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Nations Convention on Contracts for the International Sale of Goods and U.S. Law'
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 PUNITIVE DAMAGES IN CONTRACT ACTIONS: THE TENSION
BETWEEN THE UNITED NATIONS CONVENTION ON
CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS AND
U.S. LAW

I. INTRODUCrION

The extent to which monetary damages are available to an injured

party in a commercial breach of contract action seems set in stone in
American law. Under the English case of Hadley v. Baxendale and its
progeny in the United States, only foreseeable, compensatory damages
may be imposed on a breaching party in a contract action.' Damages
which punish an individual or a business entity have traditionally been
prohibited.2 This rule illustrates the "efficient breach" theory, in which
the law attempts to encourage breach of commercial promises when it is
beneficial to the breaching party.3 The hope of the efficient breach ratio-
nale is that economic growth will result from individuals having some
freedom to seek out the best deals in contracts without adverse conse-
quences. 4 Theoretically, the imposition of punitive damages on a breach-
ing party is considered a detriment to the formation of contracts, and
thus a hindrance on business and profit.5 Therefore, punitive damages
6
have been technically forbidden in breach of contract actions.
There are, however, "loopholes" or exceptions to this supposedly
rigid rule which allow punitive damages to be awarded in some commer-
cial contract actions. 7 The result of these exceptions is an increasingly in-

1. Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. Ch. 1854); see also Lieberman v. Templar Mo-
tor Co., 140 N.E. 222 (N.Y. 1923) (permitting plaintiff to recover lost profits and contract price as
compensation).
2. See JOHN D. CALAMAPi & JOsEPH M. PERaR . THE LAW OF CoNTRACTs §§ 14-3 to 14-5 (3d
ed. 1987); see also RESTATEMENT (SECOND) OF.CoNTRACrS §355 (1981); HOWARD 0. HUNTER. MODERN
LAW OF CoNTEACrs 18.03[l ] (rev. ed. 1993).
3. See Mark Pennington, Punitive Damages for Breach of Contract: A Core Sample from Deci-
sions of the Last Ten Years, 42 ARK. L. REv. 31, 32-33 (1989) (citing RICHARD POSNER, ECONOMIC
ANALYSIS OF THE LAw 107 (3d ed. 1986)); see also HUNTER, supra note 2, $ 1.03.
4. See HUNTER, supra note 2, 1.03.
5. See POSNER. supra note 3, at 107-108. In addition to court-awarded punitive damages, "pen-
alty" damage clauses in contracts have also been suspect because of their potential deterring effects. Id.
at 116. See generally HUGH COLLINS, THE LAw OF CONTRACT 385 (2d ed. 1993).
6. See NORMAN JAY ITZKOFF, Introduction to DEALING wrrH DAMAGES 1, 8-9 (Norman Jay Itzkoff
ed., 1983).
7. See infra Part II; see also RESTATEMENT (SECOND) OF CONTRAcrS § 355 cmt. b (1981);
 JOURNAL OF LAW AND COMMERCE [Vol. 16:2:215

consistent and unpredictable system of remedies for contract parties. 8 Al-

though the actual number of commercial contract cases in which large
punitive awards have been granted is relatively small, the fact that such
cases are on the books at all poses an obstacle to contract formation and
the efficient breach theory. 9
The threat of punitive damage awards is especially problematic in
contracts and contract actions between American and international par-
ties. The United Nations Convention on Contracts for the International
Sale of Goods I0 ("CISG" or "Convention") generally governs the law of
commercial sales contracts between two or more parties from different
nations. With respect to damages, the CISG does not allow for the excep-
tions regarding exemplary relief that American contract law permits." In-
stead, the CISG strictly advocates the efficient breach theory and limits
damages to compensatory awards. 12 The limitations of the CISG on puni-
tive damages is in direct conflict with the loopholes and flexibility of
American domestic law.' 3 This tension creates the potential for abuse and
misinterpretation by domestic courts in international contract cases.
This Comment will assert the position that the United States must
change its domestic punitive damages scheme in commercial contract
cases in order to comply with the CISG in the sales contract context and
to further the goal of uniform contract law in general. In particular, Part
II will review the availability of exemplary damages for breach of con-

HUNTER, supra note 2, j 18.03[1l, [3]. Traditionally, the exceptions to the prohibition of punitive dam-
ages have been in areas such as the breach of a promise to marry, breach of fiduciary duties, breach of
insurance contracts, and breaches by public utilities. See id. 18.03[2]. However, courts have often ex-
panded the exception into commercial contract actions as well. See id. 18.03[3].
8. See HUNTER, supra note 2, J 18.03[3].
9. See John A. Sebert, Jr., Punitive and Nonpecuniary Damages in Actions Based Upon Con-
tract: Toward Achieving the Objective of Full Compensation, 33 UCLA L. REv. 1565, 1660-61 (1986).
10. United Nations Convention on Contracts for the International Sale of Goods, April 11, 1980,
52 Fed. Reg. 6262-02 (1987) [hereinafter CISG]. For excellent discussions of the history and formation
of uniform sales law under the CISG, see Maureen T. Murphy, United Nations Convention on Con-
tracts for the International Sale of Goods: Creating Uniformity in InternationalSales Law, 12 FORD-
HAM INT'L LJ. 727, 727-36 (1989); Arthur Rosett, Critical Reflections on the United Nations Conven-
tion on Contractsfor the International Sale of Goods, 45 OHO ST. LJ. 265 (1984).
11. See CISG, art. 74. See also United Nations Commission on International Trade Law [herein-
after UNCfTRAL] Secretariat Commentary on the 1978 Draft, in DOCUMENTARY HISTORY OF THE UNI-
FORM LAW FOR INTERNATIONAL SALES 404, 449-50 (John 0. Honnold ed., 1989).
12. See CISG, art. 74. See also Fit= ENDER IaFN & DErrRIH MASKOW, INTERNATIONAL SALES
LAw 297-03 (1992) (provides United Nations Commentary on the CISG); JOHN 0. HoNNors, UNIFORm
LAw FOR INTERNATIONAL SALES UNDER THE 1980 UNITED NATIONS CONvENTION § 407 (1987).
13. Compare RESTATEMENT (SECOND) OF CONTRACTS, supra note 2, § 355, and HtrNTER, supra
note 2, 18.03[1], with UNCITRAL, supra note 11, at 449-50. See generally 5 CoRItN ON CONTRAcrs
§ 1077 (1964) (discussing exceptions to the rule that punitive damages are not recoverable for breach
of contract).
1997] PUNITIVE DAMAGES IN CONTRACT ACTIONS

