Connecticut Law Review
The idea of extracompensatory damages for abusive breach of contract presents a fundamental conflict. Contract doctrine aims to facilitate exchanges. Extracompensatory damages are disincentives. These aims are essentially irreconcilable. And traditionally the goal of facilitating exchanges has trumped any interest in punishing bad conduct. But there is a lingering sense that sometimes a proportionate response to bad conduct surrounding breach requires more than the traditional measure of damages. At the edges of contract doctrine, two notable experiments manifest the sense that some breaches demand more than compensatory damages. One, the failed California experiment with bad faith breach, permitted the plaintiff to collect punitive damages for defendant's "bad faith" denial of the existence of a contract. Criticism of the bad faith breach was rife. Lower courts had difficulty drawing even rough boundaries around the concept and split over many questions. The California Supreme Court ended the confusion in a 1995 decision scuttling the bad faith breach. Another experiment, allowing the award of punitive damages against insurance companies for bad conduct breaches, is an enduring exception to the general bar on extracompensatory damages in contract law. The model case is a denial of coverage on some specious pretext. This Article shows that a unified analysis of the two efforts yields an insight that delineates our capacity to respond to abusive breach. Considered together, they show that rules punishing abusive breach with extracompensatory relief are indeed viable so long as their impact is limited to subcategories that are conceptually and practically severable from the general pool of transactions. Severability is the core requirement of any workable extracompensatory response to abusive breach. If we respect it, then we can punish subcategories of abusive breach with aggressive disincentives. Failure to respect severability will violate the basic aims of contract doctrine by leaking collateral risk into the general pool of transactions, thus discouraging exchanges.
Nicholas J. Johnson,
Boundaries of Extracompensatory Relief for Abusive Breach of Contract, The , 33 Conn. L. Rev. 181 (2000-2001)
Available at: http://ir.lawnet.fordham.edu/faculty_scholarship/433