Under US law, punitive damages are damages “awarded in addition to actual damages in certain circumstances. Punitive damages are considered punishment and are typically awarded at the court's discretion when the defendant's behaviour is found to be especially harmful” (definition of the Legal Information Institute of Cornell Law School).
Punitive damages aim to punish the wrongdoer and set an example for others, while most of European tort law systems, including Luxembourg, only allocate compensatory damages. Given their purpose as a deterrent, the amounts of punitive damages are usually astronomical and go far beyond what Luxembourg courts would ever grant.
The question arising is therefore, would a foreign claimant obtain recognition of a US judgment seeking the enforcement of punitive damages in Luxembourg?
A recent case allowed Luxembourg courts to contemplate the question, and examine the compatibility of punitive damages with Luxembourg international public order, which refers to the rules and principles affecting the fundamental conceptions of the moral, social, political or economic order of a country and its legal system.
In the case at hand, several claimants, having been granted hundreds of millions of punitive damages in the US, carried out a garnishment (“saisie-arrêt”) on assets located in Luxembourg, allegedly held by a foreign State (called hereafter the “Foreign State”), solely on the basis of the awarded punitive damages.
Since the US judgments had not been recognised in Luxembourg, the Foreign State brought, besides the validation proceedings, summary proceedings seeking the quashing of the garnishment.
The Foreign State alleged that the punitive damages constituting the basis of the garnishment were violating Luxembourg public order, while the initial claimants argued that the public order was a fluid notion, evolving over time, and that Luxembourg and French case law were on the verge of accepting punitive damages into their legal orders.
Luxembourg scholars had already cast significant doubt as to the admission of such damages under Luxembourg law. According to such scholars, the reservation of international public order entails the exclusion of any foreign rule which could cause a real disturbance to the order of society, through its incompatibility with the fundamental principles and structures of Luxembourg law.
In the case at hand, the summary judge followed these footsteps and found that:
- the allocated punitive damages contravene the fundamental principle of Luxembourg tort law, according to which the victim can only seek compensatory damages, as their aim is not only to repair the loss suffered by the victim, but also to punish the perpetrator of the damage;
- the amounts granted by the US judgments were disproportionate compared to what the Luxembourg courts would have allocated in similar circumstances.
As the garnishment was purely based on US judgments granting punitive damages, deemed contrary to the Luxembourg international public order, the judge found that there was a manifestly unlawful disorder and quashed the garnishment. This decision has been appealed.
Consequently, claimants should be more cautious when recovering damages awarded by US judgments in Luxembourg, and should voluntarily exclude punitive damages from the scope of their recognition proceedings.