Should Estonian Law Provide for an Award of Punitive Damages?

• Author: Karin Sein
• Position: Doctor iuris, Lecturer of Private International Law, University of Tartu
• Pages: 46-54

Karin Sein

Doctor iuris, Lecturer of Private International Law, University of Tartu

Should Estonian Law Provide for an Award of Punitive Damages?

Punitive damages are an institute of law practiced in the Anglo-American legal system. They are defined as damages awarded in addition to the actual material or non-material damages to punish the defendant and deter him or her from committing violations of law in the future. Estonian lawyers too have somewhat unexpectedly proposed to set forth in Estonian law the possibility of awarding punitive damages, especially for violations of personal rights (e.g., defamation). The reasoning behind the proposal is that today defamation is not punished as a criminal offence in Estonia , and injured parties allegedly remain without effective judicial protection¹. The aim of this article is to analyse the nature of punitive damages, whether that institute could or should be applied to Estonian law, but also whether provision of punitive damages could be in conflict with the values stated in our Constitution. The central issue of this article is whether application of punitive damages is necessary for cases of defamation and violation of other personal rights.

1. Nature of the institute of punitive damages

As I said, Anglo-American law defines punitive damages (also known as exemplary damages) as damages that are in excess of the compensatory damages in order to punish the defendant and deter new violations of law. This is a conceptual difference from the Continental-European doctrine according to which the indemnification obligation of civil law damage primarily has a compensatory function, i.e., the purpose of the damages is to restore the former situation for the injured party. The same principle is provided in Estonian law in § 127 (1) of the Law of Obligations Act ² , which sets forth that the purpose of compensation for damage is to place the aggrieved person in a situation as near as possible to that in which the person would have been if the circumstances which are the basis for the compensation obligation had not occurred. Continental-European law doesn't traditionally seek to punish the tortfeasor through damages, only to redeem or compensate the damage inflicted to the injured party³.

Punitive damages are applied primarily in judicial practice in the United States ⁴ , but are known also in the United Kingdom , Canada , Australia , New Zealand and India ⁵. The amount of a punitive damage is decided by the jury, but the judge has the right to later reduce the amount at the request of the defendant, which is often the case. It is generally possible to award punitive damages in all tort cases. Punitive damages are mainly awarded when the tortfeasor's behaviour is found to be especially harmful, i.e., intentional or gravely negligent. Punitive damages can exceptionally be awarded also in cases of breach of contract, especially in the case of contracts of employment and insurance contracts⁶. The actual amount of a punitive damage depends inter alia on the level of liability of the tortfeasor and his or her financial situation⁷.

Although the name might leave an impression that the purpose of punitive damages is only to punish the tortfeasor, it is not quite so. Although the main aims of punitive damages are indeed punishment and deterrence of new offences ⁸ , punitive damages do actually have several other functions. Those other functions are primarily profit-erasing of the tortfeasor (the violator of another person's right), compensation of the injured party's legal expenses, redemption of the offence ⁹ , but also compensation of the enforcement gap¹⁰.

Yet, the judicial practice of the U.S. juries in punitive damages cases has fallen under growing criticism and for some time now relevant literature calls for a tort reform¹¹. The institute of punitive damages and the relevant U.S. judicial practice is blamed for primarily the following:

- the institute of punitive damages is problematic from the constitutional perspective ¹² ;

- there are no clear criteria for determining the amount of the damage, which means that a judgment is absolutely not predictable;

- juries act too emotionally ¹³ ;

- sometimes the damage awarded is even more than the initial claim by the injured party ¹⁴ ;

- enormous damages threaten to push producers to bankruptcy, which suppresses entrepreneurship and initiative ¹⁵ ;

- boundaries between penal law and private law are blurring.

