exemplary damages

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Exemplary damages, better known as punitive damages, refer to extra damages awarded beyond that actually incurred by the plaintiff. Punitive damages are considered punishment or damages intended to dissuade and are typically awarded at the court's discretion when the defendant's behavior is found to be especially harmful. Punitive damages are normally not awarded in the context of a breach of contract claim. See e.g. O'Gilvie Minors v. United States 519 US 79 (1996) and Honda Motor Co. v. Oberg 512 US 415 (1994).

Punitive Damages in Tort Law

In the case of tort liability, courts may choose to apply punitive damages. However, they will typically only do so if the plaintiff can prove that the defendant engaged in an intentional tort and/or engaged in wanton and willful misconduct.

In National By-Products Inc. v. Searcy House Moving Co., the Arkansas Supreme Court found that awarding punitive damages requires evidence that the defendant proceeded intentionally with an unlawful action after knowing that the act was likely to cause injury.

With regard to a principal-agent relationship, courts are reluctant to award punitive damages on the principal for the reckless actions of the agent. One exception to this preference is when the principal encourages or causes the agent’s recklessness.  

Distinguishing Punitive Damages in Contract Law

Some contracts will list certain"liquidated damages" as a consequence of a breach. A court, however, may choose to ignore this clause if the liquidated are actually punitive damages. There is a 2-part test that courts will typically use to determine whether to apply a liquidated damages clause:

  1. The agreed damages must be a reasonable forecast of just compensation for the harm that is caused by the breach
  2. The harm must be incapable of accurate estimation 

If the clause meets both of these elements, then the court will typically apply the clause, finding no evidence of punitive damages.

Applying Punitive Damages

Courts apply punitive damages in about 5% of verdicts. Recently, courts have begun to evaluate the appropriateness of assigning punitive damages in comparison to the amount of compensatory damages assigned. (See this Law360 article https://www.law360.com/articles/877406/punitive-damages-post-campbell-questions-remain).  While the Supreme Court has not assigned a particular test to use when courts consider punitive damages, in State Farm v. Campbell (2003), the Court decided that lower courts should focus on reprehensibility and acceptable punitive-to-compensatory damage ratios.

Further Reading

For more on punitive damages, see this Yale Law Journal note and this University of Minnesota Law Review note.

[Last updated in December of 2022 by the Wex Definitions Team]