tract in the United States. It will also identify reasons why the loopholes
that allow punitive damages on a domestic level must be changed in or-
der to increase economic opportunity and to comply with the CISG in in-
temational sales contracts. Part III will propose several solutions to the
problem of punitive damage awards that will aid American courts, legis-
lators and litigants in dealing with such damages. Overall, this Comment
will expose how current judicial practices of imposing punitive damages
have created a growing conflict in the law, which must be resolved by
the legal community as we move into the twenty-first century.

HI. PuNrnvE DAMAGES IN CONTRACT CASES-THE CONFLICT

A. The "Loopholes" in the American System
As stated above, the general rule in American law is to prohibit the
imposition of punitive damages upon a breaching party in commercial
contract cases.' 4 This rule, however, is tainted by two large loopholes-the
tort exception and jury deference.

1. The Tort Exception

The biggest exception to the traditional rule on limiting punitive
damages in contract actions is found in the basic common law regarding
contact remedies. 5 Many states and the Restatement (Second) of Con-
tracts provide punitive damages to a non-breaching party, so long as
"the conduct constituting the breach is also a tort for which punitive
damages are recoverable."' 16 The Restatement expressly identifies the
availability of punitive damages in breach of contract actions:
The term "tort" in the rule stated in this Section is elastic, and the
effect of the general expansion of tort liability to protect individual inter-
ests is to make punitive damages somewhat more widely available for
breach of7 contract as well. Some courts have gone rather far in this
direction.'

14. See supra notes 1-3.

15. See RESTATEMENT (SECOND)OF CONTRACTS, supra note 2, § 355. See also U.C.C. § 1-103
(1995) (stating that the common law of contracts may supplement U.C.C. provisions in sale of goods
contracts).
16. RESTATEMENT (SECOND)OF CONTRACTS, supra note 2, § 355. The RESTATEMENT (SECOND)OF
TORTS § 908(1) (1977) defines punitive damages as "damages, other than compensatory or nominal
damages, awarded against a person to punish him for his outrageous conduct and to deter him and
others like him from similar conduct in the future."
17. RESTATEMENT (SECOND) OF CONTRACTS, supra note 2, § 355 cmt. b. For some examples of
states articulating and following this loophole in common law see, e.g., Klusty v. Taco Bell Corp., 909
F. Supp. 516 (S.D. Ohio 1995) (denying punitive damages for breach of contract because there was no
 JOURNAL OF LAW AND COMMERCE [Vol. 16:2:215

The Uniform Commercial Code ("U.C.C.") briefly addresses exemplary

damages in section 1-106(1): ". . neither consequential or special nor
penal damages may be had except as specifically provided in this Act or
by other rule of law.' 8 However, the exception for "other rule of law,"
along with the continued availability of common law damages under sec-
tion 1-103, preserves the possibility of punitive damages in sales contract
actions under the U.C.C.19
To effectuate this loophole, the injured party merely needs to attach
to his suit a cause of action for tortious conduct arising out of the oppos-
ing party's breach of contract. 20 The non-breaching party is often able to
allege that the breach of contract was the result of imprecise tortious
conduct such as fraud, malice, oppression, misrepresentation, or a viola-
tion of the implied obligation of good faith. 21 These terms are extremely
vague and almost impossible to define. Thus, a non-breaching party has
wide latitude to transform the defendant's breach into a tortious cause of

