Exemplary Damages in Equity: A Law and Economics Perspective

Abstract

In Harris v. Digital Pulse Pty Ltd (2003) 56 NSWLR 298, the New South Wales Court of Appeal held that exemplary (or punitive) damages are not available for breach of fiduciary duty or other equitable obligation. The decision runs counter to authorities in Canada, New Zealand and some states in the U.S. Punitive (exemplary) damages is a hotly debated topic in the U.S. and it has attracted considerable interest among law and economics scholars, particularly in the tort litigation context. This paper analyzes the Digital Pulse case from a law and economics perspective. Polinsky and Shavell (among others) argue that the function of punitive damages is to achieve optimal deterrence in cases where the probability that the plaintiff will discover and successfully litigate the defendant's wrongdoing is less than 1. Given the high costs of monitoring fiduciary behaviour, it might be tempting to conclude that punitive damages should be routinely awarded for breach of fiduciary obligation. The paper explains why this view is wrong. On the other hand, given the availability of gains-based remedies (the account of profits and the like)for breach of fiduciary obligation, it might be tempting to conclude that punitive damages are never needed in fiduciary cases. The paper explains why this view is wrong too. The main conclusions are that: (1) exemplary damages should be available for breach of fiduciary duty and the like, but in exceptional cases only; and (2) exemplary damages were probably not warranted in Digital Pulse itself.