Key Takeaways

  • Punitive damages in contract law are rare and generally awarded only when a defendant's conduct is especially egregious or involves tortious behavior.
  • These damages are intended to punish the wrongdoer and deter similar future conduct, not to compensate the injured party.
  • Courts usually require proof of bad faith, fraud, or intentional misconduct before awarding punitive damages in contract disputes.
  • There are constitutional and statutory limitations on the amount of punitive damages that may be awarded.
  • Punitive damages are more common in insurance bad faith cases or where the breach of contract is closely tied to tort law principles.
  • Specific examples and legal tests, such as the "clear and convincing evidence" standard, influence whether punitive damages are appropriate.
  • Punitive damages are subject to appellate review and may be reduced if deemed excessive.

Punitive Damages in Contract Law

Punitive damages in contract law are monetary damages awarded to a plaintiff to punish the defendant and prevent him from engaging in the same conduct at any point in the future. Punitive damages are also referred to as exemplary damages and are only one type of award given to the plaintiff. An additional damage could include compensatory damages for the damage done by the defendant to the plaintiff.

Punitive damages are generally awarded on top of the compensatory or other types of damages; this could ultimately increase the plaintiff’s reward significantly. However, with that said, there are some rules in place for such damages. The judge can’t simply award any amount of punitive damages that she sees fit. Punitive damages are generally awarded if:

  • The compensatory damages are inadequate
  • The defendant’s conduct was egregious

As an example, a breach of contract claim will not usually award punitive damages. The reason for this is because the court is assuming that both parties are entering into the contract fully aware of the risks. With that said, if a plaintiff brings a legal suit against an insurance company and can prove that the defendant breached its requirement of good faith and fair dealing, then the plaintiff might be awarded punitive damages in this type of breach of contract claim.

The court might also award punitive damages if no actual damages are available to the plaintiff. Generally, you’ll see these damages awarded in tort cases, i.e. personal injury, assault, product liability, etc.

While such damages are common in these types of cases, the damages will rarely be in the millions of dollars. According to research conducted by the U.S. Department of Justice, roughly 2% of tort cases involve punitive damages, and the average amount awarded is $50,000.

Legal Basis for Awarding Punitive Damages in Contract Disputes

Punitive damages in contract law are generally disfavored unless the breach of contract is accompanied by independently actionable tortious conduct. Courts typically do not allow punitive damages for mere failure to perform contractual duties unless the breach includes elements of fraud, oppression, or malice.

To recover punitive damages in a contract-related case, a plaintiff must often show:

  • Intentional Misconduct: The defendant knowingly engaged in conduct that harmed the plaintiff beyond just breaching the contract.
  • Tortious Conduct: The breach of contract is tied to a tort, such as fraud or bad faith.
  • Statutory Authority: Some jurisdictions allow punitive damages for contract violations under specific statutes, such as consumer protection laws.

Many states require “clear and convincing evidence” of the defendant’s wrongful intent. This higher evidentiary standard helps prevent punitive damages from being awarded in routine breach of contract cases.

Types of Contract Disputes Where Punitive Damages May Apply

Punitive damages are most likely to be awarded in contract law under the following scenarios:

  • Insurance Bad Faith: Insurers acting in bad faith by unreasonably denying or delaying claims can be liable for punitive damages.
  • Fraudulent Misrepresentation: If a party enters into a contract through deceit, courts may view this as a tort and award punitive damages.
  • Employment Contracts: Retaliatory discharge or other malicious conduct by an employer may qualify.
  • Consumer Contracts: Some consumer protection laws allow punitive damages if a seller acts with willful deception or intentional misconduct.
  • Real Estate or Lending Fraud: If a lender or seller misrepresents material facts, punitive damages may be appropriate.

Courts assess whether the behavior goes beyond a simple breach and instead indicates a willful disregard for the rights or safety of others.

Examples of Punitive Damages

A prime example of when punitive damages might be awarded involves a contract between a customer and manufacturer. Let’s assume that the manufacturer of a dietary pill promises that the pill is a safe method of losing weight. A customer chooses to purchase a bottle of the pills, and after taking the pills or a week, suddenly becomes ill. Her doctor has indicated that an ingredient in the pill reacts negatively with certain prescription medications, particularly one that the customer was currently prescribed.

