Where the Law Commission is wrong on punitive damages
Radical extension of the law
The Law Commission has proposed that the common law relating to exemplary damages should be replaced with a general, principled, statutory test of availability. The introduction of a general test would radically extend the current law. Exemplary damages are for example, not currently available in any product liability claim based on strict liability provisions. The consequences of this change would be potentially enormous. The economic consequences have not been analysed but should be considered very carefully before any such change is contemplated.
The awards of exemplary damages in this country are exceedingly rare. On very few occasions in which they have been considered by the appellate courts in the past 4 decades, it is clear that the judiciary have been attempting to limit the availability of exemplary damages. In 1964, Lord Devlin in the House of Lords analysed the previous cases within clearly defined categories and limited any further development of those categories. In 1972, the House of Lords refused to extend exemplary or aggravated damages to torts for which they had not been awarded prior to 1964, such as negligence and deceit. In 1992, the Court of Appeal applied but also supported those earlier decisions, refusing to extend exemplary damages to negligence. Stuart-Smith LJ said "in my judgment this is not a developing field of the law". The courts have, therefore, affirmed the principle that damages are essentially compensatory and have consistently resisted attempts to extend the categories of exemplary damages or any punitive principle.
Punitive damages have no place in the modern commercial world
Against this background, it must seriously be questioned whether punitive damages have any place in the modern world. This is certainly true of the world of commerce. Commercial organisations are subject to immensely wide-ranging and detailed regulatory regimes covering, for example, product manufacture, health and safety, product regulation and environmental issues. Regulatory agencies exist which have extensive powers backed by criminal sanctions. To introduce the risk of liability for punitive damages where one does not already exist would in effect duplicate the existing regulatory mechanisms and provide businesses with unnecessary double jeopardy.
Further, in the context of extensive regulation, punitive damages constitute a backdoor and unsatisfactory solution to problems which should be addressed directly by specific and sophisticated legislation. There are many admirable features of existing regulatory systems, including regulators’ ability to develop expertise in particular industries or subjects, their ability to achieve consistency and continuous dialogue and exert pressure, both in relation to individual business enterprises and within an entire industry, and their flexibility to deploy a range of pressures or sanctions on businesses as might be appropriate in the circumstances. None of these advantages would be shared by consumers or the civil courts in isolated punitive damages cases. Punitive damages would be an extremely blunt instrument in relation to modifying industry practice - ill-informed, inconsistent, inflexible and lacking in any continuity. There would be the further legal inconsistency in that the punitive damages sanction would be exercisable on a lower standard of proof than a criminal prosecution.
The few examples quoted by the Law Commission in its Consultation Paper and Report almost exclusively cover action by individuals, often such as policemen or landlords, where it is thought that the existing law does not provide sufficient deterrence or sanction. That theory does not hold good for industry, which is subject to many further pressures over and above regulatory or criminal sanctions, such as pressure from shareholders, government, lobby groups, the media, suppliers and customers. The Law Commission’s proposal seeks to address a problem which can occur in a limited number of situations within society but, by adopting an approach which would have universal application, ends up creating problems which do not exist in the areas where the problem does not exist. Overall, it is a theoretical solution which creates far more problems than it solves.
No justification without evidence of need
There is no justification for extending punitive damages in relation to industry. Where is the evidence that there is a need to legislate for a new long-stop sanction in relation to commercial entities, given the existing wide-ranging regulation? If punitive damages had been available during the past 40 years in, for example, product liability or environmental claims, would they have even been considered by judges on more than a handful of occasions? On any cost-benefit analysis, the increased costs to industry in insurance premiums would hugely outweigh any benefit to society.
Problems with wording
The Law Commission has partly recognised the overlap with existing criminal law. It suggests that a punitive award should be made only if the defendant’s conduct showed deliberate and outrageous disregard of the plaintiff’s rights and the other remedies awarded would be inadequate to punish the defendant for his conduct. No award should usually be made where the defendant has already been convicted of an offence involving the conduct which founds the claim to punitive damages. The court should be required to take into account any other sanctions which may have been imposed, when deciding whether punitive damages are necessary and therefore available. The court would retain a "safety-valve" discretion to refuse punitive damages if some exceptional factor exists which makes it proper in the circumstances to refuse an award.