proof of an independent tort connected with the breach); Wheeler Motor Co. v. Roth, 867 S.W.2d 446
(Ark. 1993) (permitting punitive damages if a tort is involved in a contract action); Colorado Interstate
Gas Co. v. Chemco, Inc., 833 P.2d 786 (Colo. App. 1991), aff'd, 854 P.d 786 (Colo. 1993) (stating that
punitive damages not recoverable for contract breach, unless conduct is also a tort for which punitive
damages are recoverable); White v. Northwestern Bell Tel. Co., 514 N.W.2d 70 (Iowa 1994) (denying
punitive damages because the breach was also a tort); Storck v. Cities Serv. Gas Co., 634 P.2d 1319
(Okla. App. 1981) (stating that certain contracts breached can justify punitive damages if rooted in mal-
ice, fraud or oppression); Gower v. Cohn, 643 F.2d 1146, 1161 (5th Cir. 1981) (allowing punitive dam-
ages, under Georgia law, in a breach of contract action involving matters of fraud; but see GA. CODE
ANN. § 13-6-10 (1982) "[Elxemplary damages shall never be allowed in cases arising on contracts.");
Totz v. Continental Du Page Acura, 602 N.E.2d 1374 (Ill. App. 1992) (allowing punitive damages for
misrepresentation).
18. U.C.C. § 1-106(l) (emphasis added).
19. U.C.C. § 1-103 ("Unless displaced by the particular provisions of this Act, the principles of
law and equity . . . shall supplement its provisions"); see also 2 RoY R. ANDERSON. DAMAGES UNDER
THE UNIFORM COMMERCIAL CODE § 11:35 (1992); Royal Bus. Mach., Inc. v. Lorraine Corp., 633 F.2d
34 (7th Cir. 1980) (allowing punitive damages for breach of contract if the conduct is also tortious in
nature and punitive damages would serve the public interest by deterring others).
20. See HUNTER, supra note 2, 1 18.0313]. The actual manner in which the tort cause of action is
included may differ from state to state. For example, under the "Texas" approach, the plaintiff must al-
lege and prove the tort separately from the breach of contract; whereas under the "South Carolina" ap-
proach, the tort may be subsumed within the breach of the contract action (i.e. by alleging "fraudulent
breach"). See id.
21. See Sebert, supra note 9, at 1600-1607; see also ITzIoFF, supra note 6, at 7 ("As a general
rule, punitive damages are theoretically an available remedy for all civil causes of action involving ac-
tual malice or wanton behavior."). See generally Miller v. National Am. Life Ins. Co., 126 Cal. Rptr.
731 (Cal. App. 1996) (allowing punitive damages if an action is in tort as well as contract, upon a
showing of malice, fraud or oppression, though tort incidentally involves breach of contract); Horn v.
Guaranty Chevrolet Motors, 75 Cal. Rptr. 871 (Cal. App. 1969) (stating that fraud alone is an adequate
ground for awarding punitive damages in action for breach of contract).
1997] PUNITIVE DAMAGES IN CONTRACT ACTIONS

action, and recover punitive damages.2 Once the plaintiff prevails on the
tort claim, he is often able to recover both punitive damages and tradi-
tional compensatory damages for the breach of the contract.
This loophole has been used and approved by the courts of many
states.Y One reason is that judges are often concerned with returning par-
ties to the position they were in before the breach occurred and are espe-
cially interested in providing the real costs of the breach to the non-
breaching party. 24 Some courts are lenient in permitting tort and contract
remedies for breach of contract actions in order to avoid the persistent
problem of undercompensation of the non-breaching party, which is often
the result when only traditional contract remedies are permitted.25 By al-
lowing a tort action as well as a contract action, parties may be more
fully compensated for the disruption of their business that a breach of
contract may have caused. Such integrated actions have been allowed
when state law provides the Restatement loophole.26 Some scholars argue
that this is the most likely explanation for large damage awards in com-
mercial cases, stating, for example, that:
The imposition of tort liability enables courts to award damages far in
excess of those available under traditional contract law, including damages
for all proximately caused injury and punitive damages. []It is widely rec-
ognized that traditional remedies for breach of contract result in undercom-
pensation for injured plaintiffs. []The problem of undercompensation is in-
herent in a system of remedies that requires the nonbreaching party to
prove the certainty and foreseeability of damages, and permits virtually no
27
extra-economic relief.
The problem with allowing exemplary damages to make up for un-
dercompensation, however, is that it has the potential to overcompensate
more often than simply re-compensating the non-breacher. This may lead
to the unjust enrichment of a plaintiff who began with equal bargaining
power during the formation of the contract and should therefore be re-

22. See Timothy J. Sullivan, Punitive Damages in the Law of Contract: The Reality and the Illu-
sion of Legal Change, 61 Mm. L. REv. 207, 230-31, 236-37 (1977) (indicating the flexibility of the
terms "fraud," "willful tort," and the like often permit punitive damage awards in contract actions).
23. See supra note 17.
24. See Sandra Chutorian, Tort Remedies for Breach of Contract: The Expansion of Tortious
Breach of the Implied Covenant of Good Faith and Fair Dealing into the Commercial Realm, 86
CoLuM. L. REv. 377, 381 (1986).
25. See id. at 391-92, 399. See also Sebert, supra note 9, at 1565-66.
26. In sales contracts, where the U.C.C. applies, courts may still have the ability to allow tort el-
ements and punitive damages by applying section 1-103 of the U.C.C. and allowing the traditional
common law (or the Restatement) to act as a supplement to the U.C.C. See supra note 19; see also
HUNTEiR,supra note 2, 11 18.03[1], [3].
27. Chutorian, supra note 24, at 381 (footnotes omitted).
 JOURNAL OF LAW AND COMMERCE [Vol. 16:2:215

sponsible for the risk, which he accepted, that breach would occur in per-
formance of the contract.3 In addition to the problem of potential over-
compensation, allowing punitive damage awards only serves to punish
the breaching party and may have the effect of deterring future contract
formation. 9 While some courts undoubtedly allow for punitive damages
precisely for deterring breach, such deterrence works to discourage con-
tract formation and undermines the rationale of the efficient breach
theory. °

2. The Jury System Loophole

Another significant loophole that fosters punitive damage awards in
commercial breach of contract cases is the jury system, and the deference
afforded to juries in providing remedies.3 This deference is problematic
because juries may not be able to differentiate between the subtleties of
the contract action versus the tort action, thus leading to a blurring of the
lines that distinguish punitive and compensatory remedies.3 2 Often the
distinction and standards made in jury instructions are vague.33 Even
when a court instructs a jury to only give compensatory damages, juries
may over-extend this award out of sympathy for the non-breacher-again
illustrating the basic desire to reverse what is perceived as persistent un-
34
dercompensation of contract parties.
The lack of simple, clear-cut rules for juries awarding punitive dam-
ages might be dealt with by taking damage assessments out of the hands
35
of the jury altogether, and simply leaving damages issues to the judge.

