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Punitive Damages Not Recoverable in Contract Breach, Supreme Court Rules

Punitive damages are not recoverable in a breach-of-contract lawsuit unless the breach involves a tort, the Ohio Supreme Court ruled today.

In a majority opinion  authored by Justice Terrence O’Donnell, the Court reversed a judgment of the Seventh District Court of Appeals and clarified several provisions in the law regarding breach-of- contract lawsuits in which fraud and duress are alleged.

The ruling vacated a judgment awarded by the Mahoning County Common Pleas Court to Christine Lucarell, a former agent of the Nationwide Mutual Insurance Co., who had sued her former company.

The court remanded the matter to the appeals court for further proceedings consistent with the Supreme Court’s opinion.

Justice O’Donnell was joined in the majority opinion by Chief Justice Maureen O’Connor and Justices Sharon L. Kennedy, Judith L. French. Patrick F. Fischer and R. Patrick DeWine.

Justice William M. O’Neill concurred with the ruling that punitive damages are not recoverable for breach of contract. He dissented from the remainder of the opinion without writing a dissenting opinion.

The majority opinion held that:

  • Punitive damages may not be awarded for a breach of contract.
  • A party to a contract does not breach the implied duty of good faith and fair dealing by seeking to enforce the agreement as written or by acting in accordance with its expressed terms.
  • There cannot be a breach of the implied duty unless a specific obligation imposed by the contract is not met.
  • A release of liability is an absolute bar to a later action on any claim unless fraud, duress, or other wrongful conduct can be proved by clear and convincing evidence.
  • The prevention of performance doctrine is not a defense to a release of liability.
  • A claimant cannot rely on predictions or projections that relate to future performance or that are made to third parties to establish a fraud claim. 

Company Recruits New Agents
Nationwide developed its Agency Executive (AE) Program to recruit new agents by offering planning, training, and startup financing with the expectation that the new agents could build self-sustaining, profitable businesses after three years. The company brought the program to Ohio in 2004 and in 2005 recruited Lucarell using a business projection showing that she could earn $200,000 a year in commissions.

Lucarell signed an independent contractor agreement and obtained a $290,000 loan with distributions contingent on her performance in the AE program. Lucarell used the funds to start her agency in January 2006 and initially exceeded the minimum production requirements imposed by the agreement. However, like other AE Program agents, she began to struggle meeting her production goals.

In 2007, Lucarell signed a memorandum of understanding (MOU) with Nationwide in which she received additional funds in exchange for signing a release to “forever discharge any and all claims” that she might have against the company. Lucarell later claimed she had “no choice” but to sign the MOU because Nationwide would have terminated it and made her loan due in full.

As her business continued to struggle, she entered a modified version of the AE program and signed a contract acknowledging that Nationwide had given her the opportunity to exit the program with her loan forgiven. The contract also represented that she had made the decision to participate in the modified  AE Program voluntarily “while under no economic duress” and “without any reliance on any inducement, promise, or representations” outside the written contract.  The modified agreement also contained a release of liability in which she relinquished all claims against Nationwide, including “any claims for fraud, negligence, and breach of contract.”

Lucarell initially met the conditions of the modified program but soon failed to meet her production goals and defaulted on her loan payments. She learned in May 2009 that beginning that July, part of her commissions would be withheld to repay the defaulted loan. Her production never recovered, and she resigned in July 2009.

Agent Sues Insurer
Lucarell sued Nationwide for breach of contract and fraudulent misrepresentation, and she also asserted a claim for invasion of privacy because Nationwide continued to use her name in mail to her former customers after she left the company. She later added claims that Nationwide constructively discharged her, that it retaliated against her by filing a counterclaim for repayment of the loan, and that it breached the modified AE program agreement, alleging that she had been on track to complete the original AE program requirements but that Nationwide induced her to sign the modified agreement by misrepresenting sales data and promising her mergers with other agencies.

Lucarell presented an expert witness who testified that she suffered $4.8 million in lost earnings based on a projection of a 25-year career. Nationwide presented an expert who opined that Lucarell’s business could not have survived 25 years and who noted that her tax forms and expense reports indicated an unexplained $456,000 shortfall.

Trial Court Rules on Claims
The trial court granted a directed verdict to Nationwide on the fraudulent misrepresentation claim, and the jury found in favor of Lucarell on all the remaining claims. Both parties appealed to the Seventh District, which affirmed the breach of contract verdicts against Nationwide and the invasion of privacy claim.

However, the Seventh District reduced the punitive damages for invasion of privacy to $200,020. The appellate court reversed retaliation and constructive discharge verdicts that had been returned in favor of Lucarell as well as the directed verdict for Nationwide on the fraud claim. The Seventh District remanded the fraud claim to the trial court and stated that punitive damages could be awarded for the breach of contract claims if the jury found that Lucarell proved her fraud claims.

Nationwide appealed the decision to the Supreme Court, which agreed to hear the case.

Punitive Damage Awards Clarified
Justice O’Donnell noted that since 1922, the Court has held that punitive damages are not recoverable in a breach of contract case. But he noted that some Ohio appellate courts, including the Seventh District, have suggested there is an exception to the rule when the breach is accompanied by a separate but independent tort.

The majority opinion explained that the Supreme Court had never recognized that exception and clarified that punitive damages may be available if the conduct constituting a breach of contract also constitutes a tort. Any punitive damages awarded are limited to the harm attributable to the tort and must be separate from the harm caused by the breach of contract.

The opinion explained the distinction between a breach of contract and a tort by citing the Court’s 2015 Sivit v. Village Green of Beachwood L.P. decision, in which a fire caused by negligent construction and maintenance destroyed an apartment building. Although the trial and appellate courts concluded that punitive damages could be awarded for a breach of contract, the Supreme Court clarified that punitive damages could only be awarded for harm caused by the tort and therefore are subject to the cap on punitive damages imposed by R.C. 2315.21.

Lucarell Not Eligible for Punitive Damages
The Supreme Court ruled that punitive damages could not be awarded on Lucarell’s breach of contract claims and that the trial court properly directed a verdict on her fraud claim. The opinion noted that the fraud claim was based on the projections made by a sales manager that she could earn $200,000 a year. However, the Court explained that a fraud claim can only be predicated on a misrepresentation of a fact that relates to the past or the present and cannot be based on projections. It noted that Nationwide’s projections included a disclaimer that results were not guaranteed.

Lucarell also asserted that Nationwide breached the “implied contractual duty of good faith and fair dealing,” which precludes a party to a contract from taking an opportunistic advantage in a way that could not have been foreseen at the time the parties drafted the agreement. The majority opinion noted that unless there is a breach of a specific obligation of the written contract, there can be no violation of the implied duty. Unless Lucarell proved that Nationwide breached a specific provision of the written agreement, she could not establish a breach of the implied duty, the Court concluded.

Contract Claims Must Be Reexamined
The appellate court had concluded that the jury could have found that Lucarell could avoid the releases she signed based on duress and the “prevention of performance” doctrine. The Supreme Court ruled that the trial court had erred in instructing the jury on the standard of proof for duress, which requires proof by clear and convincing evidence.  The court further explained that the prevention-of-performance doctrine is not a defense to an unconditional release of liability.  The Supreme Court remanded the breach of contract claims for review by the court of appeals to determine in the first instance whether Lucarell presented sufficient evidence of breach and, if so, it directed the appellate court to remand the case for a new trial based on the error in instructing the jury on duress.

2016-0585. Lucarell v. Nationwide Mut. Ins. Co., Slip Opinion No. 2018-Ohio-15.

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