CASE FOR PUNITIVE DAMAGES IN CONTRACTS

ABSTRACT

The maturity of American authorities don’t allow corrective damages for breach of contract unless the breach constitutes an independent tort. Decreasingly, courts and observers have reckoned on the proposition of” effective breach” to explain the rule against corrective damages in contracts. In this Composition, Professor Dodge argues that profitable effectiveness supports a different rule- one allowing corrective damages for any willful breach of contract.

Efficiency also supports extending liability for punitive damages to those breaches that are, in proposition,” effective.” The trouble of corrective damages won’t bear hamstrung performance because the potentially violating party may negotiate with the other party for a release. counting on Calabresi and Melamed’s distinction between” property rules” and” liability rules,” Professor Dodge shows that taking the potentially violating party to negotiate for a release is more effective than allowing her to transgress and pay damages because the sale costs of concession, while not negligible, are generally lower than the assessment costs of action. He also explains why other forms of” property rule” protection, like specific performance and penalty clauses, are inadequate to insure that concession occurs before breach.

INTRODUCTION

Traditionally, punitive damages have not been available for breach of contract. The thing of contract remedies has been to compensate the pledge for the breach rather than to impel the pledge to perform.’ Justice Holmes wrote in The Common Law The only universal consequence of a fairly binding pledge is, that the law makes the pledge pay damages if the promised event doesn’t come to pass. In every case it leaves him free from hindrance until the time for fulfilment has gone in, and thus free to break his contract he chooses.

There are two introductory problems with the effective breach argument against corrective damages. First, the effective breach argument provides no reason for shielding opportunistic breaches of contract those in which the violating party attempts to get further than she bargained for at the expenditure of the non violating party1- from corrective damages. As Judge Posner has honored, when a pledge breaches opportunistically,” we might as well throw the book at the pledge. Similar conduct has no profitable defense and ought simply to be dissuaded.” Yet numerous courts apply the rule against corrective damages to shield not just involuntary breaches and effective breaches, but opportunistic breaches as well. Ironically, some have indeed done so while counting on the proposition of effective breach to support their opinions.

PUNITIVE DAMAGES IN THE LAW OF CONTRACTS

The original motivation came from insurance cases. In the 1973 case Gruenbergv. Aetna Insurance Company,’ the California Supreme Court extended tort liability for an insurer’s breach of the inferred covenant of good faith and fair haggling from third- party cases, in which the insurer refuses in bad faith to defend or settle a claim against the ensured by a third party, to first- party cases, in which the insurer refuses in bad faith to pay a claim by the insured herself. Three times latterly, in Vernon Fire & Casualty InsuranceCo.v. Sharp, the Indiana Supreme Court also honored the possibility of corrective damages for an insurer’s bad faith turndown to pay a claim by the ensured. The Indiana court didn’t limit its statement of the rule to the insurance environment, still, concluding that” an independent tort need not always be established”” and that corrective damages should be available”‘( w) henever the rudiments of fraud, malignancy, gross negligence or oppression mingle in the contestation.”‘ also, the Indiana court soon applied this rule outside the insurance environment, upholding the award of corrective damages in two well known cases- Hibschman Pontiac,Inc.v. Batchelor” andF.D. BorkholderCo.v. Sandock.

The expansion of punitive damages for breach of contract continued in the 1980s. The best known case in this expansion is the California Supreme Court’s decision in Seaman’s Direct Buying Service v. Standard Oil Co. Building explicitly on its decisions in the insurance context, the court held that “a party to a contract may incur tort remedies [including punitive damages] when, in addition to breaching the contract, it seeks to shield itself from liability by denying, in bad faith and without probable cause, that the contract exists.’ ‘

THE CASE FOR PUNITIVE DAMAGES

It necessary, at the onset, to distinguish among involuntary, opportunistic, and effective breaches. After explaining those distinctions in Section II. A, my argument proceeds in two corridor. In Section II. B, I argue that corrective damages should be awarded to discourage opportunistic breaches of contract. I also bandy three exemplifications of opportunistic breach- pre textual termination, stonewalling, and bad faith turndown to pay- in order to show that numerous countries are unwisely proscribing corrective damages in cases of opportunistic breach. In Section ll. C, I argue on profitable grounds that corrective damages should be available for any will full breach of contract, indeed if that breach is” effective.”

Collapse the Boundaries Between Contract and Tort

A number of courts have expressed a fear that allowing corrective damages for breach of contract will collapse the traditional boundaries between contract and tort. Indeed if feting breach of the inferred covenant of good faith and fair haggling as a tort, as some countries do, creates this possibility, allowing contracts complainants to recover corrective damages directly, as other countries have, does not. All this Composition proposes is that corrective damages be available for wilful breaches of contract in order to discourage similar breaches and encourage accommodations. I don’t suggest that other distinctions between contract and tort law, similar as liability for unforeseeable detriment, be abolished

CONCLUSION

The maturity of American authorities don’t allow corrective damages for breach of contract unless the breach constitutes an independent tort or falls within a many other limited exceptions. Indeed among those countries that do allow corrective damages in the absence of an independent tort, veritably many permit them simply upon a showing that the contract was consciously traduced. Decreasingly, courts have turned to the proposition of effective breach to explain why corrective damages may not be recovered. effectiveness, still, supports a veritably different rule from the one most courts employ- a rule allowing corrective damages for any wilful breach of contract. At a minimum, courts concerned with effectiveness should permit the recovery of corrective damages on a showing that the breach was opportunistic.

Opportunistic breaches by definition do not increase societal wealth. They have “no economic justification and ought simply to be deterred.” For example, punitive damages should be permitted where an employee is fired for pretextual reasons, where a party engages in “stonewalling” by denying contractual liability in bad faith, and where a party refuses in bad faith to pay for goods or services received.’

REFERENCES

https://www.law.cornell.edu/wex/punitive_damages

https://scholarship.law.duke.edu/dlj/vol48/iss4/1/

http://jec.unm.edu/education/online-training/contract-law-tutorial/remedies-for-breach-of-contract

https://www.contractscounsel.com/b/punitive-damages

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