28. For example, in a breach of contract suit by Pennzoil against Texaco, Pennzoil alleged the
very vague "tortious interference with contract." As a result, a 3 billion dollar punitive damage verdict
was imposed upon Texaco. See Sebert, supra note 9, at 1660 n.353 (citing Pennzoil Co. v. Texaco; Inc.,
729 S.W.2d 768 (Tex. Ct. App. 1987) (Court of Appeals reduced to 2 billion dollars). This case illus-
trates the potential for overcompensation in a situation where the parties had equal bargaining power
when they entered the contract.
29. See Chutorian, supra note 24, at 402; ITZKoFF, supra note 6, at 6.
30. See generally PosNER, supra note 3, at 108; Huwre, supra note 2, 1.03.
31. See Sebert, supra note 9. at 1670.
32. See Sullivan, supra note 22, at 237 (noting that there is no clear line between tort and con-
tract). The Pennzoil case also illustrates the inability of juries to separate tort from contract, as the $3
billion verdict indicates. Pennzoil, 729 S.W.2d 768.
33. For example, in People ex rel. Dep't of Transp. v. Grocers Wholesale Co., 262 Cal. Rptr.
689, 700 (Cal. App. 1989), the lower court merely instructed the jury to avoid "passion and prejudice"
in granting damages, and that punitive damages must bear a relation to actual harm. Although it va-
cated and remanded the punitive damage award because of lack of evidence of the defendants' financial
condition, see id., the Appellate court upheld these vague instructions as sufficient to ensure the jury
did not have unlimited discretion. See id. at 699.
34. See generally Sebert, supra note 9, at 1667.
35. See id. at 1671.
1997] PUNITIVE DAMAGES IN CONTRACT ACTIONS

Judges are better able to differentiate between compensation and exem-

plary relief, and can at least appreciate the theoretical prohibition against
punitive damages in contracts. 36 Another solution is simply to provide ju-
ries with maximum dollar or-"ceiling" amounts that may be awarded in
a given case. 37 Regardless of how it is viewed, however, this loophole of
jury power to determine damages is perhaps the most difficult to change,
because any tampering with a jury's ability to award damages may jeop-
38
ardize the entire jury system.
Overall, the two major loopholes to the prohibition of punitive dam-
ages in contract actions-the tort exception and jury deference-are so
large that the potential exists for these exceptions to swallow the rule.
Punitive damage awards are certainly acceptable in cases where actual
personal injury results from a breach of contract. Absent personal injury
in commercial contract actions, however, punitive damages have no
place, and the loopholes which permit them must be closed.

B. Closing the Door on Punitive Damages in InternationalContracts

The loopholes in American law that permit punitive damage awards
for breach of contract need to be closed in order to promote domestic
trade and commercial ties between U.S. companies. More importantly,
however, the loopholes must be closed in order to better serve interna-
tional businesses and their contract relationships with American compa-
nies and individuals. The loopholes pose a special threat to the involve-
ment of American business and industry in international commerce for
two reasons.

1. The Deterring Effect of Punitive Damages on InternationalParties

The potential of facing large punitive judgments in the United States
is a threat and a deterrent to international businesses seeking to develop
commercial ties with American companies. The American punitive dam-
ages scheme indicated above is somewhat foreign to international parties
who do not have to face availability of such damages in their home
countries.3 9 European laws generally limit remedies to compensatory

36. But see supra notes 24-28 and accompanying text (regarding judges awarding punitive dam-
ages to remedy the problem of undercompensation in contract actions).
37. See Sebert, supra note 9, at 1675.
38. See Bozeman v. Busby, 639 So. 2d 501, 503 (Ala. 1994) (per curiam) ("The award of puni-
tive damages is grounded in the right to trial by jury, and the right to trial by jury obviously cannot
serve as a basis for interfering with the jury's verdict.").
39. See generally G.H. TRErrEL. REMEDIEs FOR BREAcH OF CoNTRAcr: A COMPARATIVE ACCOUNT
 JOURNAL OF LAW AND COMMERCE [Vol. 16:2:215

damages or specific performance, consistent with the policy of uniformity

espoused by the CISG and the European Economic Community" From
the standpoint of international trade, the American system of allowing
punitive damages may prevent international (particularly European) par-
41
ties from entering into contracts with American businesses.
The recent case of BMW of North America v. Gore4 2 serves as an il-
lustration of the perceived threat American punitive damage awards pose
to international entities. In BMW, the plaintiff, Dr. Gore, sued BMW for
failing to disclose upon his purchase of a BMW automobile that the exte-
rior of the car had undergone minor refinishing after shipment. 43 Dr.
Gore's suit alleged breach of contract, fraud and suppression." An Ala-
bama jury awarded Dr. Gore four million dollars in punitive damages and
four thousand dollars in compensatory damages. 45 The punitive damage
award was reduced by the Alabama Supreme Court to two million dol-
lars, but even this reduced award was 500 times the actual harm suffered
by the breach.4 The United States Supreme Court recently found this pu-
nitive damage award to be "grossly excessive," but failed to indicate
what would be a more appropriate amount and simply remanded the case
to Alabama. 47
78 & n.14 to 79 (1988) (noting that punitive damages are generally not available for contract actions in
Great Britain; punitive damages are not awarded in Scotland); Franco Ferrari, ComparativeRuminations
on the Foreseeability of Damages in Contract Law, 53 LA. L. REv. 1257 (1993). In France, Italy and
Germany, for example, the law clearly distinguishes between contractual and tortious liability. See id. at
1261, nn. 8-9, 1263. But see HoNNoLD, supra note 12, § 407 (stating that Article 1150 of the French
Civil Code limits contract damages to those that are foreseeable, but allows exemplary damages if the
breach was willful).
40. See Treaty Establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S. 1I,
arts. 1-2, see also Murphy, supra note 10, at 730-34 (noting that most attempts to unify sales law has
been done by Western European nations); Rosen, supra note 10, at 268.
41. For example, Axminster Electronics, a small British firm that manufactures baby monitors,
will not do business in the United States, for fear of large punitive damage awards and the company's
inability to obtain sufficient insurance against such awards. See No Paint, No Gain: Product Liability,
ECONOMIST, May 25-31, 1996, at 67 [hereinafter ECONOMIST].
42. BMW of N. Am., Inc. v. Gore, 116 S. Ct. 1589 (1996) [hereinafter BMW].
43. See id. at 1593.
44. See Brief for Petitioner at k, BMW (No. 94-896).
45. See BMW, 116 S.Ct. at 1593-1594.
46. See Brief for Petitioner, BMW (94-896) at 14; see also BMW, 116 S. Ct. at 1595.
47. See BMW, 116 S. Ct. at 1604. The Court held punitive damages must be based on three fac-
tors in determining whether they are excessive: (1) the degree of reprehensibility of the defendant's
conduct, see id. at 1599; (2) the ratio between the plaintiff's compensatory damages and the amount of
exemplary damages, see id. at 1601; and (3) the difference between the punitive damage award and the
civil and criminal sanctions that would be imposed for comparable conduct, see id. at 1603. Since
BMW's alleged breach was not actually significant upon weighing these factors, the Court concluded
the punitive damages were excessive. See id. at 1604. However, the Court did not propose exactly how
punitive damages should be assessed. Scholars and commentators to date have generally agreed that,
19971 PUNITIVE DAMAGES IN CONTRACT ACTIONS

