Punitive and Nonpecuniary Damages in Actions Based Upon Contract: Toward Achieving the Objective of Full Compensation

Abstract

The stated objective of contract remedies is to compensate the aggrieved party fully for breach by putting her as closely as possible in the same position as she would have been had the contract been performed.l Because of the traditional and still largely prevailing preference of Anglo-American law for substitutional remedies, courts seek to fulfill this full-compensation objective largely by awarding monetary damages rather than by granting specific performance or other equitable relief. It is now almost commonplace, however, to recognize that traditional contract damage remedies leave many victims of contract breach (probably a substantial majority) undercompensated. One reason for this situation is that there is an important and countervailing corollary to the principle of full compensation: Do not overcompensate the victim of contract breach; As others have shown, this desire to avoid overcompensation has multifaceted origins. Most important among these is the fear that excessive liability for contract breach may discourage valuable commercial and economic activity and thus create an undesirable barrier to the efficient reallocation of resources. Because of these concerns, the corollary of avoiding overcompensation has dominated the principle of full compensation for the past century.

This Article reviews the recent (circa 1985-86) developments concerning punitive and nonpecuniary damages in actions founded upon breach of contract, regardless of whether the pleadings are framed in contract or in tort, and focuses on both the overt and the covert ways in which courts recently have permitted these recoveries.

In the course of this review, I argue for a broader and more overt recognition of both nonpecuniary loss and punitive or supracompensatory damages in contract. Ultimately, however, I also suggest a substantial reformulation of objectives with respect to "punitive" damages in contract. These new objectives would shift the primary focus from deterrence and punishment to complete and full compensation for contract plaintiffs, at least in situations involving egregious breach. I make these suggestions fully recognizing the risks of abuse and overcompensation inherent in permitting recovery for such open-ended items as mental distress and punitive damages and acknowledging that these risks are presently of substantial concern with respect to punitive damage claims in tort actions. An appreciation of these risks and the recognition that they already may have become reality in some contract actions, particularly in some punitive damages awards against insurers for bad faith refusal to pay or settle claims, leads me to recommend that careful attention be paid to the standards for awarding nonpecuniary and punitive damages and that new procedural safeguards be employed when determining and awarding punitive damages. Before discussing these recommendations, however, it is necessary to examine more fully the ways and the extent to which traditional contract damage remedies systematically tend to undercompensate contract plaintiffs.

Keywords: contracts, remedies, punitive damages, nonpecuniary damages, full compensation, contract law, contract breach, undercompensation, overcompensation, excessive liability, courts

JEL Classification: K12, K13, K19, K39