Texas Supreme Court Holds That A Limitation-Of-Liability Clause Eliminated A Punitive Damage Claim Where A Fraud Plaintiff Enforced The Contract But Refused To Address If The Holding Would Similarly Apply To A Breach-of-Fiduciary-Duty Claim

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In Bombardier Aero. Corp. v. Spep Aircraft Holdings, a plaintiff who had purchased an aircraft sued the defendant for fraud associated with representations regarding whether the aircraft was new or used. No. 17-0578, 2019 Tex. LEXIS 101 (Tex. February 1, 2019). The purchase agreement stated: “Flexjet will not be liable to either customer for any indirect, special, consequential damages or punitive damages arising out of any lack or loss of use of any aircraft, equipment, spare parts, maintenance, repair or services rendered or delivered under this purchase agreement.” Id. The plaintiff later found that parts of the aircraft were used, and sued for breach of contract and fraud. The jury found for the plaintiff and awarded actual damages and punitive damages. The court of appeals affirmed.

The Texas Supreme Court reversed the award of punitive damages. The Court held that because the plaintiff did not seek to rescind the purchase agreement, and instead sought damages while enforcing the purchasing agreement, that the plaintiff could not evade the reach of the limitation of liability clause:

As the plaintiffs point out, we have held that “fraud vitiates whatever it touches.” … We have never held, however, that fraud vitiates a limitation-of-liability clause. We must respect and enforce terms of a contract that parties have freely and voluntarily entered. And the plaintiffs “cannot both have [the] contract and defeat it too.” Rather than seeking rescission of the agreements based on Bombardier’s fraudulent conduct, the plaintiffs have tried to enforce the agreements, seeking an award of actual damages, while at the same time seeking to strike the limitation-of-liability clauses to receive an exemplary damages award. … Bombardier and the purchasing parties—sophisticated entities represented by attorneys in an arms-length transaction—bargained for the limitation-of-liability clauses to bar punitive damages. In balancing the competing interests between protecting parties from “unintentionally waiving a claim for fraud” and “the ability of parties to fully and finally resolve disputes between them,” we believe parties can bargain to limit exemplary damages. See id. We note that the purchasing parties did not waive a claim for fraud; they only waived the ability to recover punitive damages for any fraud. As such, the valid limitation-of-liability clauses must stand.

Id.

The plaintiff could have, but did not assert a breach of fiduciary duty claim because the parties’ agreement gave the defendant power of attorney to inspect and accept the plane. “An agreement creating a power of attorney creates a fiduciary relationship.” Id. The Court noted that the fiduciary may be punished for breaching these duties by an award of exemplary damages. The Court stated: “Because there is no breach of fiduciary duty claim and the plaintiffs did not seek exemplary damages on that basis, we decline to decide whether a breach of fiduciary duty for fraudulent conduct would affect the validity of a limitation-of-liability clause.” Id. The Court cited to its previous opinion in E.R.I. Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 870 (Tex. 2010), and noted that it allowed “forfeiture as an equitable remedy for breach of fiduciary duty in addition to actual damages for fraud and breach of contract, but declining to evaluate the award in light of rules applicable to punitive damages.” This reference is important because in Swinnea, the Court held that a trial court had broad discretion to award disgorgement damages (including contractual consideration) as a remedy for a breach of fiduciary duty. So, the Court left the door open to a scenario where a contract is enforced, actual damages awarded for breach of fiduciary duty, and an award of punitive damages despite the existence of a limitation-of-liability clause. The author assumes that the theory would be that a trial court could decide to not enforce a limitation-of-liability clause in equity (as a disgorgement of contractual consideration) while still otherwise enforcing a contract.



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