Can Punitive Damages be Awarded in a Breach of a Commercial Contract Case?

Generally, under New York law, that answer is no; punitive damages are not recoverable in business-to-business litigation involving breach of contract claims. In brief, compensatory damages are the type of damages that can be recovered for breach of contract. Compensatory damages compensate a party for a breach of the relevant contract. The purpose of awarding compensatory damages is to make the non-breaching party whole. That means attempting to give the non-breaching party the benefit of its bargain, as evidenced by the contract. Alternatively, it may be said compensation is awarded to put the non-breaching party into the position it would have been in had the contract been entirely performed by the breaching party. Examples of compensatory damages include:

  • Provable out-of-pocket costs caused by the breach, like extra warehousing costs where the breaching party improperly refuses to accept delivery
  • “Cover” type damages — like the extra costs of buying alternative material goods or hiring a third party to rectify the breach.
  • Loss of revenue — like where a seller has to sell materials to a new buyer at less than the price in the contract at issue
  • Lost profits
  • And more

By contrast, Courts impose punitive damages not to compensate the non-breaching party but rather to punish the breaching party. However, contract law aims to effectuate smooth and reliable commercial transactions. The goal is not a punishment since punishment would severely impair the efficient operation of a modern economy. Further, New York Courts impose punitive damages to vindicate public rights and policies. Since contracts are private dealings, Courts don’t generally impose punishment or punitive damages. Thus, in New York, punitive damages are not recoverable in an ordinary breach of contract case.

The exception to the Rule

There is an exception that applies in narrow circumstances, however. New York case law holds that a non-breaching party can recover punitive damages in a breach of contract case where three conditions are met:

  • The alleged breach of contract ALSO involves some fraud “evincing a high degree of moral turpitude.”
  • And the breach of contract demonstrates “such wanton dishonesty as to imply a criminal indifference to civil obligations.”
  • And where the conduct was aimed at the public, generally

See Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603 (1994). In practice, this means that the breach of contract must ALSO be actionable as an independent tort for which punitive damages are available AND the conduct must be sufficiently egregious AND there must be evidence of a pattern of similar behavior directed at the public generally.

Meeting this standard is tough. New York courts consider awarding punitive damages in a private party transaction an “extraordinary remedy.”

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For more information, call the experienced New York City business law litigation team at Wright Law Firm NYC. We provide top-tier litigation services for New York businesses in both New York state and federal courts. To schedule a consultation, please get in touch with our office by e-mail or call us at (212) 619-1500.