Citation. 841 F.2d 742 (7th Cir. 1988)
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Brief Fact Summary.
Two parties entered into a franchise agreement whereby one promised that its credit cards would only be used at the others truck stops on a certain stretch of highway. The credit card company allowed other truck stops in the area to use its credit card.
Synopsis of Rule of Law.
Under Indiana law, punitive damages are available in breach of contract actions if along with the breach of contract there is evidence of "fraud, malice, gross negligence or oppression."
The Plaintiffs, Patton and others (the "Plaintiffs"), operated truck stops. The Defendant, Mid-Continent Systems, Inc. (the "Defendant"), entered into a franchise agreement, whereby in an exclusive area, the Defendant promised to franchise only truck stops operated by the Plaintiffs. Under the franchise agreement, only Plaintiffs' truck stops would have the capability of accepting the Defendant's credit card. The court found that the Defendant breached their obligation under the agreement by franchising other truck stops, including one called Truck-O-Mat. The Plaintiffs were awarded compensatory damages plus $2,250,000 in punitive damages. The district judge reduced the punitive damage award to $100,000.
Was the punitive damage award appropriate?
No. Under Indiana law, punitive damages are available in breach of contract actions if along with the breach of contract there is evidence of "fraud, malice, gross negligence or oppression." The court recognizes that even if a breach of contract is deliberate, it is not necessarily blameworthy. As such, in certain instances efficient breach of contract is encouraged. For example, "[t]he promisor may simply have discovered that his performance is worth more to someone else. If so, efficiency is promoted by allowing him to break his promise, provided he makes good the promisee's actual losses. If he is forced to pay more than that, an efficient breach may be deterred, and the law doesn't want to bring about such a result."
• The court also recognizes certain other breaches of contract are not involuntary or efficient, but opportunistic. In other words "the promisor wants the benefit of the bargain without bearing the agreed-upon cost, and exploits the inadequacies of purely compensatory remedies (the major inadequacies being that pre- and post-judgment interest rates are frequently below market levels when the risk of nonpayment is taken into account and that the winning party cannot recover his attorney's fees)." Breaches in this category are those that the Indiana courts have allowed punitive damage awards.
• Here, the facts present do not rise to the level that punitive damages are appropriate. There is no evidence that the Defendant's franchising of Truck-O-Mat was either opportunistic or deliberate. Instead, it was an honest mistake based on an unclear description of the exact territory the franchise agreement with the Plaintiff entailed. However, the Defendant did not cure the breach a year after it was called to its attention by the Plaintiff, which converted it from an innocent, to a deliberate breach. Although deliberate, the court observes that clear and convincing evidence does not show that it was "malicious, fraudulent, oppressive, or even grossly negligent." As such, an award of punitive damages was not appropriate.
This case offers an informative look at one state's take on the role of punitive damages in contract actions.