COMMENTARY AND OPINION Could exemplary damages discourage corporate wrongdoings?

[Gunnar Larson]

By Tets Ishikawa13 June 2023

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In a fast-evolving world of technological, commercial and societal
evolution, the law is constantly playing catch-up. Consequently, this lag
creates a commercial opportunity for sophisticated and well-resourced
businesses to arbitrage in the pursuit of profit. Think Lloyd v Google,
where wrong-doing was established (by the Fair Trade Commission), yet
Google was able to retain the revenues thus generated. Or, put another way,
today’s wrongfully earned profits far outweigh the cost of being
successfully litigated against in the future (weighted not only by the
probability of such litigation being successful but also the time value of
money).

Tets Ishikawa

Tets Ishikawa

Source: Lionfish

The real consequence is how this impacts recourse for victims through legal
remedy. There’s not much to do about this arbitrage but what exacerbates
the problem is the cost of recourse and the underfunded judiciary and the
public bodies who exist to enforce justice.

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Katherine Freeland’s Chasing Money highlights this in respect of fraud and
why private prosecutions are necessarily validated. Beyond the criminal
justice system, the recently published 2022 UK Judicial Attitude Survey, a
continuous survey of working judges with a response rate of above 90%
across salaried judges and 67% of fee-paid court judges, highlighted the
on-going 'poor' or 'unacceptable' morale of court staff. This cannot be
good for delivering justice.

Beyond the unrealistic canvasing of the justice secretary, there is one
rarely discussed option – a punishment tax based on principles of exemplary
damages.

For most UK lawyers, the notion of UK jurisprudence moving beyond a
compensatory approach is simply offensive. Winning claimants shouldn’t be
overcompensated by way of an undeserved financial windfall which would
encourage more vexatious or 'punt-like' litigation, stressing an already
stretched judiciary. However, there is more to exemplary damages.

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In 1997, the Law Commission, chaired at the time by the future Supreme
Court Justice Lady Arden of Heswall, published its final report in respect
of Item 2 of the Sixth Programme of Law Reform – Aggravated, Exemplary and
Restitutionary Damages. Interestingly, support for introducing exemplary
damages was broad because rather than focusing on the negatives it might
lead to, it turned to the positive deterrent such damages could play.

If the offensiveness is caused by the concept of 'damages' because it
benefits a somewhat undeserving claimant, then the focus should shift to
the concept of 'tax': punishing wrong-doers where it hurts (i.e. money) for
the benefit of the judiciary. In other words, rather than framed as
exemplary damages, it would be a punishment tax, where the proceeds of any
such 'tax' go to the judiciary rather than the claimants. Again, one can
hear grunts of sheer abhorrence but there are some obvious significant
benefits.

For a start, it would have a significant behavioural impact, changing
attitudes of current and prospective wrong-doers towards litigation risk.
Let us assume, as above, that wrong-doers assess litigation risk of any
given commercial decision not against a legal construct but against a
commercial construct where today’s wrongfully earned profits far outweigh
the cost of being successfully litigated against. Currently, this risk
assessment only assumes damages to put the victim back into the position it
would otherwise have been in had it not been for the wrong-doing the
wrong-doer is about to commit. If successfully litigated against, with the
risk of an additional 'tax', the commercial assessment of the litigation
risk would become mathematically less favourable.

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Even if the litigation risk was still worth taking, once they are found out
for a wrong-doing leading to litigation, the stakes of losing are much
higher with a punishment tax. If a defendant wrong-doer knows they have
committed wrong, a settlement becomes far more attractive. Moreover, only
the most convinced (of their innocence or strength of their defence) would
pursue matters to trial.

Moreover, settlements save court time and mitigate the financial burdens
faced by the commercial courts. For those defendants that braved a trial
and lost, the wrong-doer would not only have to pay ordinary damages to the
claimant but also an additional tax.

How that punishment tax is calculated would of course need to be
determined. At this point, one can hear the sighs of traditionalists saying
it’s too difficult to calculate anyway. But this applies to any tax. Income
and corporation tax rates only make sense because they are historically
benchmarked. The advantage of having no benchmark is the opportunity to
create a fit-for-purpose benchmark. It could for example be
guideline-based, such as a percentage or multiple of the headline claim
value. A restitutionary approach would also be logical, where the tax is
equal to the wrongfully earned profits (with 8% judgment interest in line
with s17 of the Judgments Act 1838 of course).

Alternatively, it could be at the court’s discretion based on what it
believes is an appropriate amount to act as both sufficient punishment and
deterrent, which will vary from case to case anyway.

The central point though is that any such amount would go back into the
judiciary. Put another way, the more underfunded the judiciary, the more
leverage for potential wrong-doers, leading to an increase in litigation
which means more wrong-doing and a more stressed judiciary. Not exactly a
vicious circle society wants to get trapped in.

And the bigger picture: if wrong-doing in commercial litigation helped fund
the criminal justice system to create a safer, most just society, it’ll be
a win-win because it would create a better society, even for the
profit-motivated wrong-doers, in which they can enjoy their undeserved
profits.



Tets Ishikawa is managing director of LionFish, a litigation funder

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Chris Robinson
#CommentAvatarLabelCommented on:16 June 2023 7:41am

That's very interesting idea. It goes some way to compensate for the lack
of prosecutions for regulatory breaches. It could apply only where the
court was satisfied that a breach had taken place, not easy on the evidence
in a civil dispute, but there must be cases where it could be done. The
money, like all fines, should go to the exchequer, avoiding conflicts of
interest inherent in the court being funded by fines.

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Anonymous
#CommentAvatarLabelCommented on:15 June 2023 9:52am

"If the offensiveness is caused by the concept of 'damages' because it
benefits a somewhat undeserving claimant, then the focus should shift to
the concept of 'tax': punishing wrong-doers where it hurts (i.e. money) for
the benefit of the judiciary" "benefits a somewhat undeserving claimant"?
The claimant is undeserving of the wrongdoing - not undeserving of
restitution for the wrong doing, surely.

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Anonymous
#CommentAvatarLabelCommented on:14 June 2023 9:22am

A 'punishment tax'? That's what is usually known as a fine.

A punishment tax that goes to pay for the salary and pension of the person
(the judge, along with the court staff) who decides whether the punishment
tax is payable and in what sum? That sounds more like some kind of mafia
shake-down to me. How could the courts ever be absolved of having a
conflict of interest, if their continued operation is financially dependent
on them levying sufficient 'punishment taxes'?


https://www.lawgazette.co.uk/commentary-and-opinion/could-exemplary-damages-discourage-corporate-wrongdoings/5116102.article?utm_source=litigationfinanceinsider.com&utm_medium=newsletter&utm_campaign=funding-disclosure-legislation-vetoed-plaintiff-voluntarily-reveals-funding
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