Punitive Damages

Discuss the advantages and disadvantages of punitive damages?

The question regarding the effect of the sanctions on the peculiarities of behaviour patterns under the conditions of imposing punitive damages upon the producers of defective products is frequently asked by the lawmakers. Other questions are related to the consequences of such damages for the future price and safety of the produced goods. There is a solid scientific economic theory that is aimed at predicting the consequences of legal sanctions for the patterns of conduct.

Damages can be defined as punitive provided that they suit the statement “sufficient to make the victim whole” and are given to the claimant in order to punish the defendant. The analysis of peculiarities of punitive damages is impossible without providing exhaustive replies to the questions related to the procedure of computing the amount of such damages and the conditions under which the awarding of punitive damages is possible.

The circumstances and conditions under which awarding of the punitive damages is implemented are generally presented in special statutes. The limit to the damage level is not applicable. Awarding of the punitive damages might take place in case of deliberately malicious or uncontrolled conduct of the defendant. If damages of compensatory nature are considered to be deficient as a remedy, then punitive damages are to be given. Such damages are supposed to be awarded in special cases if the behaviour of the defendant is judged as censurable under the tort law; the payment is effected in excess of the evincible injuries of the victim.

Contractual disputes are not subject to any punitive damage awards; however, different nations have different statutes. According to the legislation of the USA, awarding of punitive damages is possible under contractual disputes in case the breach of the contract by the insurer is eligible for tort actions, as it can be defined as extreme. Moreover, some nations allow for differences in types of ruling appropriate in various regions. Thus, the procedure of punitive damage awarding can be ambiguous since different judges and not the same legal system development dictate different terms. Until recently, in particular in the eighteenth and nineteenth centuries, the frequency of cases that implied awarding of punitive damages was inferior in comparison with that in the present days.

The aim of the punitive damage is restoration of the total damage of compensatory type to the actual damage amount. Such type of damages implies that there is relation to the inversed proportion between the punitive multiple and enforcement error. Therefore, victims are entitled to initiate legal proceedings so that they could obtain punitive damages. However, it can happen that the jury is not aware of the concept of punitive multiple; thus, lack of information and uncertainty can cause certain problems in that. Punitive damages are awarded not only to provide adequate compensation to the victim. One of the most essential objectives is the possibility to punish the inadequate conduct of a person who is going to be less harmful for others after paying the damage.

Therefore, one of the reasons for awarding punitive damages is obtaining the social gain.

There is strict liability of every manufacturer for the produced goods in terms of safety even in case of their misuse by the purchasers. In effect, they are even supposed to provide insurance for those customers who make avail of the products they produce; therefore, the product price gets higher. There are various options of insurance provision available in the market; therefore those customers who prefer being extra precautious and getting products at the lower price tend to obtain insurance in a different way, while less careful customers act not in a safe manner. There are certain measures taken by the manufacturers in order to increase the profitability of their products; in particular, provided that the liability regarding the punitive damages is strict, the manufacturers can take the goods off the markets to get more safety and profits. It happens even if there is some other advantageous precaution measures they can take and the amount of information available in the marker regarding a certain product is sufficient.

The qualitative effect of punitive damages on the producers is always positive. It is frequently referred to as a social benefit; one of the brightest examples of such effect is the pharmaceutical field. Awarded punitive damages result in recalling of the products which are characterized as unsafe for the customers, improvements of the engineering approach and developments in terms of instructions and warnings on chemical use of various drugs which become more specific. The research has demonstrated that it is not reasonable to refer to awarding punitive damage as to the oppressing measure. For instance, there has been no case of punitive damage award in the American Fortune 500 business companies. Furthermore, the study of the period between 1965 and 1990 demonstrated that only 355 verdicts involving punitive damage were returned in the framework of the cases of product liability. Having contemptuous critical approach is the way to encouragement of disrespectful attitude to the people engaged in the system of civil justice. Those are the same employees who assist the victims with restitution if needed.

Pollution is another tort matter known by the producers. It can be of two types: efficient and deliberate. There are so many people injured with the pollution effects that even if the company might agree to provide the payments for the caused damages, the transactions cannot be closed. The efficiency of pollution can be explained with its being an energy-product. Therefore, it can lead to obtaining certain profits since individuals or companies get benefits related to employment, production and utilities.

