Allapattah Services, Inc. v. Exxon Corp.

• Decision Date: 20 July 1999
• Docket Number: No. 91-0986-Civ.,91-0986-Civ.
• Citation: 61 F.Supp.2d 1326
• Parties: ALLAPATTAH SERVICES, INC., et al., Plaintiffs, v. EXXON CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of Florida

Page 1326

61 F.Supp.2d 1326

ALLAPATTAH SERVICES, INC., et al., Plaintiffs, v. EXXON CORPORATION, Defendant.

No. 91-0986-Civ.

United States District Court, S.D. Florida.

July 20, 1999.

Eugene Stearns, Miami, FL, Sidney Pertnoy, Gerald Bowen, McLean, Virginia, for plaintiffs.

Larry Stewart, Miami, FL, Robert Abrams, Robert Brookheiser, Stuart Harris, Darren B. Bernhard, Robert Wallis, Houston, Texas, for defendant.

ORDER DENYING PLAINTIFFS' MOTION FOR LEAVE TO ASSERT CLAIM FOR PUNITIVE DAMAGES

GOLD, District Judge.

THIS CAUSE is before the Court upon Plaintiffs' Motion for Leave to Assert Claim for Punitive Damages Against Defendant Exxon Corporation [D.E. # 1016]. Plaintiffs seek to recover punitive damages, alleging that Exxon tortiously and oppressively breached its contracts with Plaintiffs, substantiating punitive relief which is purportedly available under the laws of twenty-three of the thirty-six jurisdictions implicated in this diversity action. Having carefully considered the arguments of the parties, the relevant portions of the record and prior positions asserted by Plaintiffs, and having reviewed and applied the relevant law, the Court concludes that punitive damages are not appropriate or timely under the circumstances giving rise to Plaintiffs' claims, and therefore, should be denied.

I. Discussion and Analysis

Although Plaintiffs acknowledge that damages for breaches of a contract are generally limited to those that equate to the benefit of the bargain intended to be realized under the terms of the contract, or, in other words, that which the non-breaching party would have received had the contract been performed, Plaintiffs argue that the majority of the states' laws applicable to many of the Plaintiffs' contract claims recognize a more liberal standard, leaning toward awards of punitive damages on breaches of contractual obligations. In support of their argument, Plaintiffs cited to several cases which are distinguishable from the facts underlying the case before the Court. Significantly, rather than relying on cases involving contractual claims predicated on Article 2 of the Uniform Commercial Code, which Plaintiffs have repeatedly contended is the applicable law, Plaintiffs rely on the Restatement (Second) on Contracts to support their demand for punitive damages.

Exxon opposes Plaintiffs' attempt to interject punitive elements in the absence of any tort claims. Additionally, Exxon argues that Plaintiffs should be precluded from adding a claim for punitive damages so close to trial, because not giving Exxon a corresponding benefit of conducting necessary discovery thereon would severely prejudice Exxon in its defense of such a claim. Exxon points out that the various jurisdictions apply differing standards of proof, which will likely require numerous separate trials and individualized jury instructions, undermining the propriety of class certification.

A. General Contract Principles Regarding Punitive Damages

The underlying purpose of damages in actions premised on a breach of contract is to place the non-breaching party in the same position it would have occupied if the contract had not been breached. See Walsh v. Ford Motor Co., 627 F.Supp. 1519, 1523 (D.D.C.1986) (citing 5A Corbin, Corbin on Contracts § 922, at 5 (1964)); Mortgage Finance, Inc. v. Podleski, 742 P.2d 900, 902 (Colo.1987) (breach of contract remedies serve only to provide compensation for loss, not to punish the wrongdoer). Recognizing this central purpose, courts have uniformly rejected requests for punitive damages for mere breach of contract, regardless of the breaching party's conduct or motives. See id. Thus, well established principles of contract law dictate that punitive damages are generally not available for a breach of contract claim unless the defendant's conduct in breaching the contract also violated a noncontractual legal duty, thereby constituting a tort. See Restatement (Second) of Contracts § 355 (1981)¹; see also Continental Nat'l Bank v. Evans, 107 Ariz. 378, 489 P.2d 15, 19 (1971); Williams v. Speedster, Inc., 175 Colo. 73, 485 P.2d 728, 730 (1971); Graham v. Turner, 472 S.W.2d 831, 839 (Tex.App.Ct.1971). Even under the common law, tort remedies are not awarded in a contract dispute absent conduct which separately and independently substantiates the commission of a tort. See id.; see also Vanwyk Textile Sys., B.V. v. Zimmer Machinery America, Inc., 994 F.Supp. 350, 362 (W.D.N.C.1997) ("To state a claim in tort, a plaintiff must allege a duty owed him by the defendant separate and distinct from any duty owed under a contract."). "Whether an action is characterized as one in tort or on contract is determined by the nature of the complaint, not by the form of the pleadings, and consideration must be given to the facts which constitute the cause of action." Thomas v. Countryside of Hastings, Inc., 246 Neb. 907, 524 N.W.2d 311, 313 (1994).