While the actual entity sued was "BMW of North America," BMW
is an international company, headquartered in Germany. 4 Thus, the con-
cern after this case is that other international businesses will look at the
enormous punitive damage award in Alabama against BMW and fear for
their own liability should they face suit in the United States for breach of
a contractual obligation. 49 Limits on punitive damages under the CISG
should be applied to protect these international businesses from punitive
damages in the sales contract context.50 However, crippling awards like
those in BMW may be enough for international companies to doubt the
commitment of the United States to apply the CISG to contract cases. As
a result, foreign businesses will be deterred from entering into commer-
cial contracts with American companies altogether.
In the long run, the United States is only closing itself to lucrative
contracts and economic opportunity by allowing the threat of exemplary
damages in domestic law to continue to push away international busi-
ness.51 The result will be a continued lack of diversity and stagnation in
the American economy. As one legal commentator recently remarked:
The lack of clear nationally uniform standards against which busi-
nesses can gauge potential liability risks increases avoidance costs includ-
ing additional insurance and legal costs. These costs of avoiding legal un-
certainty restrain our international competitiveness, deter investments in
research and development, and fail largely to produce 5
significant deter-
rence or improved safety benefits (citations omitted).
To prevent these costs, the United States needs to change its punitive
damages scheme in order to attract new international business and to stay
competitive as we move into the next century.

2. Compliance with the CISG

The most important reason why the United States needs to develop
a plan to close the loopholes that allow for punitive damages in the sales

while the decision is welcome, it is simply too narrow. See, e.g., Mary Ellen Fox, Punitive Damages
Decision: No Hard and Fast Rule, PA. L WK.Y., June 10, 1996 at 7; Pamela Anagnos Liapakis, Don't
Rely Yet on the Gore Decision, NAT'L L.. June 17, 1996, at A23.
48. See BMW, 116 S.Ct. at 1593 nn. 1-2.
49. See, e.g., Garth Alexander, Litigate and Make Your Fortune, TIMEs (LONDON), Nov. 12, 1995.
ECONOMIST. supra note 41, at 67.
50. See generally infra notes 59-62 and accompanying text.
51. See Charles D. Stewart & Philip G. Piggot, Punitive Damages Since Pacific Mutual Life In-
surance Co. v. Haslip, 16 Am.J. rRIAL ADvoc. 693, 697 (1993) ("[If jury awards continue to increase,
corporate America will not be able to aggressively compete in today's international marketplace.").
52. Dick Thornburgh, Punitive Damages Ruling: Half an Answer?, PA. L. WKLtY., Aug. 5, 1996,
at 4.
 JOURNAL OF LAW AND COMMERCE [Vol. 16:2:215

contract realm is to comply with the CISG. The CISG was ratified by the
United States on January 1, 1988. 53 It applies to all contracts for the sale
of goods between parties from different countries.-' The CISG does not
apply to contracts for "personal use" products, or to personal injury lia-
bility provisions. 55 Contracting parties may, however, choose not to fol-
low the CISG in any given contract through an explicit provision. 56
The CISG was drafted with the underlying policy of unifying the di-
verse commercial law systems of the world in an attempt to foster in-
creased international trade and economic growth. 7 This goal is indicated
in the opening provisions of the Convention:
Considering that the development of international trade on the basis
of equality and mutual benefit is an important element in promoting
friendly relations among States,
Being of the opinion that the adoption of uniform rules which govern
contracts for the international sale of goods and take into account the dif-
ferent social, economic and legal systems would contribute to the removal
of legal barriers in international trade and promote the development of in-
ternational trade, [the parties have agreed to the CISG. 58

By ratifying the CISG, the United States agreed to uphold this policy of
uniformity. Yet by maintaining uncertain and diverse punitive damage
schemes domestically, it will not be able to maintain its commitment to
uniformity in the future.
The Convention's general provision on damages is found in Article
74, and states:
Damages for breach of contract by one party consist of a sum equal
to the loss, including loss of profit, suffered by the other party as a conse-
quence of the breach. Such damages may not exceed the loss which the
party in breach foresaw or ought to have foreseen at the time of the con-
clusion of the contract, in light of the facts and matters of which he then
knew or ought to have known, as a possible consequence of the breach of
contract.59

This provision generally asserts the traditional rule espoused in Hadley v.