Simultaneously, certain parties can experience losses since the effects of pollution on health are significant; thus, the company can be supposed to pay for the damage cause. Deterring of the tort is the main factor which determines whether the award of punitive damages takes place. Moreover, other factors are the related hazards and the level of awareness of the victims.

Learning the fundamentals of economics is the right way to understanding and proper analysis of the peculiarities of different types of offenses in terms of the imposed punishments. The elasticity factor may cause great variability of offenses; thus, there is significant difference in the punishments. For instance, inelastic offenses imply severe punishments which are aimed at diminishing the total amount of the made offences. In that case as well as in the case of elastic offences, the produced damage exceeds the tortfeasor’s benefits. The basic idea of this approach is referred to as ceteris paribus, and its efficiency is dubious.

Significant ambiguity related to the specific cases, in which awarding punitive damages is appropriate, can be explained with the lack of strict rules and not specific guidelines given in the statutes. They are evaluated on the basis of the present-day laws. The courts accept the relationship between the compensatory damage and the punitive damage as well as the direct relation of the latter with the defendant’s paying capacity; however, there is no specific definition of the terms ability to pay or reasonable applied in the mentioned context. There is a controversial question regarding the maximum amount of the punitive damage which can or cannot exceed the compensatory damages twofold. The lack of specific laws or rules which can regulate the punitive damage computation causes controversies. Judges are supposed to determine the appropriate amount on the basis of their own opinion and the jury awards are frequently decreased by the decisions of the judges. Every case has its specific characteristics; however, there should be universal rules applicable to very possible case.

The jury in the system of common law of England is aimed at making unbiased decisions while the role of the judge in the court is to make the decision final. It should be admitted that punitive damage is computed under the conditions of limited information and biased final decision made by the judge. Currently, the role of the jury in the legal procedures is not as significant.

There has been a tendency to imposing fines on the producers who are liable for injuries caused by vaccines. It happened even if those manufacturers provided a warning regarding all the involved health risks. Correspondingly, the price for the vaccines increased since it was supposed to cover the product liability of the producers who had to pay for insurance. Thus, the burden was shifted on the consumers.

Furthermore, opportunities for innovation are also related to the damages and product liability issues. In case the customer experience certain damage because of the newly introduced product, the latter is referred to as “profits before people”. The businesses are imposed with penalties and fines by the juries, although studying all possible risks of an innovative product is a highly complicated and challenging process. The companies might develop risk adversity in case the liability is too strict. The manufacturers are currently interested in the soonest implementation of corresponding reforms at the level of federal government which are related to the product liability laws. It leads to the gradual decrease in cases related to product liability.

In addition, the customers are entitled to sell their right of suing in order to obtain the products at a lower price. Besides, in case of injury the company may offer the employees certain compensation without any liability and the employees waive all the claims.

The customer can also obtain some household or other type of insurance. According to the point of view of manufacturers, the punitive damages taken by the victims in an easy way are too high. Gordon Tullock compares it to the rent-seeking process in his Public Choice Theory. It is possible for the manufacturer to disclose important details or to lobby the authorities. If it goes about individuals, money can settle numerous disputes being a commodity required for the derived needs and demands. In case of various accidents such as back injuries or whiplashes, it is possible that the injured represent the situation as being more serious than it actually is.

There are no limitations related to the amount that is supposed to be paid by the defendant in case of punitive damage. The ratio of punitive damage to the compensatory damage may amount to 526:1 as it was in the TXO Production Corp vs. Alliance Resources Corp case (the punitive case amounted to 1$0,000,000, while the compensatory damage amounted to $19,000).

