By Mr Robert Samut

On 23 March 1989, the super-tanker Exxon Valdez was loaded with 53 million gallons of crude oil. The ship was captained by Joseph Hazelwood, who had only recently completed at 28-day alcohol treatment program. He had dropped out of the follow-up program and stopped going to Alcoholics Anonymous meetings. There was contested evidence at trial that Exxon executives and management knew of his alcoholic relapse. Witnesses testified that prior to the Exxon Valdez leaving port, Hazelwood downed at least five double vodkas. The ship sailed at 9.12pm under the guide of a State-licensed pilot from the port of Valdez in Alaska. At 11.20pm Hazelwood took control. Due to poor conditions in the outbound shipping lane, he received clearance from the Coast Guard to move to the inbound lane, which was a less icy path. That move put the ship in the path of an underwater reef off Bligh Island. To avoid the reef the ship had to turn at a point known as "Busby Light". Two minutes prior to the required turn, Hazelwood left the bridge to go to his cabin to "do some paperwork". The ship failed to make the turn. On 24 March 1989 the Exxon Valdez was grounded on Bligh Reef off the Alaskan coast, fracturing its hull and spilling eleven million gallons of crude oil into the Prince William Sound. The result was one of the most devastating man-made environmental disasters ever to occur at sea.

Hazelwood had a blood alcohol level of .061 eleven hours after the event. Experts testified that at or around the time of the spill, he would have had a blood alcohol level of around .241, three times the legal limit for driving in most States in the US.

In the aftermath, Exxon spent around $2.1 billion in cleanup initiatives. They were fined $25 million under various State and Federal Acts, and in a separate action by the United States and the State of Alaska, consented to paying at least $900 million towards restoring natural resources. The company paid another $303 million in voluntary settlements with fishermen, property owners, and other private parties. The remaining civil cases were consolidated into this action.

In the District Court of Alaska, a jury found that both Hazelwood and Exxon had been reckless and thus potentially liable for punitive damages. The jury awarded $287 million in compensatory damages to the commercial fishermen and others, $5000 in punitive damages against Hazelwood and $5 billion in punitive damages against Exxon.

Exxon appealed to the Court of Appeals for the Ninth Circuit. The punitive damages award was reduced to $2.5 billion.

Exxon appealed to the Supreme Court of the United States.

Exxon unsuccessfully contested liability on the basis that the conduct of Mr Hazelwood was outside the scope of his employment. Liability being determined against it, the company then contested the quantum of the punitive damages award. It argued that the award exceeded all bounds of the principle underlying punitive damages awards, i.e. to deter reckless or worse behaviour and the consequent threat of harm. By a majority of 5:3, the Court held that the punitive damages award should be reduced.

The Court was concerned with common law principles and an award of punitive damages under federal maritime jurisdiction. This allowed the Supreme Court to assess the reasonableness of the award, rather than just reviewing it from a constitutional perspective to see whether it violated due process. To that extent the case is restricted, but the judgment was delivered in a manner to enable it to have wider application.

The Court observed that the prevailing rule in American courts was to limit punitive damages to cases involving, for instance, outrageous conduct on the part of a defendant, gross negligence, wilful wanton and reckless indifference for the rights of others, or behaviour even more deplorable. The Court also observed that in most American jurisdictions, the amount of the punitive damages award is generally determined by a jury in the first instance, and this determination is then reviewed by trial and possibly appellate courts to ensure that it is reasonable. The court conceded that punitive damages awards overall were higher and more frequent in the United States than anywhere else, but based on a consideration of extensive statistical analysis going back more than 20 years, considered the majority of the awards made to be principled. The Court referred to:

"A survey of the literature reveals that the discretion to award punitive damages has not mass produced runaway awards, and although some studies show the dollar amounts of punitive damages awards growing over time, even in real terms, by most accounts the median ratio of punitive to compensatory awards has remained less than 1:1. Nor does the data substantiate a marked increase in the percentage of cases with punitive awards over the past several decades. The figures thus show an overall restraint and suggest that in many instances, a high ratio of punitive to compensatory damages is substantially greater than necessary to punish or deter... The real problem, it seems, is the stark unpredictability of punitive awards."

The majority observed the spread between high and low punitive awards to be unacceptable. In proposing a solution to deal with the very high punitive damages awards, which were said to be the exception, their Honours went on to say:

"One option would be to follow the States that set a hard dollar cap on punitive damages, a course that arguably would come close to the criminal law, rather like setting a maximum term of years. The trouble is, though, that there is no "standard" tort or contract injury, making it difficult to settle upon a particular dollar figure as appropriate across the board. And of course a judicial selection of a dollar cap would carry a serious drawback; a legislature can pick a figure, index it for inflation, and revisit this provision whenever there seems to be a need for further tinkering, but a court cannot say when an issue will show up on the docket again... The more promising alternative is to leave the effects of inflation to the jury or judge who assesses the value of actual loss, by pegging punitive to compensatory damages using a ratio or maximum multiple."

The majority held that a 1:1 ratio between punitive and compensatory damages was a "fair upper limit" in a case such as this which involved recklessness on the part of the defendants rather than any malicious intent. Their Honours accepted the District Court's calculation of relevant compensatory damages at $507.5 million, and using a punitive to compensatory ratio of 1:1 reduced the award of punitive damages from $2.5 billion to that amount.

US insurers have given a collective thumbs up to the judgment. Robin Conrad, executive vice president of the National Chamber Litigation Centre said:

In reducing what started out as a $5 billion punitive damages award to just over $500 million, the majority of the Court had no regard to Exxon's capacity to pay. The company posted earnings of $40.6 billion in 2007.

In Australia, subject to statutory prohibition or modification, punitive or exemplary damages (as they are referred to here) may be awarded for any tort committed in circumstances involving a deliberate, intentional or reckless disregard of the plaintiff's interests. They are not available for breach of contract. The Ipp Committee called for their abolition in their report "Review of the Law of Negligence". The Australian States did not go that far. In Queensland, exemplary damages have been abolished for injury claims except where the injury was intentionally caused or unlawful sexual misconduct is involved.

Whilst Australian Courts are hesitant to use exemplary damages it is foreseeable that they became more of a feature in pollution and environmental harm cases. To that extent Australian courts may look for guidance from decisions abroad such as the Exxon Valdez case in deciding whether to award exemplary damages and if so, how much.

Climate change is something which affects everyone on this planet, and an international perspective to the assessment of damages to punish those harming the environment is not only appropriate, but desirable.

It must also be borne in mind that the 1:1 ratio as a suggested upper limit does not restrict punitive damages awards where the conduct is intentional or wilful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Robert Samut
Barry & Nilsson
Level 21
215 Adelaide Street
Brisbane
Queensland
4000
AUSTRALIA
Fax: 073231 6399
E-mail: robert.samut@bnlaw.com.au
URL: www.bnlaw.com.au

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