53. Under the Supremacy Clause of the Constitution, the CISG, as a treaty, prevails over state
law in international transactions. See Jeffrey S. Sutton, Measuring Damages Under the United Nations
Convention on the International Sale of Goods, 50 O1o ST. LJ. 737, 737 (1989).
54. See CISG, supra note 10, art. 1; see also HoN.oLD, supra note 12, § 12.
55. See CISG, supra note 10, arts. 2, 5; see also Sutton, supra note 53, at 739.
56. See CISG, supra note 10, art. 6; see also Sutton, supra note 53, at 740.
57. Murphy, supra note 10; see generally Rosett, supra note 10.
58. CISG, supra note 10 (Opening Paragraph).
59. CISG, supra note 10, art. 74.
1997] PUNITIVE DAMAGES IN CONTRACT ACTIONS

Baxendale of limiting contract damages to compensatory relief. ° The of-

ficial commentary of the CISG reflects the intent of the Convention's
framers to restrict relief to foreseeable damages that simply re-
compensate and to reject tortious actions and punitive damages.
Damages can be claimed no matter whether the breach of contract has
been culpably committed intentionally or negligently or in any other way.
The mere fact of a breach of contract is sufficient. Compensation for dam-
ages is, however, limited by the foreseeability of the loss, on the one hand,
and by the exemptions provided for in articles 79 and 80, on the other....
Article 74 does not provide for multiple claims for damages as it is
given, e.g. as punitive damages, in American law.61
The CISG does, how-
ever, not exclude relevant contractual agreements.

Even more indicative of the CISG's strict adherence to the principle of

limiting damages to compensation is found in the 1978 Draft of the
Convention.
The amount of damages that can be recovered by the party not in
breach 'may not exceed the loss which the party in breach foresaw or
ought to have foreseen at the time of the conclusion of the contract ....
This principle of excluding the recovery of damages for unforeseeable
losses is found in the majority of legal systems.
[]In some legal systems the limitation of damages to those 'which the
party in breach foresaw or ought to have foreseen at the time of the con-
clusion of the contract' is not applicable if the non-performance of the
contract was due to the fraud of the
62
non-performing party. However, no
such rule exists in this Convention.

Thus, the explicit denial of punitive damages in actions based on interna-

tional sales contracts is in conflict with the American system, where ex-
emplary damages are often available in contract actions. This conflict
must be resolved if the United States is to maintain its status as a leader
in world trade, and if our legal system is to sustain its commitment to
the CISG.

C. The U.S. Must Abandon the "Loopholes" and Follow the CISG

Unless parties agree to include a penalty provision in the contract,

60. See Sutton, supra note 53, at 743; see also HO NOLD, supra note 12, § 407. But see Ferrari,
supra note 39, at 1266-69 (offering contrasting interpretations of Hadley and Article 74).
61. ENDERuam & MASKOW, supra note 12, at 297-99, citing Commentary on the United Nations
Convention on Contracts for the International Sale of Goods, 11 Apr. 1980 [hereinafter Commentary]
(emphasis added); see also UNCrTRAL supra note 11, at 449-50.
62. UNC1TRAL supra note 11, at 449-50 (emphasis added).
 JOURNAL OF LAW AND COMMERCE [Vol. 16:2:215

the CISG forecloses the possibility of punitive damage awards. 6a Ameri-

can law, where punitive damages are available, is therefore in direct con-
flict with the CISG. This conflict creates the potential for American
courts, when faced with a CISG contract case, to apply the Convention
within the limited context of state law.64 Because the CISG resembles a
civil law code, and since U.S. state law is accustomed to operating on a
common law system, a dangerous potential exists that American courts
65
will interpret the CISG through a domestic, common law approach.
Such a result will undermine the effectiveness and applicability of the
CISG on the issue of contract remedies.
Although there have been very few CISG cases in the United States
to date, the number of commercial conflicts under the Convention is
growing, and the United States must apply the CISG consistently and
wholeheartedly.66 This consistency of application will be impossible if
domestic law is not instep with the CISG. There are several reasons why
the conflict will be detrimental from both legal and business perspectives.
First, the conflict between the damages schemes of the CISG and
domestic law is detrimental because it permits two different legal systems
for contract actions-a domestic contract system, where actions for breach
may be exposed to punitive damage liability, 67 and a system for interna-
tional contracts, where parties would never be subject to punitive dam-
ages .6 This system is currently in place in the United States, and it is
highly impractical. Moreover, it is often difficult to determine whether
some companies are "international" (i.e. not American) in scope, be-
cause a single international entity may be incorporated both in the United
States and abroad.69 Thus, it may be impossible in some circumstances to
determine which contract law (the CISG or American law) the party

63. See id.

64. See id. at 1.
65. See Joanne M. Darkey, A U.S. Court's Interpretationof Damage Provisions Under the U.N.
Convention on Contractsfor the InternationalSale of Goods: A PreliminaryStep Towards an Interna-
tional Jurisprudence of CISG or a Missed Opportunity?, 15 JL. & Cot. 139, 141-42 (1995).
66. An example of a U.S. court's interpretation of the CISG is in Delchi Carrier, SpA v. Rotorex
Corp., No. 88-CU-1078, 1994 WL 495787 (N.D.N.Y. Sept. 4, 1994). There, the District Court, applying
the CISG, awarded Delchi (an Italian corporation) compensatory and consequential damages for a
breach of contract on the part of defendant Rotorex. See id. at *4-*7. Delchi did not ask for punitive
remedies, but the court was liberal in awarding to Delchi most of what it requested by way of dam-
ages. This reflects a willingness on the part of American courts to take on an expansive approach to
damages in CISG cases. See also Darkey, supra note 65, at 143-152.
67. See supra notes 14-30 and accompanying text.
68. See supra notes 59-62 and accompanying text.
69. See generally BMW of N. Am., Inc. v. Gore, 116 S. CL 1589, 1593 n.2 (1996). BMW is a
corporation in both the United States and Germany.
1997] PUNITIVE DAMAGES IN CONTRACT ACTIONS

