The U.S. Supreme Court just released its decision in Exxon Shipping Co. v. Baker (see http://www.supremecourtus.gov/opinions/07pdf/07-219.pdf), an appeal by Exxon in respect of a $5 billon award of punitive damages made against it by a civil jury arising from the infamous 1989 oil spill near Alaska.  The $5 billion award was reduced to $2.5 billion by the Ninth Circuit, and Exxon argued before the Supreme Court that the award should be reduced further. The Court agreed and found that the award was excessive as a matter of maritime common law. Thus, the punitive damages award was reduced to an amount equal to the sum awarded in compensatory damages ($507.5 million). In general, the Supreme Court found that a growing problem with punitive damage awards is their “stark unpredictability”. Courts are concerned with fairness as consistency, and the available data suggested that the spread between high and low individual awards was unacceptable. The spread in state civil trials was great, and the outlier cases subjected defendants to punitive damages that dwarfed the corresponding compensatories. The Supreme Court further stated that a penalty scheme ought to threaten defendants with a fair probability of suffering in like degree for like damage. In response to this unpredictability, the U.S. Supreme Court established a standard for assessing maritime punitive damages. It rejected a standard based on verbal formulations or by setting a hard-dollar cap. Instead, it opted to peg punitive awards to compensatory damages using a ratio. In maritime cases, the Court held that a 1:1 ratio was a fair upper limit.  

The U.S. Supreme Court’s approach is quite different from the approach which has been followed in Canada. The leading Canadian case is the Supreme Court of Canada’s decision in Whiten v. Pilot Insurance Co. In Whiten, a jury award the Plaintiff $1 million in punitive damages due to Pilot’s unfounded allegation that the Plaintiff had set her own home on fire. The Plaintiff had sued Pilot under a home insurance policy, and was also awarded $318K in compensatory damages. The Ontario Court of Appeal reduced the punitive damage award to $100K, holding that the jury’s award was excessive. Before the Canadian Supreme Court, Pilot defended the reduction in the award, and warned against the “Americanization” of Canadian law (via high punitive awards) that, if adopted, would bring the administration of justice in this country into disrepute. The Supreme Court rejected this argument, and restored the original $1M punitive award. Although it would not have itself awarded such a sum, it nonetheless found that the award was within “rational limits”. However, central to this decision was the Supreme Court’s observation that in the U.S., ratios had not been adopted and typically punitive awards there were 3-4 times the award for compensatory damages. The $1 million award in Whiten  was within that range. Accordingly, the Canadian Supreme Court, desiring a more predictable method for assessing the quantum of punitive awards, established a verbal formula requiring that punitive damages be assessed in an amount reasonably proportionate to such factors as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant.

Given the U.S. Supreme Court’s decision in Exxon, particularly its rejection of a verbal formula and adoption of a 1:1 ratio between punitive and compensatory damage awards, it may be only a matter of time before Canadian courts are once again asked to look at the concept of ratios. Whiten was decided in 2002, and since then the U.S. has clearly trended towards ratios and tighter mathematical formulas. Exxon may provide Canadian insurers and corporate defendants with sufficient ammunition to re-visit the issue of ratios in relation to punitive damage awards.

The Whiten decision can be found at CanLII:

http://www.canlii.org/en/ca/scc/doc/2002/2002scc18/2002scc18.html 

Raj K. Datt