One of the most famous cases related to punitive damage was in 1994. It is known as Liebeck vs. McDonald’s Restaurants case. A 79-year-old woman got severe burns on the thighs after she had spilled coffee there. The serious injury required expensive and complicated skin grafting treatment. It was not clear in that case whose negligence was the cause of the accident. Liebeck sued McDonalds after they had refused to cover the medical bills which amounted to 20 thousand dollars. The accidents led to disclosure of information on the amount of other complaints all around the country. A few hundreds people claimed that they had suffered from serious burns made with the coffee from McDonald’s. The liability of the café was based on the statement that they had been aware of the fact of hazards related to drinking of their product; however, no measures had been taken to prevent the consequences. The conclusion of the jury was to estimate the blame of Liebeck as 20% and award her compensatory damage in the sum of $160,000 and punitive damage in the sum of $2,700,000. Many people adhere to the opinion that the accident was caused by the woman’s carelessness. Afterwards there was an enormous reduction in the amount of punitive damage ($480,000 out of $2,700,000 was to be paid) made by the judge; although most frequently the judges are not inclined to reduce the amounts of punitive damage costs. The American liability system is generally seen as a liberal one which encourages awards of such damages too frequently. The access of a citizen to the law is easier in the USA in comparison with any other country of the world, for instance Japan, in which individuals apply to the legal system only in the most severe circumstances.

Computing damages

A flawless system of tort liability implies resolving of all possible disputes between the parties, for instance the consumers and manufacturers, without involvement of any expenditure. The awarded damages in that case are supposed to be of compensatory nature under the conditions of perfect liability. In such cases, the disputed are resolved without any costs spent by the injured party which recovers from the party that produced the harm.

However, the current system of tort liability cannot be referred to as a perfect one. It still introduces the so-called “enforcement error”, and there is a huge quantity of victims who do not get any compensation for the injuries. The injured party obtains only compensatory damages in case the enforcement error equals to a half. Then there is reduction in the liability of the manufacturer provided that the low quality control is adopted. The inefficiency of enforcement errors is determined by the fact of high profits of the manufacturers who choose the quality control of low level. That inevitably results in the losses incurred by the customers.

Setting the standards of quality control as low implies spending less money by the manufacturers and choosing the principle of “profit over people”. The producers expect raising full faith in the safety and quality of the goods since it is claimed it caused no hazards or health risks. Computation of the damages is done via setting appropriate charges for expected liability which should be higher than the precautions cost. However, those precautions are not implemented. It should be noted that punitive damages are to be taken into consideration. The enforcement error may cause the counterbalance of efficiency decrease with the augmenting compensatory damages along with the punitive damages. In case the punitive damage is not taken into account, compensatory damages (A) serve as constraints to the liability of decision-makers (L) if there is certain enforcement error of the accident (e): L = Ae.

In case the enforcement error is offset, the punitive damages are computed according to the theoretical method using the punitive multiple: L = Aem (m=1/e being the reciprocal of e).

On the basis of fundamental math principles it is possible to eliminate the enforcement error (e) provided that the calculation involves the punitive multiple (m): L = A; it is valid if there punitive damage is awarded.


To sum up, although there has been an argument regarding the court’s establishment of the damage level proportionally to the defendant’s well-being; however, there are special cases of irresponsible neglect aimed at obtaining the optimal effect out of the situation with punitive damages. Thus, according to the opinion of the tortfeasor, it is a punishment. However, in case the defendant pays the amount of damage which is proportional to the caused harm, it cannot be regarded as punishment. It happens if the defendant of income inelastic type has done malicious and deliberate harm; then paying the amount of damage may encourage them to avoid such kind of conduct in the future. The jury may make the rational decision based on hindsight bias with insufficient investigation and analysis of the court decision. In case there is the fault of the victim involved, estimation of the fault proportions between the defendants and the victims and quantitative evaluation of the damage can be extremely challenging.

In addition, the conclusions of the jury and the judge are frequently controversial in terms of awarding the punitive damage.

Although the final decision is made by the judge, it is unclear how the case of the awards and punishments are resolved. The outcomes of the similar situations can be absolutely different in different countries or even within different areas of the same country.

There are the cases in which the wrong party wins the case since the legal actions are taken either under the conditions of inadequate evidence or with the support of the most efficient legal defence. Furthermore, in some cases it is disputable whether it is the right solution to compensate the victim and to penalize the defendant. It can happen that the victim would be provided with the incentives to sue in case of imposed fines; thus, the litigation costs increase. Computing of the damage is likely to be challenging; however, unreasonably high penalty can slow down the efficient offences. Such fines will encourage people to keep to the cautious and careful conduct. In case of deliberate offences the tortfeasor knows about all the hazards and risks in advance and takes insufficient precautious. High fines and severe punishments in such cases are supposed to be beneficial for the societies.

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