South-Western Legal Studies in Business

Punitive Damages Allowed if Tort of Fraud Shown Beyond Breach of Contract
Description

California high court held that in a case where a contract was breached, and damages were awarded for the breach, since the plaintiff also showed fraud, which is a tort, by the defendant, there could be punitive damages in addition to the compensatory damages for breach.

Topic Contracts
Key Words

Breach; Economic Loss Rule; Misrepresentation; Fraud

C A S E   S U M M A R Y
Facts

Robinson makes helicopters that use sprag clutches made by Dana. All aircraft markers must have certificates from the Federal Aviation Administration that sets the design of aircraft as of the date of certificate issue. The copters required a specific clutch from Dana. Robinson had bought thousands of clutches from Dana and had a failure rate of 0.03%. Dana changed its manufacturing process, which reduced the hardness of the clutch. It did not inform Robinson or the FAA. Dana continued to provide certificates for the clutch under the previous production method. Unaware of the change, Robinson used about a thousand of the new clutches, which had a failure rate of 9.86%. There were no crashes, but customers were not pleased. The FAA required Robinson to recall all copters made with the newer clutch and install the superior model. The expense was over $1.5 million. Robinson sued. The jury awarded $1.5 million compensatory damages and $6 million punitive damages. Dana appealed. The appeals court held that under the economic loss rule, Robinson could not collect punitive damages. Robinson appealed.

Decision

Reversed. The economic loss rule provides that where a buyer’s expectations in a sale are frustrated because the product is not working properly, the remedy is said to be in contract alone, and not in tort, because only economic losses have been suffered. However, the tort of fraud claimed here goes beyond breach of contract. There is a tort when the conduct is clearly a deviation from socially useful business practices. The public interest in improving commerce is advanced by punishing intentional misrepresentation or fraud to deter such behavior in the future. Hence, punitive damages were justified in this case since fraud was shown.

Citation

Robinson Helicopter Co. v. Dana Corp., 120 P.3d 268 (Sup. Ct., Calif., 2004)

Back to Contracts Listings

©1997-2007  SW Legal Studies in Business. All Rights Reserved.