Even on their own terms, these qualifications do not go far enough in recognising reality. Mechanisms for effective regulatory control extend far beyond mere conviction of an offence. As stated above, regulators have a wide range of possible sanctions or pressure points which they may deem an appropriate response in particular circumstances. It is not enough merely to exclude punitive damages where there has been a conviction or other sanctions may have been imposed. Sanctions may have been available but not invoked. Regulatory action in a wider sense not involving offences or, possibly, "sanctions" might also have been available, appropriate and sufficient. However, the most important point here is that in the modern world there should be a mandatory exclusion of punitive damages where any regulatory control exists, irrespective of whatever offence, sanctions or powers might be exercisable (and not just exercised).
One must be alive to the fact that the wording of any exclusion which might be adopted may be important. It would be unfortunate if clever pleading would enable a punitive damage claim to be brought in an area which was intended to be excluded.
Who should benefit?
The Law Commission proposes that punitive damages should be claimable by individual plaintiffs. Where a defendant’s conduct constitutes wrongs against two or more persons, it recognises that it would be wrong for defendants to be punished more than once. It recommends that punitive damages should only be awarded to the first of those persons to succeed in claiming them. Again, the practical effects of this proposal are potentially appalling. Punitive damages constitute a considerable windfall to a plaintiff over and above damages which are paid to him to compensate him for his loss. The effect of a "first-come, first-served" rule would constitute a major incentive for people to bring claims which include punitive claims. American experience clearly shows that the existence of a punitive claim increases pressure on defendants which distorts consideration of the underlying validity of the claim. It encourages unjustifiable claims and encourages unjustifiably high settlements, thereby increasing costs to industry overall.
The question of how to divide up a single award between a number of individuals who might bring claims at different times is, as has been recognised in considering the rules on multi-party actions, one for which it is impossible to achieve a fair solution. It would be unfair to the first person entitled to have to wait for an indefinite period to see how many other individuals might bring claims which then succeed on the punitive basis so as to be able to finalise the arithmetical division amongst them all in equal shares. A suggestion that the first should hold the entire sum on trust for the rest who might qualify might be theoretically fair but is impractical. For these reasons, the Law Commission’s quick and dirty solution is merely to reward the first past the post.
There is, however, another solution. The Law Commission recognises that the function of exemplary damages, as they are currently known, involve an essential punitive element: it suggests they should be renamed punitive damages. As we have seen, it also recognises the overlap with criminal offences. Given this background, the solution to the problem of division of an award amongst multiple plaintiffs is that any punitive award should be paid not to any of the individual plaintiffs, who already receive full compensatory damages, but to the state.
Economic analysis concludes, first, that punitive damages need not be awarded if the size of the criminal penalty was equal to the optimal punitive award (a point relevant to the double jeopardy issue discussed above) and, second, that there is no reason why the punitive component of one award must go to the victim and that it could be paid to the state.
Self-interest of lawyers
In considering a proposal of this kind, one has to assess the practical consequences. Practical reality is that punitive damages claims have important economic consequences for plaintiffs’ lawyers. The economic incentives and consequences for plaintiffs’ lawyers of an extension of the right to claim punitive damages must be carefully considered. This is particularly so given the fact that the Law Commission’s proposals were conceived in an era of legal aid funding for litigation, whereas they would operate in the context of the new era of conditional fee agreements (CFAs). A plaintiff might recover compensatory damages and taxed legal costs. His damages would be reduced, under the traditional system, by the amount of the legal costs not recovered from the opponent. Under a CFA, however, the plaintiff agrees to pay his solicitor a success fee, set at an agreed proportion of up to 100% of the normal fee. (The Government is currently consulting on whether the success fee should or should not be recoverable from the opponent.) If a punitive claim is included, would the solicitor argue that a higher uplift is justified? Would that not be unethical? The mere fact that there is a possibility of a higher award should not affect the chances of success of the basic claim. In reality, of course, a punitive claim raises the stakes but not the risk of winning.
There might also be a temptation for the lawyer to prolong a case in order to negotiate for a higher settlement and so raise the amount of both the basic fees and the success fees which would be paid. Under the CFA system, a solicitor’s success fee is usually capped voluntarily at 25% of a client’s total damages. It is obvious that the greater the settlement or damages award or costs, the more money the plaintiff’s lawyer will receive. Given that a major criticism of the legal aid system has been that it encourages demand-led litigation by lawyers, whereas CFAs are intended to reverse this trend, will an extension of punitive claims merely encourage more and longer litigation?
