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The problem with punitive damages

Prashant Reddy 

It isn't every day that an Indian court hands out a Rs 100 crore judgment in a case of environmental litigation. The Supreme Court's judgment against Sterlite is one such example, where the Court ordered Sterlite to pay damages of Rs 100 crore for polluting the environment around its copper smelting plant in Tuticorin. The copper plant and the environmental clearances granted to it have been the subject of environmental litigation since 1996 and the Madras High Court had finally ordered the plant to close down in 2010 because of its breach of environmental norms. The case was appealed to the Supreme Court which, in a recent judgment, allowed the plant to continue operating subject to compliance with environmental norms. In addition, the Supreme Court ordered Sterlite to pay Rs 100 crore in damages.

Damages, in any litigation, can either be compensatory or punitive damages. Compensatory damages are aimed at compensating a certain loss suffered by a party, while punitive damages are intended to punish the erring party with the hope of deterring such future conduct. It must be remembered that damages awarded by the courts are different from fines, which are usually notified in advance under the law. To illustrate with the help of an example: If you were to meet with an accident as a result of another vehicle violating a traffic rule, you will be liable to claim compensatory damages from the offender for damages suffered by you. At the same time, the traffic police may levy a statutory fine on the offender for violating the traffic rule which caused the accident. But can you also claim punitive damages against the person who caused the accident?

The answer to that question depends on the circumstances. In countries like the US, juries regularly award punitive damages - especially in product liability cases. India, on the other hand, has been remarkably resistant to the idea of punitive damages. Take, for example, the Uphaar cinema tragedy, in which more than 50 people perished in a fire at a Delhi cinema theatre. In that case the Delhi High Court had found the cinema owners and bodies of the Delhi government liable for negligence, and awarded the families of the victims damages of Rs 25 crore. On appeal, the Supreme Court upheld the grant of punitive damages given the conduct of the cinema owner - but drastically reduced the punitive damages to a mere Rs 25 lakh, on the basis of profits earned through the installation of the excess illegal seats at Uphaar.

At the time, the Supreme Court had reasoned that punitive damages could be granted only in very limited circumstances. In the pertinent part of the judgment, it stated: "Punitive damages can be awarded when the wrongdoers' conduct 'shocks the conscience' or is 'outrageous' or there is a wilful and 'wanton disregard' for safety requirements. Normally, there must be a direct connection between the wrongdoer's conduct and the victim's injury."

There is good reason for the Supreme Court's conservative position on punitive damages, and that is the fact that these damages are unpredictable and can create substantial uncertainty, since there is rarely any fixed set of factors to guide judges. The result is that the award of punitive damages is usually quite arbitrary. The most detrimental effect of punitive damages has been expensive insurance premiums which only make it more expensive to run a successful business.

But even presuming that there are set guidelines for the award of punitive damages, we need to question the rationale for punitive damages. If the idea is to compensate a victim, then compensatory damages can always be awarded, depending on the damages actually suffered by the victim. If the idea is to punish, then criminal law better serves the purpose - especially in the context of corporate liability, since it fixes the responsibility on individual officers of the company rather than penalising shareholders for the misconduct of the officers. Regardless, punitive damages continue to exist on the books.

In this context, it is unfortunate that the judgment of the Supreme Court in the Sterlite case provides little explicit justification for the chosen figure of Rs 100 crore. The Court extracts a portion of Sterlite's financial report which described Sterlite's profits as being Rs 1,043 crore. On the basis of these two sentences from Sterlite's report, the Court concludes that Rs 100 crore would be appropriate punitive damages. It orders the money to be deposited by the Collector of Tuticorn in a bank with instructions to use the interest from the money for "improvement of the environment, including water and soil of the vicinity of the plant". It then also leaves the door open for Sterlite to be sued for any other damage caused by it.

One obvious problem is that this is concluded without any reference to the actual damage caused to the environment by way of Sterlite's conduct. What if the damage caused by the environment was in excess of Rs 200 crore? Or, alternatively, what if the damage caused to the environment was only Rs 1 crore? In either case, the Rs 100 crore judgment is either disproportionately high or low. This goes to show that punitive damages cannot be calculated solely on the basis of the polluter's profits. It has to be based on a combination of the actual damage cause and the financial wherewithal of the polluter.

The most important question, especially for India, is whether the law should permit Indian courts to award punitive damages in environmental cases. It is easy to take refuge under the presumption that it is the industry which is going to have to cough up the money - but the cumulative effects of such verdicts will push up the cost of insurance and ultimately take its toll on the economy.

The writer is at Stanford Law School

First Published: Sat, April 20 2013. 21:46 IST