Measures have already been taken to restrain the awarding of uncurbed damages: eleven states have adopted a law on the maximum amount of a punitive damage, limiting it to just 1-5 times the compensatory (regular) damage; some states have laid down maximum levels of punitive damages (from 300,000 up to five million U.S. dollars); 13 states have adopted a regulation regarding transfer of a certain percentage of the awarded damage to the Treasury or the Alliance for Equal Justice¹⁶. Also, the U.S. Supreme Court has ruled in 2003 that as a rule punitive damages should not exceed the amount of the compensatory damage by more than nine-fold¹⁷.

2. Punitive damages in Europe

The punitive aim of damages in its narrower sense (redemption, repentance and revenge) is not known at least in the Continental-European private law tradition¹⁸. Punitive aims derive from the tortfeasor, not the injured party, and are intrinsic to penal law. There is a predominate opinion that punitive damages are not part of Continental-European legal culture, and neither the European Principles of Tort Law (see article 10:101) nor the Study Group on a European Civil Code provide for punitive damages.

However, there is a noticeable tendency in Continental-European legal orders to take account of punitive elements upon awarding damages at least in some sectors. In German law, for example, the increasing importance of the deterrence factor in a compensatory obligation is more and more talked about, especially in connection with damage to a creditor's non-material rights¹⁹. If the violation concerns such benefits, then it can only formally be claimed that the purpose of the monetary compensation is to make up for the damage and restore the benefits. In those areas of activity German judicial practice has reached similar conclusions regarding amounts and bases for calculation of damages as the U.S. judicial practice on award of punitive damages. Damages awarded under German judicial practice are often more than compensational, and the argumentation used in motivation partly resembles the punitive damage approach²⁰. Deterrent function exists for example in damages for wasted holiday time, which on one hand compensates the non-material damage inflicted on a passenger, and on the other hand should help to avoid bad business practice by package holiday travel agents²¹.

In several countries of the Continental-European legal system the deterrent function of damages plays an important role in the award of compensation for violation of personal rights: the purpose of the compensation for the loss inflicted by such violations is not only to compensate the loss to the injured party, but also the deterrence of such violations in the future²². The topic of punitive damages has found its way also to studies of Continental-European legal scholars. For example one of the main topics at the 66^th Day of Jurists of the Federal Republic of Germany was whether it is necessary to amend the German indemnification regulation, especially whether it is necessary to establish institutes of punitive damages and collective action. However, it was admitted that punitive aims in their narrower sense are foreign to private law and should remain that way²³.

At the European Union level the attitude toward punitive damages type compensation is unclear and non-consistent in different legal acts and decisions²⁴. For example, according to the second sentence of article 29 of the Montreal Convention for the Unification of Certain Rules for International Carriage by Air ²⁵ punitive, exemplary or any other non-compensatory damages are not recoverable. Also for the Rome II regulation ²⁶ long debates were held over whether or not to provide in the regulation expressis verbis that punitive damages could be in conflict with a MemberState's public order.

The European Court of Justice, on the other hand, has taken a stand in an antitrust case that if a national court awarded a punitive damage for an infringement of antitrust law, then the same should be done in cases of infringement of the European Union antitrust law provisions²⁷. The European Court of Justice has at least in two instances ruled in equal treatment lawsuits that damages awarded for discrimination of workers must have a deterrent effect²⁸. The European Union Court of Justice judicial practice shows that, for the effective protection of a worker, who is the weaker side, a damage awarded for job-related discrimination should in excess of the traditional compensatory nature also have deterrent influence.

Possible punitive damages are being deliberated also in the European Union in the context of infringements of antitrust law. The European Union green paper on antitrust law proposes automatic so-called double damages for the compensation of infringements of antitrust law²⁹. Such a proposal is evidently inspired by the U.S. antitrust law, where the classical punitive damages institute has today been replaced by the so-called treble damages option provided by law³⁰. The main aim of multifold damages is to prevent future infringements of antitrust law (the deterrent function). Other aims are to compensate the damage done to those who have suffered loss, profit erasing, and...