Opinion ID: 2805465
Heading Depth: 4
Heading Rank: 2

Heading: Punitive Damage Limitations

Text: The Homeowners have also challenged the arbitration clause’s restriction on punitive and consequential damages. “Punitive or exemplary damages are generally defined as those damages assessed in addition to compensatory damages for the purpose of punishing the defendant for aggravated or outrageous misconduct and to deter the defendant and others from similar conduct in the future.” Masaki v. Gen. Motors Corp., 71 Haw. 1, 6, 780 P.2d 566, 570 (1989) (citation omitted). “Since the purpose of punitive damages is not compensation of the plaintiff but rather punishment and deterrence, such damages are awarded only when the egregious nature of the defendant’s conduct makes such a remedy appropriate.” Id. “The conduct must be outrageous, either because the defendant’s acts are done with an evil motive or because they are done with reckless indifference to the rights of others.” Restatement (Second) of Torts § 908, cmt. b (1979). It would create an untenable situation if parties of superior bargaining strength could use adhesionary contracts to insulate “aggravated or outrageous misconduct” from the monetary remedies that are designed to deter such conduct. Masaki, 71 4 We do not decide whether the contractually shortened limitations period is unconscionable because there has been no assertion that the Homeowners’ claims are barred by that provision. 27  FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER  Haw. at 6, 780 P.2d at 570. For this reason, many state supreme courts that have considered the issue have held that punitive damage limitations are unconscionable. See, e.g., Ex parte Thicklin, 824 So.2d 723 (Ala. 2002) overruled on other grounds by 929 So.2d 997 (Ala. 2005) (“[I]t violates public policy for a party to contract away its liability for punitive damages, regardless whether the provision doing so was intended to operate in an arbitral or a judicial forum.”); Armendariz, 6 P.3d at 680, 683 (“‘All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.’”) (quoting California Civil Code § 1668 (1872)); Carll v. Terminix Int’l Co., L.P., 793 A.2d 921, 923 (Pa. Super. Ct. 2002) (holding that an arbitration agreement was unconscionable because it precluded the arbitrator from awarding special, incidental, consequential, and punitive damages); State ex rel. Dunlap v. Berger, 567 S.E.2d 265 (W. Va. 2002) (holding that an arbitration agreement which prohibited punitive damages was unenforceable as against public policy). Hawai#i law already disfavors limiting damages for intentional and reckless conduct. In Laeroc Waikiki Parkside, LLC v. K.S.K. (Oahu) Ltd. Partnership, 115 Hawai#i 201, 224, 166 P.3d 961, 984 (2007), this court held that a contract provision 28  FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER  limiting tort liability would violate public policy to the extent that it attempted to waive liability for criminal misconduct, fraud, or willful misconduct. Further, we have acknowledged that “[e]xculpatory contracts are not favored by the law because they tend to allow conduct below the acceptable standard of care.” Fujimoto v. Au, 95 Hawai#i 116, 155, 19 P.3d 699, 739 (2001) (quoting Yauger v. Skiing Enterprises, Inc., 206 N.W.2d 60, 62 (Wis. 1996)). This court has also acknowledged that “although parties might limit remedies, such as recovery of attorney’s fees or punitive damages . . . a court might deem such a limitation inapplicable where an arbitration involves statutory rights that would require these remedies.” See Kona Vill., 123 Hawai#i at 485, 236 P.3d at 465 (Acoba, J., dissenting) (quoting Uniform Arbitration Act § 4, cmt. 3 (2000)). Extending these principles, and in reliance on persuasive authority from many other state supreme courts, we endorse the view that, with respect to adhesion contracts, a contract term that prohibits punitive damages is substantively unconscionable.5