must submit to upon a breach of contract action. 70

Second, maintaining two conflicting systems of contract remedies is
unfair to American businesses. A U.S. corporation who breaches a con-
tract to sell a product to an international company will only be liable for
compensatory damages under the CISG;7 ' but if the exact same contract
is breached against another American company, the result may be hefty
punitive damages. 72 The overall effect for American companies is uncer-
tainty and inconsistency, which has led to enormous legal costs incurred
to combat the threat of punishment. 73 The effect of increased costs has
also begun to result in fewer innovations, and disincentives for contract
formation. 74 The overall result is that America's ability to uphold its
commitment to the Convention and the goals of uniformity is being se-
verely undermined.

Il. SOLUTIONS TO THE PROBLEM OF PuNIvE DAMAGES

The tension outlined above between the availability of punitive dam-

ages under current U.S. law and the foreclosure of such damages under
the uniform law of the CISG demands prompt attention and change. The
basic remedy to this conflict is to bring the domestic approach in line
with the CISG, thus providing a more defined body of law for con-
tracting parties and judges. There are three general solutions to effectuate
this change.

A. Judicial Change

The first solution would be a coordinated effort on the part of fed-

eral and state courts to reform the punitive damages scheme in breach of
contract actions. Most notably, courts must begin to overlook the loop-
holes that allow inclusion of tort elements into commercial contract
cases, and instead re-adopt the strict rule of Hadley.75 Indeed, the Court's
decision in BMW may be a signal that a systematic rethinking of the in-

70. See generally Hoi'iou, supra note 12, § 42.

71. See supra notes 59-62 and accompanying text.
72. See supra notes 14-38 and accompanying text.
73. See generally Alexander, supra note 49 (commenting on the large legal costs for U.S.
companies).
74. See John Gould, Needed Federal Tort Reform Goes Into Limbo, TELEGRAM & GAZETrE
(Worcester, Mass.) Aug. 1, 1996, at A9. More than one-fifth of Massachusetts companies responding to
a survey had discontinued product development and production due to the costly burden of the threat of
punitive damages. See id.
75. See Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. Ch. 1854).
 JOURNAL OF LAW AND COMMERCE [Vol. 16:2:215

terpretation of contract remedies has begun. 76 At the very least, the Court
recognized the need to curb grossly excessive damages, and implicitly
hinted at the need for states to re-examine exemplary damage awards. 77
Likewise, in the international contract context, judges must be sensitive
78
to the CISG and take care not to alter it with inconsistent state law.
The problem with this solution, however, is that it may be virtually
impossible to synchronize a movement on the part of courts nationwide.
Outside the CISG, no domestic judicial or legislative mandate exists to
stop awards of punitive damages in these contract cases. Therefore, we
would be left with only a haphazard attempt on the part of courts to
switch back to a strict application of Hadley. Even assuming such a re-
form movement could be coordinated on the part of courts nationwide,
reverting back to the traditional rule, to bring U.S. law in step with the
CISG, would most likely take many years, which may be too little, too
late.
Another problem in attempting to reform damages at the judicial
level is the general deference afforded by most courts to the doctrine of
stare decisis. 79 Many judges will feel bound to follow the current trend
which allows for a flexible system that makes punitive damages available
in commercial cases. Overall, though this solution could work to solve
the problems of punitive aamages, but its implementation may be so im-
practical as to render it virtually impossible at the present time.

B. State Legislation
A second solution to the punitive damages problem would be a re-
form movement in the state legislatures. Since the exceptions which al-
low for punitive damages come out of state law, an organized movement
by all states to pass legislation would eliminate completely the opportu-
nity to receive punitive damages in contract cases. Some states have
taken steps in this direction.80 However, until all state law is consistent,

76. See generally BMW of N. Am., Inc. v. Gore, 116 S. Ct. 1589 (1996).
77. See id.
78. See supra notes 64-65 and accompanying text.
79. See BLACK'S LAW DIcTIONARY 1406 (6th ed. 1990).
80. For instance, New Hampshire has attempted to outlaw punitive damages. See N.H. REv.
STAT. ANN. § 507:16 (1995) ("No punitive damages shall be awarded in any action, unless otherwise
provided by statute."). Other states which have attempted to limit punitive damages in general include:
Florida, which caps punitive damages at three times compensatory damages, see FLA. STAT. ANN.
§ 768.73(1)(a) (West Supp. 1997); Nevada, which caps punitive damages at three times compensatory
damages of $100,000 or more, or $300,000 where compensatory damages are less than $100,000, see
NEV. REv. STAT. § 42.005.1 (1996); and Virginia, which caps punitive damages at $350,000, see VA.
CODE Am. § 8.01-38.1 (1996).
19971 PUNITIVE DAMAGES IN CONTRACT ACTIONS

the lack of uniformity persists, and as a nation we continue to maintain

conflicting standards for domestic and international sales contracts.
The major problem with this solution, similar to the problems with
judicial reform, is coordination. It is nearly impossible to "force" states
to act on their own to comply with the principle of uniformity and to re-
vise their rules. Even if states did enact legislation capping or eliminating
punitive damages in contract actions, it is inevitable that no two states
would enact the same limits. Thus, the goals of uniformity and certainty
will most likely not be accomplished if the revision of punitive damages
is left to the states.

