TSpace Research Repository tspace.library.utoronto.ca Punitive Damages: Divergence in Search of a Rationale Bruce Chapman and Michael Trebilcock Version Publisher's version Citation Bruce Chapman & Michael Trebilcock, "Punitive Damages: Divergence (published version) in Search of a Rationale" (1989) 40 Alabama Law Review 741 Publisher’s Statement Bruce Chapman & Michael Trebilcock, "Punitive Damages: Divergence in Search of a Rationale" (1989) 40 Alabama Law Review 741 Copyright © [1989]. Reprinted by permission of Alabama Law Review. How to cite TSpace items Always cite the published version, so the author(s) will receive recognition through services that track citation counts, e.g. Scopus. If you need to cite the page number of the author manuscript from TSpace because you cannot access the published version, then cite the TSpace version in addition to the published version using the permanent URI (handle) found on the record page. This article was made openly accessible by U of T Faculty. Please tell us how this access benefits you. Your story matters. PUNITIVE DAMAGES: DIVERGENCE IN SEARCH OF A RATIONALE Bruce Chapman* Michael Trebilcock** TABLE OF CONTENTS 1. INTRODUCTION: THE GENERAL PUZZLE OF PUNITIVE DAMAGES'. ............................ .. ....... .. 742 II. THE EVOLUTION OF THE LAW ON PUNITIVE DAMAGES.. 745 A. Developments in the United Kingdom: Restricting Punitive Damages .............. .. 745 B. Canadian Developments: A Cautious Expansion of Punitive Damages ...................... .. 750 C. Developments in the United States: Substantial Expansion of the Scope of Punitive Damages. 758 D. Divergence in Search of a Rationale. ....... .. 761 III. THE COMPENSATION RATIONALE ... .. 761 A. First-Order Issues. ........................ .. 761 1. Types of Proscribed Conduct ........... .. 761 2. Quantum of Punitive Damages 769 B. Second-Order Design Issues. ............... .. 774 ~, 1. Vicarious and Corporate Liability. ...... .. 774 I 2. Insurability............................. 777 3. The Relevance of Defendant's Wealth. .. .. 777 4. Special Procedural Protections '. 778 IV. THE RETRmUTIVE RATIONALE.... .. 779 * Assistant Professor of Law, University of Toronto. ** Professor of Law and Director of the Law and Economics Program, University of Toronto. This study was sponsored by the Ontario Law Reform Commission, whose financial assistance is gratefully acknowledged. However, the views expressed herein are not to be attributed to the Commission. In addition to the invaluable research assistance of James Penner and Paula Hurwitz, we gratefully acknowledge helpful comments from Alan Brudner, John Jeffries, John Palmer, Harold See, and Stephen Waddams. 741 Electronic copy available at: http://ssrn.com/abstract=1156859 742 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 743 A. First-Order Issues. ........................ .. 779 what the defendant pays as damages must go to the plaintiff as 1. Proscribed Conduct : . .. 779 compensation, and adequate activity level incentives to avoid ex a. A Third Kind of Wrongdoing? ...... .. 780 ante the costly interactions between the two parties require some­ b. Private Enforcement of Retribution: thing other'than the zero sum game that tort law characteristically The Argument from Administrative provides ex post? This strictly economic approach to a problem is Efficiency ......................... .. 786 one that presupposes only the singular policy concern of optimal 2. Quantum of Damages : ..... .. 797 accident deterrence in the very particular context of tort law." We B. Second-Order Design Issues. ............... .. 7.98 should expect these difficulties to be that much greater if we are 1. Vicarious Liability. .................... .. 798 trying to combine within a single action for punitive damages the 2. Insurability............................. 801 quite different types of concerns that typically inform tort and 3. The Relevance of Defendant's Wealth. .. .. 801 criminal law. 4. Special Procedural Protections 804 The specific puzzle in an action for punitive damages is in ex­ V. THE DETERRENCE RATIONALE : .. .. 805 plaining the characteristic focus of the action on the quality of the A. First-Order Issues: Types of Conduct Addressed defendant's conduct, and in particular on whether the defendant's and Sanctions Imposed. ................... .. 806 conduct was "wilfully," "maliciously," or otherwise "outrageously" 1. Criminal Conduct 808 wrong, while at the same time providing an explicit role for the 2. Tortious Conduct. ..................... .. 811 plaintiff as an enforcer of the law." Sometimes we find ourselves a. Intentional Torts. ................. .. 811 b. Negligence. ....................... .. 812 c. Strict Liability .................... .. 