Thanks for an interesting question, katamilla!
The short answer to your question is that, as with almost all areas of
law, there is no ABSOLUTE rule against punitives in contract actions,
although you do correctly state the general rule.
Let me, if I may, quote Professor John Edward Murray, Jr. who authored
my law school text on Contract Law:
Since the purpose of contract law is to compensate the aggrieved
party, damages should not be awarded for the purpose of punishing the
contract breaker in an effort to deter similar conduct. On the other
hand, in tort actions [e.g. negligence, assault, trespass]
particularly outrageous conduct by the tortfeasor will often give rise
to punitive damages in addition to compensatory damages for the actual
harm suffered. . . . A few courts have awarded punitive damages in the
absence of a tort where, for example, the conduct is fraudulent though
not tortious. More recently, a number of courts have been willing to
award punitive damages where there has been a willful breach of a
fiduciary duty such as that owed by a real estate broker to a client
or by an insurance company to a client. . . . There is an implied
covenant of good faith in every contract and it is possible to
construe a willful violation of that covenant as tortious as well as a
breach of contract. Murray on Contracts, 3d ed., p. 706 (1990).
Now even though damages may be limited in contract actions, there are
a number of different flavors of damages, including: lost profits,
consequential damages, incidental damages, and resitutionary damages
to name a few.
There are laws on the books of certain states that may permit punitive
or exemplary damages for certain specific breaches of contract. This
is particularly true in insurance contracts where the insurer
wrongfully denies coverage or fails to pay in a timely manner. Again,
this varies state to state.
Certain states do recognize Tortious Breach of Contract which does
open the door for consideration of punitives. Again, this varies by
As with all legal matters, there is no substitute for the advice of
legal counsel that may specialize in matters of contract law.
You may find this particular web page helpful in explaining the
concept of damages: http://www.west.net/~smith/damages.htm
I wish you luck!