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Should punitive damages be part of the judicial arsenal in contract cases?

Published online by Cambridge University Press:  02 January 2018

Ralph Cunnington
Ralph Cunnington*
Affiliation:
University of Birmingham
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Abstract

This paper challenges the traditional assumption that punitive damages are unavailable for breach of contract. It is shown that Addis v Gramophone provides weak authority for this assumption. The paper considers whether there is a logically coherent argument for retaining punitive damages in tort, while denying them for breach of contract, and it is shown that there is not. The main arguments advanced against punitive damages in civil proceedings are examined and shown to be unpersuasive. Finally, the efficient breach theory is considered and rejected on the ground that it significantly underestimates the costs associated with breach. In conclusion, the paper recommends that punitive damages should be exceptionally awarded to deter outrageous breaches of contract in cases where compensatory damages are inadequate and gain-based damages are unavailable.

Type
Research Article
Information
Legal Studies , Volume 26 , Issue 3 , September 2006 , pp. 369 - 393
Copyright
Copyright © Society of Legal Scholars 2006

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References

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2. Punitive more aptly describes their purpose, embracing punishment, example, vindication and deterrence.

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4. [2002] 2 AC 122.

5. Ibid, at 157.

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18. Some courts explained these awards as compensation to the claimant for mental suffering and injured feelings, while other courts explained the awards as serving the purpose of punishing the defendant for his misconduct; see Merest v Harvey (1814) 5 Taunt 442, 128 ER 761.

19. [1964] AC 1129.

20. Aggravated damages compensate the claimant for the mental distress caused by the defendant’s wrongdoing.

21. [1964] AC 1129 at 1226–1227.

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23. [1972] AC 1027 at 1083.

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33. Ibid, at 146.

34. Ibid, at 145.

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46. [1909] AC 488 at 492.

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48. Indeed, it was for this proposition that the case was cited and followed in Groom v Crocker [1939] 1 KB 194. In recent years, this ratio has been made subject to several exceptions; see Malik v BCCI [1998] AC 20; Johnson v Gore Wood & Co [2002] 2 AC 1. Damages for non-pecuniary losses are now available in actions for breach of contract where the purpose of the contract is to provide pleasure and enjoyment: Jarvis v Swan Tours [1973] QB 233; Jackson v Horizon Holidays [1975] 3 All ER 92; Farley v Skinner [2002] 2 AC 732.

49. [1909] AC 488 at 494 and 496.

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51. Lord Sondes v Fletcher (1822) 5 B & A 835.

52. [1909] AC 488 at 500.

53. Ibid, at 498.

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67. Burrows, above n 56, p 13.

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70. Ibid, at 63.

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72. Ruxley Electronics Ltd v Forsyth [1996] 1 AC 344.

73. Farley v Skinner [2002] 2 AC 732; Hamilton Jones v David & Snape (A Firm) [2004] 1 All ER 657; Jarvis v Swan Tours [1973] QB 233; Jackson v Horizon Holidays [1975] 3 All ER 92.

74. See J Edelman ‘Exemplary damages for breach of contract’ (2001) 117 LQR 539 at 543; A Phang and PW Lee ‘Restitutionary and exemplary damages revisited’ (2003) 19 JCL 1 at 22.

75. Addis v Gramophone Co [1909] AC 488; Foley v Interactive Data Corp (1988) 254 Cal Rptr 211 at 237–239.

76. Washington, above n 8, at 365; J Fleming ‘Is wrongful dismissal a tort?’ (1990) 106 LQR 8 at 11.

77. [1909] AC 488 at 494 and 495.

78. The growing number of economic torts bears testimony to the impact of tort on commercial affairs. Likewise it is undeniable that each one of us enters into numerous non-commercial contracts each day.

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81. City of New Orleans v Fireman’s Charitable Association 9 So 486 (1891).

82. Attorney General v Blake [2001] 1 AC 268.

83. See Law Commission Report, above n 28, para 5.72.

84. McBride, above n 80, at 382.

85. 777 F2d 57 at 63 (2nd Circ, 1985).

