PUNITIVE DAMAGES An award of damages is generally made in order to compensate a plaintiff for his or her loss. With punitive damages, however, the focus turns instead to the misconduct of the defendant. Punitive damages are imposed out of a perceived need to condemn the behaviour of the defendant that led to the loss suffered by the plaintiff. The leading case is Whiten v. Pilot Insurance Co., 2002 SCC 18. The Facts The case begins with a house fire on a cold Ontario night in January, 1994. Mrs. Whiten and her family escaped with their lives but little else, the fire completely destroying their home and belongings. The two family cats died in the fire, while Mr. Whiten suffered serious frostbite to his feet in the -18º C weather. The Whitens were in a precarious financial position, but fortunately they had insured their home, through Pilot Insurance Co. The insurer, however, knowing of the Whitens’ limited means, alleged that the fire had been deliberately set as part of a fraudulent insurance claim. Pilot pursued this theory even after arson was ruled out by its own adjustors, independent investigators, and the fire chief. Donald Crabbe, counsel for Pilot, actively looked for evidence to support a finding of arson, even succeeding in having one expert re-classify the fire as “suspicious.” He was confident that, given their financial situation, the Whitens could be forced to accept a much smaller settlement than the one they deserved. Having made just one $5,000 payment for living expenses, Pilot abruptly cut off rent payments for the small cottage the Whitens were living in while they awaited the conclusion of their file. Pilot’s case was discredited at trial two years later. There was no evidence that the Whitens stood to benefit from making a fraudulent insurance claim (the payout would have gone only to paying the mortgage on the house and new living arrangements). That Pilot continued with its course of action regardless of the facts and cognizant of the hardships it was inflicting was criticized by the judge, who described Mr. Crabbe’s conduct as “exceed[ing] the permissible limits.” This conduct was made all the more egregious by the fact that Pilot senior management had been copied on all aspects of the file and were thus fully aware of how it was being handled. The jury agreed and awarded punitive damages of $1 million on top of compensatory damages of $318,000 and solicitor and client costs. Pilot appealed. Although compelled to admit that there had never been any evidence of arson, Pilot’s appeal was allowed in part and the award was reduced to $100,000. Mrs. Whiten then appealed to the Supreme Court of Canada to restore the initial award. Pilot cross-appealed, arguing that no punitive damages should be assessed. On the basis of the exceptional circumstances of the case, the Court allowed Mrs. Whiten’s appeal and restored the original award of $1 million. Context “This case raises once again the spectre of uncontrolled and uncontrollable awards of punitive damages in civil actions.” In deciding Whiten, the Court was mindful of the controversial status of punitive damages in the broader legal community. The increased frequency and size of such awards in recent years had drawn comparisons to well-known and highly- criticized decisions in the United States, prompting fears of the “Americanization” of the Canadian legal system. Whiten, while stunning for the Court’s upholding of such a large award, also represents an effort to limit the instances in which punitive damages may be awarded. Doctrine The court held that there are two basic requirements for an award of punitive damages in a breach of contract action. First, the misconduct must be found to be highly reprehensible. Punitive damages are to be reserved for cases of misconduct that can be characterized as “high-handed, malicious, arbitrary or highly reprehensible … that departs to a marked degree from ordinary standards of decent behaviour.” Second, the misconduct must be an independent actionable wrong aside from the main cause of action. This may be founded in a breach of a term of the contract and need not necessarily be a tort. In Whiten, this was anchored in Pilot’s breach of the implied contractual duty owed by all insurers to act in good faith. Policy Framework The Court laid out the following policies to guide future application of the doctrine. This enables a principled approach to punitive damages guided by rational responses to the misconduct at hand. Key features of this framework are exceptionality, rationality, and proportionality. A. Exceptionality Punitive damages, it is stressed, are the exception to the general rule of compensatory damages in breach of contract. Their award must in all respects be a rational response to the circumstances of the case, driven by the highly reprehensible behaviour of the defendant. B. Rationality The Court noted that punitive damages are intended to achieve three objectives: punishment, deterrence, and denunciation. A decision to impose punitive damages must be linked to any one of these three goals, ensuring that the award serves a rational purpose. C. Proportionality Rationality is also the guiding precept by which the quantum of the award is to be calculated: the sum should be proportionate to the degree of misconduct exhibited and no more. Anything in excess is irrational and will be struck down. This is to safeguard against the runaway sums often awarded in American cases. The concept of proportionality as a means by which a sum is arrived at is expressed in several ways. Proportionate to the blameworthiness of the Defendant’s conduct. In this assessment, relevant factors include the deliberateness of the misconduct, the motive behind it, the length of time during which it continued, whether the defendant knew he was doing something wrong, and whether he profited by the misconduct. Proportionate to the degree of vulnerability of the plaintiff. Here it is proper to consider the relative positions of both parties and whether the stronger party abused its position or exploited a financial or other vulnerability of the weaker party. Proportionate to the harm or potential harm directed at the plaintiff. The jury is free to assess both the actual harm and the likely harm that occurred. The defendant is to be punished not necessarily for the outcome of his actions, but for the nature of his conduct, including what could have happened but did not. Proportionate to the need for deterrence. The jury should arrive at a sum that will serve to deter both the wrongdoer and future wrongdoers from contemplating similar misconduct but should not be calculated so as to “sting” the pocketbook of the defendant. Generally, the award should be what is rationally required as deterrence, and no more. Anything more exceeds the bounds of rationality and undermines the principled framework of punitive damages. Proportionate, even after taking into account penalties that have already been assessed for the same misconduct. Punitive damages should not be awarded if compensatory damages and criminal penalties are adequate to meet the policy objectives. Proportionate to the advantage wrongfully gained by the misconduct. If the defendant still stands to gain even after an assessment of punitive damages, then the objectives of the process have not been met. The amount of the award must be such that the defendant cannot regard it as merely a cost of doing business or a “license to abuse other’s rights”. In the End The Court held that Pilot’s conduct was exceedingly reprehensible and in breach of its obligation to deal with the Whitens in good faith. This was exacerbated by the fact that insurance contracts are essentially “peace of mind” contracts. People enter these so as not to have to worry about being in the kind of situation that Pilot essentially forced the Whitens into: homeless and without security. Moreover, the Court found that Pilot’s behaviour was planned and deliberate even in the awareness of the hardship it was inflicting upon the Whitens. With this in mind, the initial jury award, though high, was within the rational limits considered by punitive damages. Discussion Punitive damages is one of the few areas of contracts that contemplates fairly substantial ideas of right and wrong conduct. The denunciative goals of punitive damages, taken with the relationships between private individuals that they seek to regulate, uncomfortably straddle both private and public law. Criminal law imposes penalties for behaviour held to be injurious to society at large. Punitive damages, however, are awarded in the civil context for behaviour similarly considered to be injurious but not necessarily criminal. In a sense, Binnie J. notes, plaintiffs bringing cases for punitive damages, and the juries and judges who award them, are functioning as private attorneys-general – for while they are seeking redress for their own losses, they are performing a socially useful service in that aberrant behaviour such as that displayed by the defendant is punished and deterred, while society has the opportunity to express its detestation for the behaviour. The key question in this case is whether the award had its intended effect. Whiten has been criticized for introducing a level of “unreckonability” to damages. Plaintiffs have the option of seeking aggravated damages, however the rules there limit recovery considerably more than what punitive damages now has the potential to offer. It has been suggested that had Mrs. Whiten made a claim for aggravated damages she would have been awarded a sum in the vicinity of $50,000. As a result, plaintiffs are much more likely to claim punitive damages, making the potential costs for defendants much higher than would normally be contemplated in a breach of contract case.