April 14 2011
On December 1 2010,(1) in a decision on the recognition of a foreign judgment in France, the Supreme Court held - in its first ruling on the issue - that "the principle of an order to pay punitive damages is not, in itself, contrary to public policy". However, in this case the court upheld the non-recognition of the foreign judgment in France on the grounds that the amount awarded to the plaintiff was disproportionate to the loss and the breaches of the defendant's contractual obligations.
Two US citizens domiciled in the United States bought a catamaran from a French company, Fountaine Pajot, for $826,000. The plaintiffs complained about defects that resulted from the inadequate repair of the boat after a storm, before delivery and the concealment of these repairs. They served a summons on Fountaine Pajot and its US intermediary to appear before the Superior Court of California, County of Alameda. In its judgment of February 26 2003 the US court awarded damages of more than $3 million to the plaintiffs, half of which represented punitive damages. The plaintiffs then requested that the decision be recognised in France.
At present, there is no international convention between France and the United States on the recognition of decisions in civil and commercial matters. To grant recognition of a US decision in France, the French court had to be satisfied that that the following three conditions were met:
The Poitiers Court of Appeal, upholding a first instance decision, dismissed the claim for enforcement of the US judgment in France. First, the court noted that the amount of damages awarded was:
"manifestly disproportionate, as largely exceeding, on the one hand, the sale price and, on the other hand, the very amount of the compensatory damages allocated as compensation for the entire loss."
The court also stated that:
"under French law, the very purpose of civil liability is to restore as accurately as possible the balance destroyed by the damage and replace the victim in the position in which it would have been if the harmful event had never occurred."
The appellate court thus expressly dismissed two of the criteria on which the US courts decide whether to grant punitive damages: the significance of the fault and the financial situation of the author of the damage.
The buyers of the boat lodged an appeal against the decision. They maintained that the consideration of international public policy is separate from the review of the merits of the case, and that the amount awarded was not disproportionate in light of the absolute impossibility of using the boat and the fraudulent behaviour of Fountaine Pajot.
The Supreme Court dismissed the appeal, holding that:
"if the principle of an order to pay punitive damages is not, in itself, contrary to public policy, this is not the case when the allocated amount is disproportionate... to the suffered loss and the breaches of the debtor's contractual obligations."
The effect of the Supreme Court's decision is twofold.
First, the recognition in France of a decision that orders a party to pay punitive damages is not excluded as a matter of principle. However, litigants that have obtained punitive damages abroad must not be too quick to celebrate. The court added that damages awarded abroad, in order to be recoverable in France, must be proportionate to the loss suffered and to the "breaches of the debtor's contractual obligations". If the court had imposed a condition of proportionality only in light of loss suffered, orders to pay punitive damages would not be recognised in France. By definition, punitive damages are additional to pure compensation for the loss suffered - they are a penalty imposed on the person at fault.
Second, by adding breaches of the debtor's contractual obligations to the condition of proportionality, the court accepted - in the context of the recognition of foreign judgments - the possibility of departing from the principle of full compensation that takes into account only the loss suffered by the victim, not the behaviour of the wrongdoer and the seriousness of its fault.
Thus, the court has refused to bring the principle of full compensation to the level of international public policy. Rather, it has left the door open to the recognition of foreign decisions awarding punitive damages, in particular when the behaviour of the debtor justifies it. However, the fact that the court requires proportionality between the amount of the damages and the behaviour of the debtor may, in many cases, justify a refusal to recognise a decision. Compliance with international public policy is always assessed in concrete terms, resulting in a case-by-case analysis of the proportionality of the damages awarded.
It will therefore be necessary to pay attention to future decisions in this field, where the courts rule on the merits, to see how the criterion of proportionality set by the Supreme Court is assessed in practice.
For further information on this topic please contact Cécile Di Meglio or Karine Ponczek at Hogan Lovells (Paris) LLP by telephone (+33 1 53 67 47 47), fax (+33 1 53 67 47 48) or email (firstname.lastname@example.org or email@example.com).
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