Key Takeaways

  • Punitive damages in contract law are rare and generally not awarded unless the breach also involves a tort such as fraud, bad faith, or malicious misconduct.
  • Courts primarily award compensatory damages (direct, consequential, and incidental) to make the injured party whole, but punitive damages serve to punish and deter extreme behavior.
  • States differ: some, like Ohio, explicitly bar punitive damages for breach of contract unless a tort is proven, while others allow them in narrow exceptions.
  • Courts often evaluate factors such as willfulness, fraud, bad faith, or egregious conduct when considering punitive damages.
  • Alternative remedies include nominal damages, liquidated damages, and equitable relief (rescission, reformation, or specific performance).
  • The purpose of punitive damages is not compensation, but deterrence—making an example of the wrongdoer.

Punitive damages breach of contract occurs when one party to a legal contract failed to live up to their obligations agreed to in the contract.

Contracts, which are the basis upon which many business relationships are conducted, contain promises that join businesses together. They usually require a commitment of capital or the transfer of goods or services between the businesses. If the obligations contained in the agreement are not carried out in accordance to the contract, great harm can befall the aggrieved party to the agreement.

Remedies for Breach of Contract

Therefore, contract law and the courts provide remedies for the failure of a party to live up to their obligations, known as breach of contract. They generally exist as either legal damages or equitable remedies.

Legal damages usually involve the award of monetary payment for damages

Forms of equitable remedy are applied when the court determines that monetary damages are not sufficient to rectify the harm caused. In these cases, also called “remedies in equity” or “injunctive relief,” the court orders the parties to take action. These include:

  • Cancellation of the contract.
  • Demanding that a specific performance is completed.
  • Voiding or recession of the contract. The two parties then usually enter into a new contract. This is common when is detected.
  • Modifying the terms of the contract to punish the offending party. This occurs when it is established that the parties entered into the contract with false assumptions.

Types of Contract Damages Beyond Punitive

In addition to punitive damages, courts may award several other categories of damages in breach of contract disputes:

  • Compensatory damages: The most common form, covering direct financial losses caused by the breach.
  • Consequential damages: Also called “special damages,” these extend to losses that were foreseeable when the contract was formed, such as lost profits.
  • Incidental damages: Costs incurred in dealing with the breach, such as expenses to secure replacement goods or services.
  • Nominal damages: A small amount awarded when a breach occurred but the plaintiff cannot prove significant loss.
  • Liquidated damages: Predetermined amounts written into the contract itself, enforceable if they are reasonable and not considered a penalty.

Understanding these categories helps clarify how punitive damages differ—while the others focus on compensation, punitive awards aim at punishment and deterrence.

What Are Punitive Damages?

When the court determines that a party has acted in a willful, fraudulent, or malicious manner in a contracted business relationship, it has the authority to punish the offending party. Also known as “exemplary damages,” these awards to the wronged party can take the form of retribution above and beyond the compulsory damages that cover that actual loss in terms of dollars and cents. The intent of the court with punitive damages is to severely punish the offending party (and therefore dissuade them from acting in a like manner in the future) and make an example of them, so others think twice before committing similar acts.

There is no limit to the number of punitive damages a court may demand of the offending party. It is largely determined by the scope of fraud, maliciousness, or willfulness to cause harm as determined by the court.

Limits on Punitive Damages in Contract Law

Although punitive damages can be awarded when a party acts with fraud, malice, or gross negligence, courts generally set strict limits:

  • Availability varies by jurisdiction. Some states expressly prohibit punitive damages in contract disputes unless a tort claim is proven.
  • Statutory caps may apply. For example, some state laws limit punitive damages to a multiple of compensatory damages, such as two or three times the actual award.
  • Constitutional considerations. U.S. Supreme Court precedent (e.g., BMW v. Gore) requires punitive awards to remain proportional to the harm suffered to avoid violating due process.
  • Burden of proof. Plaintiffs must show not just breach, but intentional, egregious misconduct beyond ordinary nonperformance.

This means punitive damages are not only rare but also subject to close judicial scrutiny.

Punitive Damages and Breach of Contract

There is no requirement that any punitive damages be awarded in a breach of contract. In determining the extent of damage caused by a breach of contract, the court bases its decision on the premise that the parties entered into the agreement with “open eyes,” meaning they should have a basic awareness of the risks involved in the contract.

However, there are some occasions when the awarding of punitive damages shows up most often. These include:

  • Willful misrepresentations in insurance contracts.
  • Tort/contract crossover matters, which occur when the offending party’s conduct is so egregious that it is.
  • Instances of severe and harmful fraud cases.

The judge may take other matters into consideration, such as whether or not the compulsory damages are sufficient to meet the breach of contract and even state laws governing breach of contract awards.

For instance, a recent case in which the Supreme Court of Ohio overturned a decision by the Seventh District Court of Appeals has a dramatic impact regarding the awarding of punitive damages in breach of contract cases. In their ruling, the Ohio court declared that punitive damages are not recoverable in instances of breach of contract, except in instances where the breach constitutes a tort.

If the breach does indeed constitute a tort, the award decided by the court hearing the breach of contract case can only be awarded for the tort, not the breach of contract itself, and even then the amount of the punitive award is subject to statutory limits found in the Ohio Revised Code (ORC).

Determining whether or not punitive damages are justified in a breach of contract case, and the amount of the punitive damages to be awarded, is the duty of the court hearing the breach of contract case. A key factor in making the decision involves whether the matter falls under contract law or tort law.

When Courts Award Punitive Damages

Punitive damages in contract law typically arise in limited and extreme circumstances, such as:

  • Fraudulent inducement: When one party intentionally misrepresents facts to secure agreement.
  • Bad faith by insurers: Insurance contracts are a common setting where punitive damages may be awarded, since insurers have a duty of good faith and fair dealing.
  • Tortious conduct tied to breach: For instance, conversion, misrepresentation, or intentional interference with contractual relations.
  • Egregious misconduct: Where the breaching party acted maliciously or recklessly, causing harm beyond the scope of contract expectations.

In most cases, courts will not award punitive damages for a simple breach, no matter how costly, unless it overlaps with a tort.

Frequently Asked Questions

  1. Are punitive damages common in contract law?
    No, they are rare. Most courts limit damages to compensation, reserving punitive awards for cases involving fraud, bad faith, or tortious conduct.
  2. Can punitive damages be awarded without compensatory damages?
    Typically no. Courts usually require a showing of actual harm and compensatory damages before punitive damages are considered.
  3. Do all states allow punitive damages in breach of contract cases?
    No. Many states prohibit them unless the breach constitutes an independent tort. Even where allowed, statutory caps often limit the award.
  4. What is the difference between punitive and compensatory damages?
    Compensatory damages make the injured party whole, while punitive damages punish the wrongdoer and deter future misconduct.
  5. Can contracts waive or limit punitive damages?
    Yes, parties may include clauses limiting remedies, though courts may strike down such provisions if they conflict with public policy or involve willful misconduct.

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