817 1. See S. SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW (1987) [hereinafter S. SHAVELL, ECONOMIC ANALYSIS]; Shavell, Strict Liability versus Negligence, 9 J. LEGAL STUD. 3. Breach of Contract 818 1, 19 (1980) (Proposition 5). According to Shavell, B. Second-Order Design Issues. ............... .. 819 one is led to ask whether there exists any conceivable liability rule that always results 1. Vicarious Liability. .................... .. 819 in optimal levels of activities. The answer is no.: The reason, in essence, is that for injurers to choose the correct level of their activity they must bear accident losses, 2. Insurability............................. 821 whereas for victims to choose the correct level of their activity they too must bear 3. The Relevance of Defendant's Wealth. .. .. 822 accident losses. Yet injurers and victims cannot each bear accident losses. 4. Special Procedural Protections 825 S. SHAVELL, ECONOMIC ANALYSIS, supra, at 29. VI. CONCLUSION..................................... 826 Of course, alternatives to tort law litigation, which provide for negative sum games ex post (e.g., regulatory fines or taxes), could help to solve this problem. 2. We do not mean to suggest that economic analysis of law is unconcerned with the other possible goals of tort law. It has much to say, for example, about the optimal provision 1. INTRODUCTION: THE GENERAL PUZZLE OF PUNITIVE DAMAGES of insurance for accident costs that cannot be avoided. Our point here is only to argue that whatever further goals are added, a single action in tort will in general be unable to provide Punitive damages lie at the interface between torts and crimi­ adequately for deterrence of both the victim and the injurer at the activity level. As it hap­ pens, combining deterrence with insurance only compounds the difficulties for tort. See nallaw. While the separation between any two substantive areas of generally Trebilcock, The Social Insurance-Deterrence Dilemma of Modern North Ameri­ law is always somewhat artificial, there is, nevertheless, good rea­ can Tort Law: A Canadian Perspective on the Liability Insurance Crisis, 24 SAN DIEGO L. son to be skeptical that any single legal institution can provide us REV. 929 (1987) [hereinafter Trebilcock, The Social Insurance-Deterrence Dilemma]. with a coherent response to the quite different concerns that ani­ 3. It is commonplace to point to the anomaly of allowing the plaintiff to recover as damages what the defendant must pay as a penalty. See, e.g., J. FLEMING, THE LAW OF mate the law relating to tort and crime. In fact, economists have TORTS 566-68 (7th ed. 1987); S.M WADDAMS, THE LAW OF DAMAGES para. 985 (1983); Cooter, recently argued that a'single tort action is incapable of providing Economic Analysis of Punitive Damages, 56 S. CAL. L. REV. 79, 90 & n.9 (1982) [hereinafter, adequate incentives, at both the care and activity levels, for both Cooter, Economic Analysis]; Ellis, Fairness and Efficiency in the Law of Punitive Damages, 56 S. CAL. L. REV. 1, 10-11 (1982) [hereinafter Ellis, Fairness and Efficiency]. For judicial the defendant and the plaintiff to avoid the costly interactions that articulation of the anomaly, see Lord Reid's opinion in Cassell & Co. v. Broome, [1972] App, happen to link them. This is because in a private law tort action, Cas. 1027, 1086 (H.L.). Electronic copy available at: http://ssrn.com/abstract=1156859 744 Alabama Law Review [VoL 40:3:741 1989] Divergent Rationales 745 looking at the defendant, and sometimes at the plaintiff, but rarely Cooter in his earlier article on punitive damages" can be usefully at the two together as the private law form of the action really' dissected into subcomponents to reveal a richer array of very par­ requires. It all depends, it seems, on whether we emphasize the ticular implications that vary according to context. At the action as one for punitive damages, or as one for punitive dam­ conclusion of our analysis of punitive damages under the different ages. While these two are obviously the same in some sense, the rationales, we will provide a summary matrix of the different im­ different points of emphasis reveal them to be very different, too. plications of all the rationales for both the first and second-order And therein lies the source of our continued puzzlement. issues." This matrix, we think, provides some understanding for This puzzle takes on a different complexion depending upon why it is generally believed that the law on punitive damages is not which of the various rationales or perspectives one uses to under­ now developing in a sufficiently single-minded or coherent fashion. stand .punitive damages. In this Article, after a general No single legal institution can be responsive to the requirements of comparative