Limitation of Liability Clauses in Asset Acquisitions

Bombardier Aerospace Corporation, Petitioner v. SPEP Aircraft Holdings, LLC, PE 300 Leasing, LLC,et al., Respondents
Supreme Court of Texas, Case No. 17-cv-0578
Decided February 1, 2019

This case underscores the importance of conducting comprehensive due diligence in acquiring any asset, even when the asset is new.

Plaintiffs SPEP Aircraft Holdings, LLC (“SPEP”) and PE 300 Leasing, LLC (“PE”) purchased a new Challenger 300 aircraft from Flexjet, a subsidiary of defendant Bombardier Aerospace Corporation (“Bombardier”). The purchase agreement included the following limitation of liability clause:

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.

Under the purchase agreement, SPEP and PE gave Flexjet power of attorney for acceptance and registration over the aircraft, which gave Bombardier exclusive power over inspection and acceptance of the aircraft on SPEP’s and PE’s behalf. Believing that a new aircraft would not require an inspection, and because Bombardier was responsible for inspecting it, SPEP and PE did not retain a third party to inspect their new Challenger 300.

In its management agreement, Flexjet agreed to “manage and maintain the aircraft with reasonable care in accordance with applicable insurance coverage and within the standards and guidelines established by the [FAA] and [to] comply with all laws, ordinances or regulations relating to the use, operation and maintenance of the aircraft.” Flexjet also promised in the management agreement to “maintain . . . all records, logs and other materials” required by the FAA and to “provide professionally trained and qualified pilots” to operate the Challenger 300. The management agreement further contained a limitation of liability clause similar to that in the purchase agreement, which provided:

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, including delay or failure to furnish the aircraft or by the performance or non-performance of any management services covered by this Management Agreement.

Due to dissatisfaction with Flexjet’s management services, SPEP and PE eventually canceled Flexjet’s management of the Challenger 300. Upon inspection of the Challenger 300 logbooks, SPP and PE discovered that when they acquired the Challenger 300, it had “repaired engines,” not new engines. The left engine had been repaired for an interstage turbine temperature split (“ITT Split”), water contamination, and oil-wetted cavities, and the left and right engines had each been installed and removed multiple times on at least two other aircraft. Indeed, during the Challenger 300’s initial flight, one of Flexjet’s pilots noticed the ITT Split and he informed the aircraft’s Corporate Aircraft Logistics Manager, who then informed the Vice President of Sales – all of whom believed SPEP and PE should be made aware of the engine history. Bombardier’ Director of Operations and Vice President of Operations, however, told the Bombardier employees that the engine history was not their concern and that they were not to tell SPEP or PE about it.

At trial, the plaintiffs’ expert, Delvin Fogg, a certified aircraft appraiser, testified as to the diminution in value of the Challenger 300 in light of the non-disclosures, i.e., he testified as to the price that SPEP and PE should have paid for the Challenger 300, and he calculated plaintiff’s actual damages as the difference between that amount and the higher purchase price.

The jury found in favor of the plaintiffs on both the breach of contract and fraud claims. Under the doctrine of election of remedies, the plaintiffs elected to recover on the fraud claim, and, as such, they were able to recover exemplary damages. The jury awarded plaintiffs $2,694,160 in actual damages for fraud and $5,388,320 in exemplary damages, consisting of treble damages.

Bombardier appealed, arguing: (i) that the trial court erred in rendering judgment on the fraud claim because Bombardier did not owe any duty of disclosure to the plaintiffs; (ii) that the evidence was legally insufficient to support a finding of fraud; (iii) that there was no evidence that Bombardier committed fraud against all plaintiffs; (iv) there was legally insufficient evidence to support the actual damages award, and that the exemplary damages award should be vacated or reduced; and (v) the exemplary damages award was barred by the parties’ limitation-of-liabilities clauses. The court of appeals affirmed the trial court’s judgment.

Bombardier filed a petition for review with the Supreme Court of Texas, which was granted. The Supreme Court was tasked with determining: (i) whether the Court of Appeals for the Fifth District of Texas (“Court of Appeals”) erred in finding that the evidence was legally sufficient to support the trial court’s award of both actual and punitive damages to all plaintiffs; (ii) whether the limitation of liability clauses in the parties’ agreements barred punitive damages; and (iii) whether the punitive damages award was unconstitutionally excessive.

The Court found that any error in the jury charge’s definition of “plaintiffs” is harmless because, pursuant to a stipulation entered into by the parties, the judgment could be enforced only by the purchasing parties, SPEP and PE. Further, the Court noted that, in the context of fraud, “[it has] never required each plaintiff to prove fraud separately when no plaintiff claims damages in a separate amount and the jury finds one sum of damages for fraudulent conduct.”

The Court, however, reversed the Court of Appeals ruling that the limitation of liability clauses were unenforceable because Bombardier committed fraud. In its decision, the Court of Appeals reasoned that “a buyer cannot be bound by an agreement waiving exemplary damages if the seller commits fraud by nondisclosure.” (Citation omitted.) The Supreme Court of Texas, however, held that it “must respect and enforce terms of a contract that parties have freely and voluntarily entered,” and that plaintiffs “cannot both have [the] contract and defeat it too.” (Citation omitted.) The Court explained that “[r]ather 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.” (Citation omitted.) The Court ruled:

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. (Citations omitted.)

The Court acknowledged that “[a]lthough Bombardier’s conduct in failing to provide SPEP and PE with the new engines they bargained for was reprehensible, the parties bargained to limit punitive damages, and we must hold them to that bargain.”

As a result, the Court struck the trial court’s award to plaintiffs of $5,388,320 in exemplary damages – a significant victory for Bombardier who was found to have committed fraud.

Because the Court held that the limitation of liability clauses in the parties’ contracts barred an award for punitive damages, it did not reach the issue of whether the punitive damages awarded were excessive.