Punitive Damages Breach of Contract: Everything to Know
Punitive damages breach of contract occurs when one party to a legal contract failed to live up to their obligations agreed to in the contract.3 min read
Punitive damages breach of contract occurs when one party to a legal contract failed to live up to their obligations agreed to in the contract.
Contracts, which are the basis upon which many business relationships are conducted, contain promises that join businesses together. They usually require a commitment of capital or the transfer of goods or services between the businesses. If the obligations contained in the agreement are not carried out in accordance to the contract, great harm can befall the aggrieved party to the agreement.
Remedies for Breach of Contract
Therefore, contract law and the courts provide remedies for the failure of a party to live up to their obligations, known as breach of contract. They generally exist as either legal damages or equitable remedies.
Legal damages usually involve the award of monetary payment for damages
Forms of equitable remedy are applied when the court determines that monetary damages are not sufficient to rectify the harm caused. In these cases, also called “remedies in equity” or “injunctive relief,” the court orders the parties to take action. These include:
- Cancellation of the contract.
- Demanding that a specific performance is completed.
- Voiding or recession of the contract. The two parties then usually enter into a new contract. This is common when is detected.
- Modifying the terms of the contract to punish the offending party. This occurs when it is established that the parties entered into the contract with false assumptions.
What Are Punitive Damages?
When the court determines that a party has acted in a willful, fraudulent, or malicious manner in a contracted business relationship, it has the authority to punish the offending party. Also known as “exemplary damages,” these awards to the wronged party can take the form of retribution above and beyond the compulsory damages that cover that actual loss in terms of dollars and cents. The intent of the court with punitive damages is to severely punish the offending party (and therefore dissuade them from acting in a like manner in the future) and make an example of them, so others think twice before committing similar acts.
There is no limit to the number of punitive damages a court may demand of the offending party. It is largely determined by the scope of fraud, maliciousness, or willfulness to cause harm as determined by the court.
Punitive Damages and Breach of Contract
There is no requirement that any punitive damages be awarded in a breach of contract. In determining the extent of damage caused by a breach of contract, the court bases its decision on the premise that the parties entered into the agreement with “open eyes,” meaning they should have a basic awareness of the risks involved in the contract.
However, there are some occasions when the awarding of punitive damages shows up most often. These include:
- Willful misrepresentations in insurance contracts.
- Tort/contract crossover matters, which occur when the offending party’s conduct is so egregious that it is.
- Instances of severe and harmful fraud cases.
The judge may take other matters into consideration, such as whether or not the compulsory damages are sufficient to meet the breach of contract and even state laws governing breach of contract awards.
For instance, a recent case in which the Supreme Court of Ohio overturned a decision by the Seventh District Court of Appeals has a dramatic impact regarding the awarding of punitive damages in breach of contract cases. In their ruling, the Ohio court declared that punitive damages are not recoverable in instances of breach of contract, except in instances where the breach constitutes a tort.
If the breach does indeed constitute a tort, the award decided by the court hearing the breach of contract case can only be awarded for the tort, not the breach of contract itself, and even then the amount of the punitive award is subject to statutory limits found in the Ohio Revised Code (ORC).
Determining whether or not punitive damages are justified in a breach of contract case, and the amount of the punitive damages to be awarded, is the duty of the court hearing the breach of contract case. A key factor in making the decision involves whether the matter falls under contract law or tort law.
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