Notably, the breach of a duty is an element in both contractual and tort causes of action. See Splitt v. Deltona Corp., 662 F.2d 1142, 1145 (5th Cir.1981). The distinction is that "duties involved in [tort actions] are raised by law and social policy and owed to an entire class of persons .... [while] [c]ontractual duties are created by the contract terms and [are] owed to the parties thereto." Id.

Not only are intentional breaches exempt from punitive claims, they are sometimes encouraged. "The law has long recognized the view that a contracting party has the option to breach a contract and pay damages if it is more efficient to do so." L.L. Cole & Son, Inc. v. Hickman, 282 Ark. 6, 665 S.W.2d 278, 280 (1984) (citing Holmes, "The Path of the Law" in Collected Legal Papers 167, 175 (1920)).² The logical result of this theory is a "limitation of breach of contract damage exposure to losses contemplated by the contracting parties, and for which a defendant `at least tacitly agreed to assume responsibility.'" Delta Rice Mill, Inc. v. General Foods Corp., 763 F.2d 1001, 1006 (8th Cir. 1985) (quoting Morrow v. First Nat'l Bank of Hot Springs, 261 Ark. 568, 550 S.W.2d 429, 430 (1977)).

This acceptance of intentional, efficient breaches has been uniformly adopted among the jurisdictions. See, e.g., Thyssen, Inc. v. SS Fortune Star, 777 F.2d 57, 63 (2d Cir.1985) ("Breaches of contract that are in fact efficient and wealth-enhancing should be encouraged, and ... such `efficient breaches' occur when the breaching party will still profit after compensating the other party for its `expectation interest.' The addition of punitive damages to traditional contract remedies would prevent many such beneficial actions from being taken."); Reiver v. Murdoch & Walsh, P.A., 625 F.Supp. 998, 1015 (D.Del. 1985) ("some breaches may be intentional and ... efficient [] when the payment of damages would be less costly than performance ... that fact alone does not entitle a plaintiff to seek punitive damages unless the intentional breach is similar in character to an intentional tort."); Harris v. Atlantic Richfield Co., 14 Cal.App.4th 70, 17 Cal.Rptr.2d 649, 653 (1993) ("The traditional goal of contract remedies is compensation of the promisee for the loss resulting from the breach, not compulsion of the promisor to perform his promises." Therefore, "willful" breaches have not been distinguished from other breaches. The restrictions on contract remedies serve purposes not found in tort law. They protect the parties' freedom to bargain over special risks and they promote contract formation by limiting liability to the value of the promise. This encourages efficient breaches, resulting in "increased production of goods and services at lower cost to society.") (internal citations omitted); Kutzin v. Pirnie, 124 N.J. 500, 591 A.2d 932, 941 (1991) ("The approach that we adopt is suggested to have the added benefit of promoting economic efficiency: penalties deter `efficient' breaches of contract `by making the cost of the breach to the contract breaker greater than the cost of the breach to the victim.'") (quoting Posner, Economic Analysis of Law § 4.10 (3d ed.1986)).

In sum, in the normal commercial situation, damages for breach of contract are limited to the pecuniary loss sustained, since the damage is usually financial, susceptible of accurate estimation, and the wrong suffered by the plaintiff is the same regardless of the defendant's motive. See Kewin v. Massachusetts Mut. Life Ins. Co., 409 Mich. 401, 295 N.W.2d 50 (1980); J.J. White, Inc. v. Metropolitan Merchandise Mart, Inc., 107 A.2d 892 (Del.Super.1954); Smyth v. Fleischmann, 214 S.C. 263, 52 S.E.2d 199 (1949). Although this is the general rule, courts have, nevertheless carved out exceptions, which are not applicable to the instant contractual dispute.³

B. Punitive Damages Under the UCC

For the sale of goods, remedies for breach of contract are addressed in UCC § 1-106, which provides:

The remedies provided by the Act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed but neither consequential or special nor penal damages may be had except as specifically provided in this Act or by other rule of law.

UCC § 106(1) (emphasis added). While consistently relying on UCC principles of law throughout this litigation, Plaintiffs now seek to utilize the common contract laws of the various states to obtain punitive relief. Since various states permit recovery of punitive damages for independently tortious conduct, Plaintiffs argue that Exxon's intentional and willful breach of its good faith obligation supports a claim for punitive damages. In essence, Plaintiffs aver that Exxon's willful breach of the covenant of good faith, implied in contracts governed by the UCC, constitutes an independent tort for which punitive damages are recoverable. The Court does not agree with Plaintiffs' assessment of the law.

As articulated in prior orders...