C. Federal Change-A Uniform Federal Remedy Scheme

The final and most appealing solution to the problem of punitive
damage awards for contract actions would be a federal, uniform statute
that embraces the traditional rule of limiting remedies to compensatory
damages. Legislators, litigants and corporate America have been advocat-
ing a reform of tort remedies for a long time. The recent Common Sense
Product Liability Legal Reform Act of 199681 proposed a cap on punitive
damage awards and a uniform formula for calculating money damages in
product safety cases. This Act reflects the increased awareness of the
harm punitive damages produce.8 2 The bill was vetoed by President Clin-
ton, primarily because he feared that limits on punitive remedies in tort
actions would interfere with personal injury cases and "prevent many
persons from receiving full compensation for injury."'8 3 However, a more
narrow, uniform rule expressly eliminating punitive damages in commer-
cial contract cases alone can be formulated, which would not cause sub-
stantial harm to, or effect damage awards in, personal injury actions.
A uniform, federal rule would result in predictability and certainty
for American businesses. Perhaps even more importantly, a national pro-

81. H.R. 956 104th Cong. (1995). In Section 2 of the bill, Congress made findings such as the
following: "excessive, unpredictable, and often arbitrary damage awards and unfair allocations of liabil-
ity have a direct and undesirable effect on interstate commerce by increasing the cost and decreasing
the availability of goods and services ... ;- "because of the national scope of the problems created by
the defects in the civil justice system, it is not possible for the States to enact laws that fully and effec-
tively respond to those problems. ... Section 108 of the bill attempted to create uniform standards
for the award of punitive damages, most notably by placing a "cap" on exemplary damage awards not
to exceed the greater of two times the compensatory award or $250,000.
82. See id. § 2.
83. Editorial, Keep "Tort Reform" Veto, AMEMCAN-STATESMAN (Austin, Tex.), May 7, 1996, at
A8 (citing key portions of President Clinton's reasons for veto). The same bill, however, was re-
introduced in the Senate in January, 1997. See Kenneth Jost, Tort Issues Resurrected, A.B.A. J., Mar.
1997, at 18.
 JOURNAL OF LAW AND COMMERCE [Vol. 16:2:215

hibition on punitive relief would put U.S. domestic law in sync with the
CISG.84 A single, uniform standard for damages would thus be estab-
lished for all contracts-domestic and international. Finally, a uniform fed-
eral standard would ease the burden on courts and juries of applying the
law of contract remedies to all commercial cases. The problem of defer-
ring td juries and risking huge punitive damage awards can be eliminated
by a federal statute prohibiting any punitive damages in commercial con-
tract cases. For these reasons, a federal law prohibiting exemplary dam-
ages in contract cases is the most sensible and workable solution to the
problems these damages create in the United States.
The obvious problem with this solution, however, is its potential for
undermining state sovereignty. Under the Tenth Amendment, states have
the power to make law not reserved for Congress or the Executive
branch in Constitution.8 5 This authority includes the power to create and
maintain substantive laws on contract and tort remedies. A federal law
requiring a limit on damages may be viewed as an interference with the
rights of individual states to dictate when and how punitive damages will
be allowed in contract actions.
While the states rights argument is legitimate, Congress nevertheless
has the power to create such a limitation on damages under the Com-
merce Clause of the Constitution.86 A national standard limiting punitive
damages, particularly in sale of goods contracts, would regulate the man-
ner and amount of trade between all businesses of different states, and,
indeed, different nations. Congress has never been shy about extending
this power over the states, and there is no reason it should refrain from
acting in this area of the law as well.8 7 A federal, uniform law eliminat-
ing the loopholes for punitive damages in commercial cases will accom-
plish the goal of bringing the United States instep with the CISG, and
will benefit the nation's economy as a whole.

84. One suggestion, of course, is to have the federal law mirror precisely the CISG's prohibition
on punitive damages. See generally CISG, supra note 10, art. 74.
85. U.S. CoNsr. amend. X.
86. U.S. CoNsT. art. I, § 8, cl. 3. See also Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 194-96
(1824) ("[The Commerce Clause] power, like all others vested in Congress, is complete in itself, may
be exercised to its utmost extent, and acknowledges no limitations, other than are prescribed in the
Constitution."); Rosett, supra note 10, 300-02 (discussing the Commerce power and the Treaty power
of Congress).
87. For some expansive interpretations upholding Congressional laws based on the Commerce
Clause, see Wickard v. Filburn, 317 U.S. 111 (1942); United States v. Darby, 312 U.S. 100 (1941);
Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241 (1964).
1997] PUNITIVE DAMAGES IN CONTRACT ACTIONS

IV. CONCLUSION

We all learn in Contracts that the black letter of the law prohibits
punishment of the breacher in contract actions. Practice and reality, how-
ever, are quite different from the black letter law inside the head of
every lawyer and law student. As this Comment has revealed, the reality
is that punitive damages are often awarded in commercial contract cases,
provided only that some vague tort is alleged and proven alongside the
breach.18 The practice of awarding punitive damages is in conflict with
the CISG and severely undermines America's commitment to uniformity
and certainty in the law. A return to the black letter concept of prohibit-
ing punitive damage awards is necessary if the United States is to main-
tain integrity among business entities at home and abroad. Whether the
prohibition of punitive damages is effectuated through judicial or legisla-
tive means, the bottom line is that a change is long overdue. Until that
change occurs, the legal community must make itself aware of the reality
of these awards in commercial contract actions, and work to protect cli-
ent interests accordingly. Hopefully, a solution to the punitive damages
problem will be underway as domestic and international trade expands
into the next century.

Amy A. Kirby

88. See supra notes 14-30 and accompanying text.