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Recovering Punitive Damages in Tennessee Breach of Contract Cases

Can you recover punitive damages in Tennessee for breach of contract? It is difficult, but not impossible.  Moreover, there is little published case law on the subject, and, as discussed below, there is one major question about punitive damages in breach of contract cases which has yet to be fully explored and answered by Tennessee courts.

A good place to start is a summary of some Tennessee cases where punitive damages were requested for breach of contract.

Riad v. Erie Insurance Exchange (Tenn. Ct. App. 2013):  In this case, the plaintiff alleged the defendant insurance company was liable for breach of contract, bad faith failure to pay and for violating the Tennessee Consumer Protection Act.  After a trial, the jury assessed punitive damages against the defendant of $1.5 million dollars.  (It assessed compensatory damages of $343,430).

While regurgitating the same phrase used in previous Tennessee cases that punitive damages are “generally not available in breach of contract cases,” the court upheld the award of punitive damages. It did so by pointing to the seminal punitive damages case in Tennessee, Hodges v. S.C. Toof & Co. (Tenn. 1992).  In Hodges, the Supreme Court of Tennessee held that, to recover punitive damages, the defendant must have acted intentionally, fraudulently, maliciously, or recklessly.  Notably, Hodges was not a breach of contract case.

Dog House Investments, LLC v. Teal Properties, Inc. (Tenn. Ct. App. 2014): In this case, the plaintiff alleged breach of contract and promissory fraud.  (A defendant is liable for promissory fraud if it can be proven that, at the time the defendant made a promise, it had no present intent to fulfill that promise.)  The Court of Appeals of Tennessee held that the breach of contract in this case did not rise to a level of egregiousness warranting an award of punitive damages.  I think most people would agree that the conduct of the defendant in this case was every bit as egregious as the conduct of the defendant in the Riad case.  In the Dog House case, the court seemed to say that, in order to receive punitive damages for breach of contract, there must be some fraud in addition to a breach of contract. Notably, in this case, the court allowed the punitive damages verdict to stand because the trial judge had found that the defendant not only breached the contract, but also, committed promissory fraud.

Next Generation, Inc. v. Wal-Mart, Inc. (Tenn. Ct. App. 2000): In this case, the Court of Appeals flat out said that, without accompanying fraud, punitive damages cannot be awarded for breach of contract.

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Based on the holdings of the Court of Appeals of Tennessee in published cases since Hodges was decided in 1992, any Tennessee breach of contract lawyer would be confused by what it takes to receive an award of punitive damages in a breach of contract case.  The Dog House and Next Generation opinions stand for the proposition that, in order to be entitled to punitive damages for breach of contract, a plaintiff must also prove fraud of some type. On the other hand, the Riad case stands for the proposition that a plaintiff can recover punitive damages for a stand-alone breach of contract claim if the plaintiff proves the conduct of the defendant was intentional, reckless, or malicious, even if the plaintiff cannot prove any type of fraud.

As I see it, here are the unanswered questions about punitive damages in breach of contract cases. First, does a plaintiff have to prove some type of fraud in addition to proving breach of contract to recover punitives? If the answer to that question is “no,” and the plaintiff can recover punitive damages for intentional, reckless or malicious conduct, to what conduct do those categories apply in a contractual setting? For example, if the plaintiff proves that, after the contract was entered into, the defendant intentionally breached the contract because it was cheaper to pay all of the plaintiff’s compensatory damages rather than finish the contract, is the defendant also liable for punitive damages?

It is not clear how exactly the standards of Hodges will apply in pure Tennessee breach of contract cases.  There is good reason to believe that the Supreme Court of Tennessee might not apply them to breach of contract cases exactly as it did to the retaliatory discharge cause of action in the Hodges case.

My advice is that, if you have a breach of contract case and you believe punitive damages may be warranted, allege, if the facts support it, a claim for promissory fraud in addition to breach of contract.