Exemplary Damages in Equity: A Law and Economics Perspective

In Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298, the New South Wales Court of Appeal held that exemplary (or punitive) damages are not available for breach of fiduciary duty or other equitable obligation. The decision runs counter to authorities in Canada, New Zealand and some U.S. states. Punitive (exemplary) damages is a hotly debated topic in the United States and it has attracted considerable interest among law and economics scholars, particularly in the tort litigation context. This article analyzes the Digital Pulse case from a law and economics perspective. Polinsky and Shavell (among others) argue that the function of punitive damages is to achieve optimal deterrence in cases where the probability that the plaintiff will discover and successfully litigate the defendant’s wrongdoing is less than 1. Given the high costs of monitoring fiduciary behaviour, it might be tempting to conclude that exemplary damages should be routinely awarded for breach of fiduciary obligation. The article explains why this view is wrong. On the other hand, given the availability of gains-based remedies (the account of profits and the like) for breach of fiduciary obligation, it might be tempting to conclude that exemplary damages are never justified in fiduciary cases. The article explains why this view is wrong too. The main conclusions are that: (1) exemplary damages should be available for breach of fiduciary duty and the like, but not as a matter of course; and (2) exemplary damages were probably not warranted in Digital Pulse itself.