or physical – because of the defendant’s egregious or outrageous conduct. Courts award them all the time in criminal court in the form of fines of community service to defer crime which in turn compensates the state post crime. In civil court, the types of cases that glean the most publicity are personal injury lawsuits where there are extensive injuries or fatalities. While there is no formula, per se, on how much should be awarded but judges usually make the amount compensatory with the actual damages determined to have been suffered by the plaintiff or about 4:1. This is a very general rule and, of course, there are outliers where the award has been as much as 145:1 (Kemp, 2013).

In some instances, companies are sued for punitive damages as part of a product liability action. An employer corporation may have vicarious liability for the negligent actions of an employee and be on the hook because of their employment relationship. Many times, corporations are the more attractive defendant because of their deep pockets increasing the chances of a higher settlement for the plaintiff. The extent of vicarious liability is determined on a state-by-state basis with some states assigning vicarious liability if the employer has done nothing negligent and other states only recognizing vicarious liability if the employer was also negligent in whatever act resulted in the personal injury. A corporation is also vulnerable to punitive damages is if there was a malicious and willful action of a managing agent.

In the area of contract law, the Uniform Commercial Code (“UCC”) controls. According to the UCC, Penalty or punitive damages clauses included in contracts are unenforceable. Court cases brought as the result of a breach in contract have only the challenge to make the plaintiff whole again – or in substantially the same position he or she was in before the breach. That goes to liquidated damages, not consequential damages (Lee, 2013).

To get around the enforceability issue, punitive damages clauses started appearing in contracts disguised in provisions regarding asset transfers, undervalued asset transfers to third parties, forfeiture or rights and/or withholding money or payments. None of these circumstances compensates loss but, rather, defers or punishes a potential breach. There are cases where damages are awarded for certain losses outside the terms of the contract such as suing for projected losses based on a breach. These are known as special damages not to be confused with punitive damages.

Plaintiffs tend to look for the deep pockets when determining named defendants in a lawsuit; however, corporations look to their customers’ pockets (deep or not) vis-à-vis contract clauses which may as well be anticipated punitive damages. Included in most cell phone agreements are clauses providing for exorbitant early termination fees. Of course, since penalty clauses in contracts are unenforceable, cell phone companies have figured out how to cleverly word their way around the enforceability issue.

As an aside, and one for cell phone contract holders to consider along with the above-mentioned enforceability issues, is also the theory of “level playing ground” where courts look to the status of the parties to the agreement and whether or not they are comparable in status. If there is a perceived unfair advantage in terms of status, the courts tend to consider the lesser-situated party when ruling to even out the field but are otherwise hesitant to intervene when the parties were in the position of an even or a close-to-even negotiating standing.

Another contract enforceability situation to consider is in real estate or earnest money agreements where the money deposited on a potential purchase is in an amount exceeding reasonableness when compared to the timeline and/or total amount of purchase. For instance, a $1,500 earnest money deposit against a $150,000 purchase forfeited after 30 days for failure to pay is an 18% gain to the prospective seller. Far more than he or she would have gained on any investment otherwise. It smacks of a penalty or deferment rather than making a party whole which should be unenforceable.

In terms of enforceability of punitive damages contracts clauses, how the courts, generally, analyze such cases seems fair. If there is a breach of a contract, the goal should be to make the party against whom the contract was breached whole. No more, no less. Of course, the same should hold in any resolution, regardless of outrageous or egregious conduct.

Works Cited

Kemp, D. (2013, April 8). The Constitution and punitive damages: a ten-year anniversary discussion of State Farm v. Campbell. Retrieved from Verdict: http://verdict.justia.com/2013/04/08/the-constitution-and-punitive-damages

Lee, L. (2013). Punitive damages on ordinary contracts. Montana Law Review, 93-109.