Economic Guidelines for Awarding Exemplary Damages

Australian and American law both recognise that where exemplary damages are available their purpose is deterrence and punishment. In the United States the goal of exemplary damages and the effectiveness of the legal system in achieving that goal have been the subject of extensive research. The idea of exemplary damages being imposed to punish or seek retribution against an individual for a gratuitous moral wrong has been questioned due to the prevalence of the corporate form. In the case of corporate wrongdoing economic theory has been invoked to argue that the focus of exemplary damages should be optimal deterrence. According to the economic analysis of deterrence, the socially correct or optimal level of deterrence is created by compelling the responsible party to internalise the full social cost of its conduct, but nothing more than that. It further follows that the financial circumstances of a corporate defendant are irrelevant. In trying to give effect to the economics of deterrence, there has been research into the decision-making processes of jurors which concluded that placing the exemplary damages decision in the discretion of jurors leads to arbitrary awards. Accordingly, this article seeks to draw on the economics of deterrence and cognitive psychology research to provide guidance to Australian courts faced with a claim for exemplary damages.