Nowhere on the manufacturer’s website or the packaging does the company state that the ingredients in the weight loss pills interact with any other medication. The customer has incurred approximately $50,000 in medical bills, including a lengthy hospital stay. She brings a legal suit against the manufacturer to collect on the medical expenses, along with lost wages for being out of work for a number of weeks.

The argument here is that the manufacture knew or should have known that the ingredients in its weight loss pill could interact negatively with other medication, whether prescribed or over-the-counter. Thus, the company should have provided some sort of textual warning on its packaging and website. The judge then rules in the customer’s favor, awarding her compensatory damages for the medical bills and lost wages. While the compensatory damages cover her bills and lost wages, the court also awards her punitive damages totaling $200,000 to primarily serve as punishment for the manufacturer, ensuring the company will not continue selling the weight loss pills without providing a warning to potential consumers of such negative medical interactions.

Other Factors Used to Determine Punitive Damages

The court will use several factors when determining whether or not to award punitive damages, such as:

  • How egregious the defendant’s actions were
  • Whether similar legal suits ended in awarding punitive damages
  • The difference in the plaintiff’s injuries and losses with the amount of damages being requested, i.e. will the compensatory damages cover such losses?

The court will also look at additional factors when, after determining punitive damages are appropriate, just how much should be awarded to the plaintiff. Such factors include:

  • If it is difficult to place a value on the type of harm done to the plaintiff
  • If the injuries are difficult to detect, or what type of continued medical care is necessary due to the defendant’s actions
  • How offensive the defendant’s actions were against the plaintiff

Limitations and Caps on Punitive Damages

There are both constitutional and statutory limits on punitive damages:

  • U.S. Supreme Court Guidance: The Court has held that punitive damages must be proportionate. In State Farm v. Campbell, the Court stated that “few awards exceeding a single-digit ratio between punitive and compensatory damages… will satisfy due process.”
  • State-Specific Caps: Many states impose caps. For example:
    • California typically limits punitive damages to no more than ten times the amount of compensatory damages.
    • Florida law allows for punitive damages up to three times the amount of compensatory damages or $500,000, whichever is greater.
  • Judicial Review: Excessive punitive awards are often reduced on appeal, especially when they do not align with the severity of the defendant’s misconduct.

Understanding these limits is crucial for both plaintiffs and defendants when evaluating the risk and potential outcome of litigation involving punitive damages.

Standard of Proof and Jury Considerations

Because punitive damages are meant to punish, the burden of proof is higher than for compensatory damages. Most jurisdictions require:

  • Clear and Convincing Evidence: The plaintiff must prove the defendant acted with malice, fraud, or oppression.
  • Jury Discretion: Juries typically assess whether the defendant’s conduct justifies a punitive award and how much should be awarded, though judges can reduce the amount post-verdict.

Judges often instruct juries to consider:

  • The reprehensibility of the defendant’s actions.
  • The ratio of punitive to compensatory damages.
  • Comparable civil penalties for similar conduct.

These standards ensure fairness while still holding defendants accountable for extreme misconduct.

Challenges and Appeals of Punitive Damage Awards

Punitive damage awards are frequently challenged post-trial. Common arguments include:

  • Excessiveness: The award is disproportionate to the harm suffered.
  • Lack of Due Process: The defendant was not given a fair opportunity to respond to the claim for punitive damages.
  • Insufficient Evidence: Failure to meet the “clear and convincing” standard can justify overturning an award.

Appellate courts regularly reduce or vacate punitive awards that don’t meet these constitutional and evidentiary standards, especially when the underlying contract dispute lacked accompanying tortious behavior.

Frequently Asked Questions

1. Are punitive damages ever awarded in breach of contract cases? Yes, but only when the breach involves fraud, bad faith, or tort-like conduct such as oppression or malice.

2. What is the purpose of punitive damages in contract law? Punitive damages are meant to punish wrongful behavior and deter others from engaging in similar misconduct, rather than to compensate the injured party.

3. What’s the standard of proof for punitive damages? Most jurisdictions require “clear and convincing evidence” that the defendant acted with fraud, malice, or oppression.

4. Is there a cap on punitive damages in contract cases? Yes, many states impose statutory caps, and the U.S. Supreme Court has ruled that excessively large awards may violate due process.

5. Can punitive damages be appealed or reduced? Yes, courts often reduce punitive damages that are found to be excessive or unsupported by the facts or law.

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