Limiting Your Liability Exposure With A “Limitation of Liability Clause”
By Gregory J. Reigel
© February, 2019 All rights reserved.
In this litigious society in which we live, it is prudent to try and limit our liability exposure in as many ways as we reasonably can. This is especially true when we are negotiating and entering into contracts. But you may wonder, can you really limit your liability simply by including certain language in your agreements? The short answer is “yes” and a recent decision by the Texas Supreme Court explains why.
In Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC
, the plaintiff aircraft purchasers sued defendant Bombardier alleging various claims arising from the plaintiffs’ purchase of a new Challenger 300 aircraft from Bombardier. As it turned out, the engines installed on the aircraft that Bombardier delivered to the purchasers were not new, but rather had previously been installed and removed multiple times on at least two other aircraft. The plaintiffs’ asserted claims for breach of contract, breach of warranty and fraud.
After a trial, the jury found in favor of the plaintiffs on both their breach of contract and fraud claims and awarded $2,694,160 in actual damages and $5,388,320 in exemplary or punitive damages. Under the election of remedies doctrine, the plaintiffs’ elected to recover on the fraud claim rather than the breach of contract claim. Not surprisingly, Bombardier appealed the verdict. On appeal Bombardier argued, among other things, that the punitive damage award was barred by the “limitation of liability clause” in the parties’ purchase agreement which stated that Bombardier
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.
The court of appeals affirmed the trial court’s judgment and Bombardier then appealed to the Texas Supreme Court again arguing that the parties’ agreement precluded any recovery for punitive damages.
The Court initially observed that “[e]xemplary, or punitive, damages are not compensatory and are designed to punish the defendant for outrageous or morally culpable conduct and to deter the defendant and others from engaging in the same behavior in the future.” It also noted that a strong public policy favors freedom of contract and “absent a compelling reason, courts must respect and enforce the terms of a contract that the parties have freely and voluntarily made.”
But the Court also recognized that an agreement may be rescinded based upon fraud by nondisclosure.
And while the plaintiffs alleged fraud, they did not seek rescission of the agreement based upon the fraudulent conduct, but rather tried to enforce the agreement seeking an award of actual damages while at the same time trying to have the limitation of liability clause struck so they could receive an award of punitive damages. As a result, in upholding the limitation of liability clause the Court stated “[i]n 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 [punitive] damages.”
The Court went on to conclude that
[u]nder our strongly held principles of freedom to contract, we hold that the limitation-of-liability clauses are valid limited warranties that were the basis of the parties' bargain…. Although Bombardier's conduct in failing to provide [purchasers] with the new engines they bargained for was reprehensible, the parties bargained to limit punitive damages, and we must hold them to that bargain.
I think the Court struggled with this case. Based upon the fraudulent conduct by Bombardier it appeared that the Court was looking for a way to uphold the punitive damage award. It is possible that had the plaintiffs argued rescission (e.g. that the agreement be considered void and unenforceable) based upon the fraud, rather than trying to enforce the agreement, then the limitation of liability clause would not have precluded them from receiving the punitive damages award. But since that wasn’t the case, the Court had little alternative but to enforce the limitation clause based upon existing precedent.
However, as this case shows, at least in Texas, where sophisticated parties have bargained for a limitation of liability clause in an arms-length transaction, courts are likely going to enforce that clause to limit the damages that may be recovered. Although such a clause may not be enforced in every case, depending upon the circumstances, certainly if you want to at least be able to have an argument regarding limiting liability you will want to include a limitation of liability clause in your agreement.