Punitive Damages in Contract Law

The concept of punitive damages is crucial in contract law, where courts award monetary compensation to plaintiffs for wrong actions and misconducts committed by defendants. One example is the case between National By-Products Inc. and Searcy House Moving Company, where the Supreme Court of Arkansas awarded punitive damages due to reckless and negligent actions by the defendant. Punitive damages are different from compensatory damages, with the former being awarded as a deterrent for future wrongdoing. Courts consider various factors when determining punitive damages, including reprehensible or egregious actions, similar incidents, and the difference between plaintiffs' losses and requested damages. Additionally, some jurisdictions have limits on punitive damage awards, such as not exceeding four times the amount of compensatory damages.

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Punitive Damage
19th July 2019
Punitive Damage
Punitive damages are the damages which are accessed to punish any defendants for any kind
of outrageous conduct to bring in reformation to the defendant and to the others who are also
engaged in such outrageous conduct. It is quite similar to that of the punishments given under
legal regulations. Punitive damages are also known as exemplary damages. The main
objective of punitive damage is to provide compensation to the plaintiff and to make the
plaintiff able to receive some kind of punitive damage award. Punitive damages are generally
awarded if it is observed that compensatory damages are inadequate remedial options. The
court can impose punitive damage award to protect the plaintiff from under-compensations.
The court also allows an opportunity for redressing undetectable civil wrongs under the
norms of the criminal justice system. In case of violation of any law, punitive damages seem
to be most commonly used remedial options to the plaintiffs. In the cases where violations to
any law are difficult to get identified, punitive damages are considered as effective. But
punitive damages are awarded to any plaintiff in a country can vary from punitive damage
awarded in another country. For example, in the European Court punitive damages
considered in the cases where violations to any private international law or public policy
doctrine take place. Punitive damage awards are generally found to be more than the provable
injuries of the plaintiffs or claimants. Hence, punitive damages are only awarded in some
specific cases.

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Punitive damages mainly observed in the case where civil wrong conducts results in loss or
harm to the claimant and it is a legal obligation for the individual who has committed any
kind of tortious act as per common law jurisdictions. Sometimes, financial losses, emotional
distress, injuries, negligence, invasion of privacy, etc. are also considered to be civil
wrongdoings under the regulations and norms of common law jurisdictions. In these cases,
punitive damages are awarded to the claimants or plaintiffs. A plaintiff is an individual
initiating a lawsuit in a court to seek any kind of legal remedy. The term plaintiff is mainly
used in civil cases. The legal investigation is conducted as per the instructions of the court to
identify whether the claim of the plaintiff is truthful or not. The court allows punitive
damages to the plaintiffs or claimants if the compensatory damages are found to be
inadequate as compared to the loss suffered by the plaintiffs or claimants. Punitive damages
can be defined as monetary rewards to be ordered by the court and to be paid to the plaintiff
by a defendant in a lawsuit case. It is highly common for the claimant or the plaintiff to be
awarded as compensation or money for any wrong committed by the defendants.
The money of the compensation which is to be paid to the plaintiffs can include property
damage award, medical bills, and even damages to be awarded only to punish the defendants
for their misconduct. The punitive damage award is paid by the defendant to the plaintiff.
Punitive damages are the compensatory damages which are paid in addition to the actual loss
suffered by the plaintiff or claimant. This is paid by the defendant to the plaintiff. It is also an
act of giving punishment to the defendant for any kind of reckless and willful misconduct.
The concept of punitive damages has been originated somewhere between 1970 and 1975.
These damages are also known as exemplary damages because the monetary amount which is
awarded to the plaintiffs under the norms of a civil lawsuit is paid to punish the defendants
for their willful misconduct. The defendants are given punishments because their misconduct
is willful and intentional and the consequences of such actions are adverse on the part of the

