Punitive Damages, Liquidated Damages, and Clauses Penale in Contract Actions: A Comparative Analysis of the American Common Law and the French Code Civil

Although American common law allows punitive damages for reckless or intentional torts, it will neither allow a jury to assess punitive damages for breach of contract nor permit enforcement of a contractual damages clause that is deemed to be punitive. This approach is rooted in an early Chancery practice of granting equitable relief from oppressive penal bonds and has been more recently justified as a means of facilitating efficient breach. Economic efficiency, however, can be accomplished even if punitive damages could be assessed for intentional breach, because the parties would have an incentive to negotiate a release from the first contract to enable both to share in the surplus offered by an intervening contractual opportunity. Moreover, negotiation of an enforceable penalty clause would allow some parties to maximize their utility by exchanging a signal of assurance of performance for a premium fee. Additionally, the French experience invites a fresh look, because – although it generally disallows punitive damages of a judicial origin for any civil wrong, tort or breach of contract -- it honors freedom of contract and the autonomy of the parties by enforcing a contractual penalty clause (although the court may reduce an excessive contractual penalty). Taking a cue from the French approach, American courts and legislatures should reconsider their refusal to sanction freely negotiated penalty clauses and enforce them to the extent that they permit the parties to maximize their collective utility