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An 80% Tax on Exemplary Damages to Improve Fairness and Reduce Litigation

  • Raises Revenue (c. £1bn per annum)

  • Simple and Easy to enforce via the Courts System

  • Makes the legal system fairer and more equitable

  • Encourages out-of-court settlements = quicker and cheaper for both parties and the Courts system

What are Exemplary Damages?

Exemplary damages, or punitive damages, are awarded where conventional damages (for e.g. financial loss or injury) would not be enough to deter the defendant in future; or to make an example of the defendant in order to deter others.

This type of damages have been growing rapidly, and are increasingly linked to ‘Social Justice’ / ‘Woke’ cases.

To give an example, imagine a trucking company does a poor job of maintaining its lorries. One day, as a result of poor maintenance, an out of control lorry hits me and I sprain my wrist.

The damages for my sprained wrist may only be, say, £1000. However, the court may award me an additional £100,000 in exemplary damages. This is in order to make sure the trucking company is hit hard enough to ensure it properly maintains its lorries in future, and to encourage other trucking companies to do so as well.

Currently those exemplary damages are not taxed. Clearly you cannot tax them at 100% as then no-one would bother seeking them. But they should be taxed very highly for two reasons:

Firstly it is unfair for some claimants to get windfalls like this, while others do not. To carry on the example, why should I get £101,000 for a sprained wrist while someone else will get only £1000 for exactly the same injury and suffering, just because they happened to be injured in a different situation, such as an accident at work or car crash?

Secondly, such a tax would dramatically increase the likelihood of swift, out-of-court settlements. The Government and The Law Society have been trying to encourage more out-of-court settlements for decades. They are cheaper (including for the taxpayer), quicker, and involve less animosity and emotional suffering.

To understand why an exemplary damages tax increases out-of-court settlements, consider the table below, using my sprained wrist/lorry scenario. As you can see, when a large tax is imposed there is a huge gap between what I can win as claimant and what the defendant can lose. That provides a nice big range in the middle in which both parties can find an incentive to settle.

Exemplary damages
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