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plaintiffs or claimants. Punitive damages are awarded to provide an example in the society
that any individual or an entity can be punished if found engaged in any wilful misconduct or
wrong actions causing harm to any other individual or organization. Compensatory damages
are generally paid in such cases. But when compensatory damages become inadequate to
remedy the courts to apply punitive damage awards. The egregious conducts of the
defendants can never be tolerated and the courts demand appropriate compensation in
addition to compensatory damages to be paid to the plaintiffs by the defendants.
Punitive Damages and Contract Law
Punitive damages are generally awarded as additional compensation to the actual damages
suffered by the claimants of plaintiffs under certain circumstances. These damages are
considered as punishments and typical awards as per the discretion of the court when the
behavior of the defendant is declared to be harmful. Punitive damages fundamentally not
awarded in case of any breach of the claim of any contract. In the tort liability cases, the court
main adopts punitive damages to be applied. The plaintiff needs to prove that the behaviors of
the defendants to be intentional tort or the behaviors which are engaged in wilful and went
wanton misconduct. One of the examples where punitive damages have been observed is the
case between National By-Products Inc. and Searcy House Moving Company. The supreme
court of Arkansas has identified that punitive damages are required to be awarded because the
defendant intentionally proceeded with some unlawful behavior and actions even after
knowing the fact that such actions would lead to severe injury. The features of Principal-
Agent Relationship indicate that the courts are quite reluctant to declare punitive damage
award on the principal for the misconduct of the agent. But there is also an exception to the
norms where the principal is found to be causing or encouraging the reckless actions of the
agents. It is very important to distinguish punitive damages in the contract law. Some

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contracts are listed with certain liquidated damages as the consequences of any breach of
contract. The court made no such clause if the liquidated damages are similar to punitive
damages.
Why Punitive Damages?
The importance of punitive damages can be understood in one example. There can be several
examples from where punitive damages could be observed to have been awarded to the
plaintiffs by the defendants as per the discretion of the court. In one of the examples, it can be
seen that an organization which is engaged in manufacturing and distributing dietary
supplements assures its customers about the safety and effectiveness of its products in losing
weight. The company has advertised its products by mentioning “all-natural” and claiming
that the supplement is quite safe. One of the customers named, Amanda had believed in the
claims of the company and took the product continuously for 30 days. But she became
severely ill after her intake of the supplement. The doctors suggested that there was at least
an ingredient or substance in the supplement which reacted with prescribed medications
which Amanda was already taking or had taken for her health. Because of the presence of
that particular substance in the supplement amount, Amanda became seriously ill. The
medical bill of Amanda amounted to about $5000 which made her file a case against the
company under civil lawsuit to recover the entire medical expenses because she not only lost
her wages but also she could not attend the office and work due to her illness. The claims
which Amanda had made had been notified to the company and from the investigation, it has
been revealed that the company was aware of the content formula of the weight loss
supplement. The company also knew that the particular substance could react negatively with
certain prescribed medications and could put the health of the customers in a vulnerable
situation.

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During trials, the company did not try to breach any of the regulations and laws and also
declared that it did not intend to call back the products or to modify its advertising campaign.
These actions proved the recklessness and negligence on the part of the company. This made
the court to declare the judgment in favor of Amanda and asked the company to provide her
with compensatory damages of $7000. The company had also been admonished by the court
which indicated reckless and negligent actions of the company compromising with the health
of its customers. Amanda has been awarded punitive damages of $100000. The punitive
damage award in the case of Amanda is much more than the compensatory damages. The
court declared such a big amount as punitive damage award to compel the company to
change the way it is marketing its product and to focus on the proactive actions the company
should take to eliminate the negative consequences of such products on the population at
large.
Difference between Punitive and Compensatory Damages
There is a difference between compensatory and punitive damages. Both these damages are
monetary compensations which are awarded to the plaintiffs by the defendants in a civil
lawsuit. Compensatory damages are found to be a most common type of damage awards
because compensatory damages are provided to the plaintiffs to compensate them for any
kind of loss either in terms of property or money due to the actions of the defendants.
Compensatory damages can also be considered as actual damages. The actual compensations
which are paid to the plaintiffs in case of any car accident or injury because of slip and fall
accident or any monetary loss because of breach of contract committed by the defendant. But
punitive damages or exemplary damages are awarded for wrong actions and misconducts of
the defendants making the plaintiffs to incur a certain loss. Punitive damages are mainly
awarded by the defendants to the plaintiffs in addition to the compensatory damages or actual

