Seven days ago, the Texas Supreme Court had an opportunity to decide on the issue of a contractual waiver of punitive damages in a case alleging fraud.

This case was based on a transaction involving the purchase of a new airplane that actually contained repaired engines.  The plaintiffs in the underlying case were successful in the trial court on a fraud claim and received an award of punitive damages.  However, there were limitations of punitive damages contained in two applicable agreements.  The purchase agreement provided that Bombardier will not be liable for punitive damages arising out of “services rendered or delivered under this Purchase Agreement.”  The second agreement, a management agreement, stated “Neither party hereto may be held liable to the other party for any indirect, special or consequential damages and/or punitive damages for any reason.”

In upholding the validity of the waiver of punitive damages case, and reducing the judgment, the Texas Supreme Court explained:

"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."

The Court continued, "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."

The Court reasoned, "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. 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."

The Court specifically withheld judgment on whether fraud in conjunction with a breach of fiduciary claim would have the same result.  The Court wrote: “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.”

There is a potential for a different result based on the causes of action claimed and the remedies pursued.

The case is Bombardier Aerospace Corporation v. SPEP Aircraft Holdings, LLC, PE 300 Leasing, LLC; Saracen Pure Energy Partners, LP; Crane Capital Group, Inc.; James R Crane; Floridian Golf Resort, LLC; Champion Energy Marketing, LLC and Crane Worldwide Logistics, LLC.  The Texas Supreme Court's Opinion can be found here.