When one party breaks the terms of a contract, and the other party sues, the court will do its best to place the parties in as good a position as they would have been had the contract been performed as promised in the first place.
In this way contract law differs from other areas of the law, such as criminal law, which generally seeks to punish the wrongdoer and deter the criminal conduct in the future. Contract law also differs from tort law which is designed to compensate the victim, punish the wrongdoer, and deter tortious behavior in the future. One reason for this policy is that people voluntarily assume responsibilities when they make a contract and those responsibilities affect only the parties and not the general public as is the case with criminal law and, at times, tort law.
All of this is fine as far as it goes, but what happens when the breaching party has deliberately undermined the basic intent of contract law by committing fraud not just in the contract at issue, but as a pattern of conduct, perhaps even an official policy, affecting hundreds and thousands of other contracts?
This is precisely what happened in State Farm Mutual v. Campbell. In that case, the Campbells had been involved in an automobile accident. They filed their case with State Farm, which refused to settle out of court, despite the desires of the Campbells and the advice of State Farm's own investigators. The original case went to trial and the Campbells lost. When State Farm refused to pay the full amount of the award, the Campbells sued the insurer for bad faith, fraud, and intentional infliction of emotional distress.
The Campbells offered evidence that the refusal to settle was not just fraudulent in relation to their contract, but was, instead, part of a larger pattern of conduct planned and executed by State Farm over a 20-year period against hundreds of policy holders. The conduct involved a national campaign referred to as the Performance, Planning, and Review (PP&R) Policy. Once the jury heard evidence about the systematic execution of the PP&R policy, they awarded the Campbells $145 million in punitive damages. The judge then reduced the punitive damages to $25 million.
On appeal the Campbells stressed the fraudulent nature of the PP&R policy and State Farm argued that their conduct in relation to the other contracts should not be used to punish them for their conduct in relation to the contract that they had with the Campbells. The supreme court of Utah agreed with the Campbells and reinstated the $145 million in punitive damages. The case made its way to the United States Supreme Court.
As you read the chapter consider the facts in the Campbell case, remember the general principles of contract law, and see if you can predict the Supreme Court's ultimate decision in the case.
[See State Farm Mutual Automobile Ins. Co. v. Campbell , 538 U.S. 408 (United States Supreme Court).]
Opening Case Questions
1. In what way does the Campbell case against State Farm Mutual appear to be both a contract case and a tort case? Explain
2. Should the evidence brought by the Campbells in relation to State Farm's conduct outside of the contract be considered to determine the measure of damages? Explain.
3. Should the reprehensible conduct of the company be considered in measuring the extent of the damages? Explain.
4. What if the conduct that the Campbell's complained of was perfectly legal in the other states? Should the court punish conduct that is illegal in its home state but is perfectly legal in another state? Why or why not?
5. Should the courts be allowed to punish a corporation that makes a contract in bad faith? Explain.