Can a Contract Cap the Damages I Can Recover? Limitation of Liability in Texas

Why Texas enforces these clauses

Texas treats a limitation of liability clause as part of the price. Two businesses that agree the vendor's exposure is capped at the fees paid, or that neither side will owe lost profits, have allocated risk, and a court will not reallocate it because the loss turned out to be large. The Texas Supreme Court said as much in Bombardier Aerospace Corp. v. SPEP Aircraft Holdings in 2019, enforcing limitation of liability clauses negotiated by sophisticated, counsel-represented parties. The result is that the clause, not the size of the loss, usually decides what a contract claim is worth.

There are three common forms, and a contract often has all three:

• A cap. Total liability limited to a dollar amount, or to the fees paid in the preceding 12 months, or to the contract price.
• An exclusion of categories. No liability for consequential, incidental, indirect, special or punitive damages, often with lost profits, lost revenue and lost data named.
• An exclusive remedy. The buyer's sole remedy is repair, replacement or a refund, and nothing else.

Sales of goods: the UCC states the rule

When the contract is for goods, Business and Commerce Code section 2.719 is the governing text. It allows the parties to provide remedies in addition to or in substitution for those in the Code and to limit the measure of damages, giving repair and replacement or return of the goods and refund as examples. A remedy is exclusive only if the contract expressly says so. Consequential damages may be limited or excluded unless the limitation is unconscionable, and the statute adds that a limitation of damages where the loss is commercial is not prima facie unconscionable. Between two businesses, a consequential damages waiver on a sale of goods is therefore presumptively enforceable.

The statute also contains the main escape hatch. Section 2.719(b) provides that where circumstances cause an exclusive or limited remedy to fail of its essential purpose, the buyer may pursue the remedies the Code otherwise provides. The classic case is a repair-or-replace remedy where the seller cannot or will not make the goods work after repeated attempts; the buyer is left with no effective remedy at all, and the exclusivity falls away. Courts disagree about whether a consequential damages exclusion survives when the exclusive remedy fails, and the answer often turns on how the two clauses are drafted and whether they are independent of each other.

Services and other contracts: the common law

Outside the UCC, Texas applies ordinary contract principles, and the result is similar. Parties may limit or exclude categories of damages and cap total liability. The clause is read according to its plain words, so the fight is usually about scope: whether "consequential damages" includes a particular loss, whether the cap applies to each breach or to the contract as a whole, whether a fee-based cap counts fees paid under one order or under the master agreement, and whether the clause reaches claims pleaded as torts rather than breach of contract. Drafting that answers these questions in advance is worth more than any argument afterward. How the clause interacts with the ordinary damages rules is covered in what damages a business can recover for breach of contract in Texas.

Fraud: what a cap can and cannot do

Bombardier is the leading Texas case on fraud and liability limits. The buyers of an aircraft proved fraud, and the jury awarded actual and punitive damages. The limitation of liability clauses barred punitive damages, and the Texas Supreme Court enforced them: the buyers kept their fraud claim and their actual damages, but the clause they had agreed to took away the exemplary award. The court stressed that the parties were sophisticated and that the clauses did not purport to eliminate liability for fraud altogether; as it put it, the buyers only waived the ability to recover punitive damages for any fraud.

The line that case draws is the practical one. A clause that limits the remedies for fraud between businesses can be enforced. A clause that would leave a defrauded party with no remedy at all for a deliberate lie is on much weaker ground, and Texas courts have long been reluctant to let a party contract its way out of its own fraud entirely. Whether a given clause falls on one side or the other is a question of its wording and the parties' sophistication. The related question of when a lie before signing supports a claim is covered in fraudulent inducement in Texas.

Negligence: the fair notice rules

A clause that releases a party in advance from liability for its own negligence is treated more strictly than a cap on contract damages. In Dresser Industries v. Page Petroleum in 1993 the Texas Supreme Court applied the fair notice requirements to such releases: the intent to release a party from the consequences of its own negligence must be expressed in specific terms within the four corners of the contract (the express negligence doctrine), and the clause must be conspicuous, meaning a reasonable person would notice it through its placement, type size, capitals or contrasting print. Whether a clause meets fair notice is a question of law for the court. The same rules govern indemnity clauses, which are covered in indemnification clause disputes. A damages cap that does not release negligence but merely limits the amount recoverable for breach is usually not subject to the fair notice rules, though the line can be contested when a cap is drafted broadly enough to cover negligence claims.

The DTPA and other statutes

Some claims cannot be contracted away by an ordinary clause. A business that qualifies as a consumer under the Texas Deceptive Trade Practices Act cannot waive its DTPA rights except through a waiver that meets Business and Commerce Code section 17.42: in writing, signed, by a consumer not in a significantly disparate bargaining position who was represented by counsel of its own choosing, conspicuous, in at least 10-point bold type and headed "Waiver of Consumer Rights." A limitation of liability clause is not that waiver. The DTPA's own exemptions matter more in practice: section 17.49 removes written contracts over $100,000 where the consumer had its own lawyer and transactions over $500,000, other than those involving a consumer's residence. Whether a business can use the DTPA at all is covered in whether a business can sue under the Texas DTPA.

Example

Suppose a Dallas distribution company licenses warehouse management software from a vendor under a master agreement that caps the vendor's total liability at the fees paid in the prior 12 months and excludes "consequential, indirect and special damages, including lost profits and lost data." A failed update corrupts inventory records for three weeks, and the company loses a large customer. Its lost profits from that customer are consequential damages, and the exclusion bars them. Its direct costs of restoring the data and the fees for the period the system did not work are direct damages, recoverable up to the cap. If the company can show the vendor knew the update was defective and said otherwise, a fraud claim may survive, and under Bombardier the clause would still be read to see whether it limits the fraud remedy or tries to abolish it. The economics of the claim are set by the clause the company signed, which is why the clause should have been negotiated when the vendor still wanted the deal.

Reading your clause

• Identify what is capped: all liability, or only liability for breach of specific sections? Each breach or the contract as a whole?
• Identify what is excluded, and check for carve-outs. Many clauses exclude from the cap breaches of confidentiality, indemnity obligations, infringement, gross negligence, willful misconduct or fraud. Those carve-outs often decide the case.
• Check whether attorney's fees are inside the cap. Fees awarded under Civil Practice and Remedies Code chapter 38 are generally a separate recovery unless the clause includes them.
• If the contract is for goods, ask whether the exclusive remedy has failed of its essential purpose, and whether the consequential damages exclusion is drafted to stand on its own.
• Consider whether the loss can be framed as direct rather than consequential. The classification is contested in many cases, and it is often the whole dispute.

A limitation of liability clause is one of the first things a litigator reads when valuing a contract claim, because it sets the ceiling before the facts are even examined. Tina Wysk represents Dallas businesses pursuing and defending contract and fraud claims where liability limits are in dispute, in state and federal court and in arbitration.