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damages. The courts declared as punitive damage awards with the main objective of differing
the misconduct or negative behavior of the defendants which have resulted in any civil
lawsuit. The court will always award punitive damages to portray the defendant as an
example to the entire society when it is believed by the court that compensatory damages are
inadequate to give punishment to the defendants.
An example can be used to explain the difference between compensatory and punitive
damages. John while driving his truck was answering a text message. He suddenly slammed
the back of another car which made some children stop from crossing the street. Michael who
was driving another car had suffered whiplash and a serious strain to his shoulder. The rear
end of his car had also been crushed badly by pickup truck of John. John tried to explain to
the police that Michael had stopped his car out of nowhere and the entire accident was his
fault because the brake light of his car did not work properly. John refused to pay
compensation for the expenses incurred by Michael. At this incident, Michael filed a civil
lawsuit where he requested almost $4500 for the entire repair to his car and $3000 for his
medical expenditure. The court had given a quick judgment and identified the accident had
been caused because of the negligence of john. This incident would have taken even more
severe shape and hence, john had been identified to be a defendant the court awarded Michael
compensatory damages for the entire amount which Michael had requested.
Furthermore, the court had also pointed out that john was not attentive while driving because
he was using his cell phone which is an illegal and reckless act. This act of john could have
endangered the lives of many people. Therefore, the judge had ordered john to make a
punitive damage award of $10,000 to Michael which could help Michael to recover the total
amount of $18,000. Therefore, in this example, it has been seen that the compensatory
damage award is the monetary compensation which is paid by the defendants to the plaintiff

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for the actual loss suffered by the plaintiff. The example has also debited the punitive damage
which the defendant needs to pay to the plaintiff in addition to the actual loss.
How Punitive Damages are applied by courts?
The Court generally applies to 2-part tests intending to determine whether liquidated damages
or the agreed damages have reasonable justification to be regarded as compensation for the
loss caused by a breach of contract and the harm is incapable of any kind of accurate
estimation. If the liquidated damages clause of the contract law meets these elements, the
court typically applies such clause in the absence of any evidence to punitive damages.
Punitive damages are applied by the court as nearly 5% of verdicts. Recently, it has been
found that the appropriateness of punitive damage awards is evaluated by the courts to
compare the same with the compensatory damage amount which gets assigned. The Supreme
Court has not yet assigned any particular test to be used while considering punitive damages
by the courts. In another case which has taken place in 2003, State Farm versus Campbell the
court mentions that it was our responsibility of the lower court to focus on reprehensibility.
The Supreme Court has also mentioned that the lower courts must take care of the acceptable
ratios between punitive damages and to compensatory damages.
Before deciding or determining punitive damages the courts need to consider several things.
The main and commonly used factors in deciding whether or not declare punitive award
damages include reprehensible or egregious actions of the defendants. The court investigates
whether similar incidents or cases with punitive damages have been awarded or not. The
court also investigates the difference between the plaintiffs’ losses or injuries and the punitive
damage awards being requested by the plaintiff. There can be several cases where a higher
amount of punitive damage awards are declared by the courts. If any plaintiff suffers from
harm because of any action of the defendant and it becomes quite difficult to put any

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particular value to the harm, a higher amount of punitive damage awards are declared by the
courts. In the cases, where the injuries or loss become quite difficult to get detected or need
some continuous care, the court declares higher punitive damage awards to the plaintiffs.
There are many cases where the conducts of the defendants are found to be extraordinarily
offensive and in such cases, the punitive damage award and also high.
Punitive Damage Limits
There are certain limits or restrictions imposed on the punitive damages in the majority of the
jurisdictions the court place certain limits on the punitive damage amount which can be
awarded to the plaintiffs but the limit varies from one state to another. Each court has the
authority to determine an amount which can be considered reasonable and proportionate.
Generally, it has been observed that the amount of punitive is not more than four times the
amount of compensatory damage award to be awarded to a plaintiff. For example, if
compensatory damage of $50,000 is awarded to any plaintiff, the court would never award
the same plaintiff punitive damage of more than $200,000. There are also some exceptions.