86. Farley v Skinner [2002] 2 AC 732; Jarvis v Swan Tours [1973] QB 233; Jackson v Horizon Holidays [1975] 3 All ER 92.

87. (1981) 136 DLR (3d) 49 at 65.

88. [1909] AC 488 at 500.

89. [2002] 2 AC 122 at 145.

90. See Street, above n 3, p 33; McGregor on Damages, ibid, p 369; Beever, ibid; Todd, ibid.

91. McBride, above n 79, p 195.

92. Injury Prevention, Rehabilitation and Compensation Act 2001 (NZ).

93. M Graham ‘Exemplary and punitive damages in contract and tort’ [2002] LMCLQ 453 at 459.

94. [1972] AC 1027 at 1114.

95. Broome v Cassell & Co [1972] AC 1027 at 1100 per Lord Morris of Borth-y-Gest.

96. HM Hart ‘The aims of the criminal law’ (1958) 23 Law and Contemporary Problems 401 at 404.

97. Some American states require evidence ‘beyond a reasonable doubt’ before punitive damages are awarded (Gruntmeier v Mayrath Industries 841 F 2d 1037 (10th Cir, 1988)). Many jurisdictions avoid double jeopardy by refusing to award punitive damages if the defendant has already been adequately punished for his conduct by the criminal justice system (Wirsing v Smith 70 A 906 (SC Penn, 1908); Watts v Leitch [1973] Tas SR 16). See the recent discussion of double jeopardy in the context of punitive damages in Borders (UK) Ltd v Commissioner of Police of the Metropolis [2005] EWCA Civ 197, [2005] The Times, April 15 at [41] per Rix LJ, at [46] per May LJ.

98. Attorney General v Blake, above n 82, at 273.

99. This objection has frequently been noted by the courts; see Ruxley Electronics v Forsyth [1996] 1 AC 344 at 353 per Lord Bridge of Harwich; Tito v Waddell (No 2) [1977] Ch 146 at 332 per Megarry VC.

100. Dr Edelman labels the term a ‘pejorative syllogism’: Edelman, above n 74, at 542.

101. B Coote ‘Contract damages, Ruxley, and the performance interest’ (1997) 56 CLJ 537 at 548.

102. Sumpter v Hedges [1898] 1 QB 673; Bolton v Mahadeva [1972] 1 WLR 1009.

103. British Transport Commission v Gourley [1956] AC 185.

104. Dewes v National Coal Board [1978] AC 1 at 12–13.

105. Oki Am Inc v Microtech International Inc 872 F 2d 312 at 315 (9th Circ, 1989) per Kozinski J.

106. McBride, above n 79, pp 196–197.

107. Ibid, p 197.

108. TA Diamond ‘The tort of bad faith breach of contract: when, if at all, should it be extended beyond insurance transactions?’ (1981) 64 Marq Law Rev 425 at 449; W Dodge ‘The case for punitive damages in contracts’ (1999) 48 Duke Law Journal 629 at 691.

109. Law Commission Report, above n 28, para 5.30.

110. John v Mirror Group Newspapers Ltd. [1997] QB 587; Rantzen v Mirror Group Newspapers [1994] QB 670.

111. Law Commission Report, above n 28, para 5.32.

112. The proportionality of punishment principle is applied in Canada; see Whiten v Pilot Insurance Co (2002) 209 DLR (4th) 257 at 299–304 per Binnie J (McLachlin CJC, L’Heureux-Dubé, Gonthier, Major and Arbour JJ concurring).

113. Wendell Holmes, O Jr (edited by De Wolfe Howe, M) The Common Law (Boston: Harvard University Press, 1963) p 42 Google Scholar. See also at 373.

114. See comments of Atiyah, above n 59, p 57.

115. Holmes does not consider the doctrine of frustration, which relieves the oppressiveness of contractual obligations where performance is rendered impossible. See the Law Reform (Frustrated Contracts) Act 1943; BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783.

