A Limitation-Of-Liability Clause May Or May Not Be Enforceable For Breach Of Fiduciary Duty Claims

Published date13 September 2021
Subject MatterCorporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Contracts and Commercial Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
Law FirmWinstead PC
AuthorMr David F. Johnson

Parties often add limitation-of-liability clauses to their agreements. These types of clauses can purport to limit a party's claims or damages or both. Damage-limitation clauses can take many different forms. For example, such a clause may forbid the recovery of consequential or loss profits damages. Cont'l Holdings, Ltd. v. Leahy, 132 S.W.3d 471, 475-76 (Tex. App.'Eastland 2003, no pet.). Further, a contractual provision setting an upper limit on the amount recoverable is a limitation of liability provision. Arthur's Garage, Inc. v. Racal-Chubb Sec. Sys., 997 S.W.2d 803, 810 (Tex. App.'Dallas 1999, no pet.); Fox Elec. Co. v. Tone Guard Sec., Inc., 861 S.W.2d 79, 83 (Tex. App.'Fort Worth 1993, no writ). If a plaintiff brings suit, the terms of the contract determine the relative positions of the parties and control the level of liability of either party. Federated Dept. Stores, Inc. v. Houston Lighting & Power Co., 646 S.W.2d 509, 511 (Tex. App.'Houston [1st Dist.] 1982, no writ).

Limitation-of-liability clauses are generally considered to not violate public policy. See e.g., Martin v. Lou Poliquin Ents., Inc., 696 S.W.2d 180, 186 (Tex. App.'Houston [14th Dist.] 1985, writ ref'd n.r.e.) ('a limitation of liability clause may waive a party's right to recover under the common law theory of breach of contract'); Brewer v. Myers, 545 S.W.2d 235, 237 (Tex. App.'Tyler 1976, no writ) (citations omitted) ('Having thus bound himself to accept the sum for such damages as may be suffered by reason of nonperformance of the contract on the part of the purchaser, the seller cannot sue the proposed purchaser for actual damages.'); Vallance & Co. v. DeAnda, 595 S.W.2d 587, 590 (Tex. App.'San Antonio 1980, no writ); Allrights, Inc. v. Elledge, 515 S.W.2d 266, 267 (Tex. 1974). When determining whether a limitation of liability provision violates public policy, courts will generally consider whether there was a disparity in bargaining power between the parties. Allright, 515 S.W.2d at 267. Some courts have also applied an unconscionability analysis. Head v. U.S. Inspect DFW, Inc., 159 S.W.3d 731, 748-749 (Tex. App.'Fort Worth 2005, no pet.). Under that analysis, courts will consider the bargaining process (procedural unconscionability aspect) and the fairness of the contractual provision in controversy, by determining whether there are legitimate commercial reasons that justify its inclusion as part of the agreement (substantive unconscionability aspect). Id.; Am. Employers' Ins. Co. v. Aiken, 942 S.W.2d 156, 160 (Tex. App.'Fort Worth 1997, no writ). A party relying on the defense of unconscionability carries the burden to show both procedural and substantive unconscionability. In re Turner Bros. Trucking Co., 8 S.W.3d 370, 376-77 (Tex. App.'Texarkana 1999, orig. proceeding).

There is a unique issue that arises when a fiduciary attempts to enforce a limitation-of-liability clause in a contract with its principal. The principal may be able to void or rescind the agreement between it and its principal, potentially due to fraud, constructive fraud (material omission) or a breach of fiduciary duty. Indeed, the Texas Supreme Court held that 'fraud vitiates whatever it touches.' Hooks v. Samson Lone Star, Ltd. P'ship, 457 S.W.3d 52, 57 (Tex. 2015). A plaintiff can generally rescind a transaction due to a breach of fiduciary duty. See, e.g., Manges v. Guerra, 673 S.W.2d 180, 181 (Tex. 1984) (upholding the award of actual and...

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