This case arises out of a dispute between a Ventura County jalapeno farmer (Underwood) and a hot sauce maker (Huy Fong Foods).  The parties started doing business together in 1988 and enjoyed a mutually beneficial relationship for several decades.  For the first decade, they operated using written agreements that specified the volume of peppers that that the farmer would supply and the price that the hot sauce maker would pay.  But eventually, as the relationship evolved, the parties operated under informal oral arguments.

That relationship seemed to be working fine until 2017, when the hot sauce company determined that it had been overcharged, and that it could obtain peppers at a lower price from other farmers.  The company terminated the relationship and sued the farmer to recover a refund of $1.4 million that the farmer had allegedly overcharged.  The farmer cross-complained for breach of contract and fraud, alleging that that the sudden decision to end the relationship had devastated the farmer, who was dependent upon its sales to the company, and had acquired leases of additional land in order to meet the company’s production demands.

A Ventura County jury ruled in favor of the farmer and awarded $13.3 million in compensatory damages and $10 million in punitive damages. On appeal, the company argued that the punitive damages should be vacated because “punitive damages cannot be awarded for breach of contract in the absence of an independent tort.”  The Court of Appeal rejected that argument in a published opinion, citing cases that permit punitive damages for fraud even when the parties have a contractual relationship.  The court did not address Civil Code section 3294, which authorizes punitive damages only for “breach of an obligation not arising from contact.”  Under the statutory language, a party ought not to be able to recover punitive damages for fraud or any other tort that involves the breach of an obligation that wouldn’t exist but for the contract.  That seems like a tricky question here, where the parties had no written contract and arguably all the representations they made were part of the terms of an oral contract.  But the court doesn’t grapple with that issue, perhaps because it wasn’t framed that way in the briefing.

The company also argued on appeal that the punitive damages are excessive, but the Court of Appeal rejected that argument too, finding that the company’s conduct was reprehensible enough to support a .75 to one ratio of punitive to compensatory damages.