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122. See Restatement (Second) of Contracts (American Law Institute, 1981) reporter’s note at 101.

123. For further examples of opportunistic breaches see Dodge, above n 108, at 657–662. Dodge provides illustrations of three types of opportunistic breach: pretextual termination of contract; stonewalling; and bad faith refusal to pay for services already performed.

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125. Posner, above n 119, p 118.

126. Posner recognises that Holmes’s position is ‘overbroad’: ibid, p 119.

127. R Coase ‘The problem of social cost’ (1960) 3 Journal of Law and Economics 1.

128. IR Macneil ‘Efficient breach: circles in the sky’ (1982) 68 Virginia Law Review 947 at 950–953; Adras Building Material Ltd v Harlow and Jones Gmbh [1995] RLR 235 at 272 per Barak J.

129. Posner, above n 119, p 131.

130. Ibid, p 120.

131. D Friedmann ‘The efficient breach fallacy’ (1989) 18 JLS 1 at 6.

132. Macneil, above n 128, at 954.

133. Friedmann, above n 131, at 6–7.

134. Posner, above n 119, p 60; R O’Dair ‘Restitutionary damages for breach of contract and the efficient breach: some reflections’ (1993) CLP 113 at 122.

135. Posner, ibid, p 61.

136. Dodge, above n 108, at 671–673. Dodge references the work of Hoffman and Spitzer who conducted a series of tests with students to see if they would bargain to Pareto-optimal solutions. In 20 experiments, 19 of the pairs bargained to the Pareto-optimal solution: E Hoffman and ML Spitzer ‘The Coase Theorem: some experimental tests’ (1982) 25 Journal of Law and Economics 73 at 92.

137. L Smith ‘Disgorgement of profits of breach of contract: property, contract and “efficient breach” ’ (1995) 24 Canadian Business Law Journal 121 at 134; Macneil, above n 128, at 968.

138. Dodge, above n 108, at 675. Posner himself recognises this: above n 119, p 119.

139. Wendell Holmes, above n 113, p 167.

140. See WW Buckland ‘The nature of contractual obligation’ (1944) 8 CLJ 247 at 249–251.

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142. Wendell Holmes, above n 113, p 236.

143. Ibid.

144. A Burrows ‘We do this at common law but that in equity’ (2002) 22 OJLS 1. Cf WMC Gummow ‘Equity: too successful’ (2003) 77 ALJ 30.

145. R Cunnington ‘Contract rights as property rights’ in Robertson, above n 60, pp 179–181; Finnis, J Natural Law and Natural Rights (Oxford: Clarendon Press, 1980) p 324.Google Scholar

146. (1853) 2 E & B 216.

147. Ibid, at 233.

148. Also see Gaudron J in Hill v Van Erp (1995) 188 CLR 159 at 197. Gaudron J said that the tort of interference with contractual rights ‘is no different from trespass, conversion, detinue and slander of title which, as I pointed out in Hawkins v Clayton (1988) 164 CLR 539, 594, are directly concerned with the protection of legal rights’.

149. Lumley v Wagner (1852) 1 De GM & G 604.

150. Bunge Corporation v Tradex [1981] 1 WLR 711. See Coote, above n 101, at 543.

151. H Dakin & Co Ltd v Lee [1916] 1 KB 566; Bolton v Mahadeva [1972] 2 All ER 1322; Sumpter v Hedges [1898] 1 QB 673.

152. White Arrow Express Ltd v Lamey’s Distributors Ltd [1995] CLC 1251.

153. See Finnis, above n 145, p 323.

154. Atiyah, above n 59, p 61.

155. Friedmann, above n 131, at 4.

156. Buckland, above n 140, at 249–251.

157. Pollock, F Principles of Contract (London: Stevens, 5th edn, 1881) p 19.Google Scholar

158. [2003] 1 AC 449.

