In Nami Res. Co., LLC v. Asher Land & Mineral, LTD, 2018 Ky. LEXIS 353 (August 16, 2018), the Kentucky Supreme Court recently considered the interplay between punitive damages and a breach of contract claim based on fraud. That case involved a dispute over a gas lease. Under the lease, the lessor received a one-eighth royalty from each well where the lessee found gas. The lessee, however, deducted certain post-production expenses incurred by the lessee to process the gas. In 2006, the lessor sued the lessee for breach of the leases, claiming that the lessee intentionally underpaid the contractual royalties by fraudulently misrepresenting the factors that determined the royalties owed the lessor.
At trial, a jury awarded the lessor over $2.5 million in punitive damages. The Supreme Court accepted discretionary review, in part, to examine the propriety of the punitive damages award. In a unanimous opinion, the Court vacated the punitive damages award.
The Court began its analysis with the general principle that punitive damages are not ordinarily recoverable for a breach of contract. This case, however, did not concern an ordinary breach of contract. Here, the plaintiff alleged breach of contract based on fraud. In determining that the general principle also applied to this type of contract claim, the Court turned to the economic loss doctrine, which had, until recently, been limited to commercial product liability cases. See, e.g, the Court of Appeals’ decision in the same case, 2015 Ky. App. LEXIS 117, at 121 (Ct. App. Aug. 14, 2015)(“Kentucky law does not extend the economic loss rule beyond the realm of commercial product sales.”) After a discussion of the economic loss doctrine, the Court held the rule in Kentucky to be as follows:
“[W]hen a plaintiff may obtain complete relief for his contractual losses by means of compensatory damages under a breach of contract claim, even when the breach is motivated by malice and accomplished through fraud, he may not simultaneously recover punitive damages after being made whole on his contractual damages. However, a party who has been aggrieved by fraudulent or malicious conduct which results in damages that differ from the damages sustained by reason of the breach of contract may assert an independent claim for such fraudulent or malicious conduct seeking whatever damages are appropriate for the independent claim, including punitive damages . . .”
The Court then reaffirmed its earlier opinion this year in Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, 2018 Ky. LEXIS 86 (Mar. 22, 2018), in which the Court similarly explained that a breach of contract claim based on negligence does not lie where no duty exists independent of the parties’ contract.
In sum, under Kentucky law, punitive damages are not recoverable for breach of contract even if the claim is based on tortious conduct. Litigants must prevail on an independent tort claim to recover such damages. It is also worth noting that in light of the Nami opinion, as well as the Court’s opinion in Superior Steel, litigants should avoid asserting “tortious breach of contract” claims unless an independent tort exists. Such claims could be considered frivolous and made in bad faith.
If you would like more information about this issue, please contact Kyle M. Winslow at [email protected]. Kyle is a commercial trial attorney in Kentucky, Ohio, and Indiana.