159. Ibid, at 455. See Kuddus, above n 26, at 145.

160. [2003] 1 AC 449 at 456.

161. [1964] AC 1129 at 1226 per Lord Devlin.

162. [2002] 2 AC 122 at 144.

163. Ibid, at 145. See also Borders, above n 97, at [42]–[43] per Rix LJ.

164. [2001] 1 AC 268.

165. Ibid, at 285.

166. Ibid, at 282.

167. Ibid, at 285 per Lord Nicholls of Birkenhead.

168. See Fried, C Contract as Promise (Cambridge, MA: Harvard University Press, 1981) p 7 Google Scholar; Finnis, above n 145, p 325; J Danforth ‘Tortious interference with contract: a reassertion of society’s interest in commercial stability and contractual integrity’ (1981) 81 Columbia Law Review 1491 at 1509 and 1511–1514.

169. See I Jackman ‘Restitution for wrongs’ [1989] CLJ 302 at 318–321.

170. F McChesney ‘Tortious interference with contract versus “efficient” breach: theory and empirical evidence’ (1999) 28 JLS 131 at 143–159; Friedmann, above n 131, at 7–8.

171. Falcke v Gray (1859) 4 Drew 541; Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361; Beswick v Beswick [1968] AC 58.

172. Cooperative Insurance v Argyll Stores (Holdings) Ltd [1998] AC 1; Johnson v Shrewsbury & Birmingham Rly (1853) 3 DM & G 914; Ryan v Mutual Tontine Westminster Chambers Association [1893] 1 Ch 116; Patel v Ali [1984] Ch 283; Kelsen v Imperial Tobacco Co Ltd [1957] 2 QB 334.

173. Wrotham Park v Parkside Homes [1974] 1 WLR 789.

174. See R Cunnington ‘Rock, restitution and disgorgement’ 1 JOR 46 at 49; J Edelman Gain-Based Damages (Oxford: Hart Publishing, 2002) p 66; Experience Hendrix LLC v PPX Enterprises Inc Edward Chalpin [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830 at [42] per Mance LJ.

175. Esso Petroleum v Niad [2001] EWHC 458 (Ch) (unreported); Experience Hendrix LLC, above n 174, at [36]–[38] per Mance LJ.

176. The residual value of punitive damages in such situations was recognised by Peter Smith J in the context of a claim for breach of statutory duty in Design Progression Ltd v Thurloe Properties Ltd [2004] EWHC 324 (Ch), [2005] 1 WLR 1 at 29. On the facts of the case, there was no claim for gain-based damages because the defendant had failed to succeed in his profit-making purpose.

177. See particularly MacGregor on Damages (London: Sweet & Maxwell, 2003) p 373

178. [2001] 1 AC 268 at 291.

179. Punitive damages were first awarded for breach of contract in Canada in Vorvis v Insurance Corporation of British Columbia (1989) 58 DLR (4th) 193. Until recently it had been assumed that punitive damages were only available for breach of contract if the defendant’s conduct also constituted a tort for which punitive damages were available. However, this interpretation was rejected by the Supreme Court in Royal Bank of Canada v W Got & Associate Electric Ltd (2000) 178 DLR (4th) 385.

180. (2000) 178 DLR (4th) 385.

181. Ibid, at 394.

182. Ibid, at 395.

183. (2002) 209 DLR (4th) 257.

184. Ibid, at 277. Citing Wilkes v Wood (1763) Lofft 1, 98 ER 489 at 498–499 per Lord Pratt CJ.

185. Ibid, at 305.

186. Ibid, at 305–306. Whiten should be compared with Sylvan Lake Golf and Tennis Club Ltd v Performance Industries Ltd (2002) 209 DLR (4th) 318, where the Supreme Court declined to award punitive damages because compensatory damages adequately achieved the objectives of retribution, deterrence and denunciation.

187. Attorney General v Blake [2001] 1 AC 268.

188. Brown v Waterloo Regional Board of Commissioners of Police (1981) 136 DLR (3rd) 49 at 65.