Can I Get Punitive Damages for Fraud in Texas?

The short answer

A business that proves fraud can ask the jury for exemplary damages on top of its actual loss. Chapter 41 of the Texas Civil Practice and Remedies Code governs every step: who qualifies, the standard of proof, how the jury decides, and how much. The chapter uses the term exemplary damages and defines it to include punitive damages; the words mean the same thing.

Fraud is one of only three grounds. Section 41.003(a) permits exemplary damages only where the harm results from fraud, malice or gross negligence. Breach of contract is not on the list, which is the main reason a business with both a contract claim and a fraud claim pleads both: the fraud claim is the only route to a punitive award. The line between the two is drawn in fraud versus a broken promise.

What must be proven, and how

Three requirements come from section 41.003 and the definitions in section 41.001.

• Clear and convincing evidence. The plaintiff must prove the fraud by clear and convincing evidence, defined as proof that produces in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations. This is higher than the preponderance standard that decides liability. The statute adds that the burden may not be shifted to the defendant or satisfied by evidence of ordinary negligence, bad faith or a deceptive trade practice.
• Actual fraud, not constructive fraud. Section 41.001(6) defines fraud for this purpose as fraud other than constructive fraud. A breach of fiduciary duty that involved no deceit may be constructive fraud and support disgorgement, but it does not by itself support an exemplary award unless malice or gross negligence is also shown.
• Unanimous jury. Under section 41.003(d) exemplary damages may be awarded only if the jury is unanimous on liability for and the amount of exemplary damages, and the court must instruct the jury accordingly.

Section 41.004 adds two gates. Exemplary damages may be awarded only if damages other than nominal damages are also awarded, so a plaintiff who proves fraud but no real loss gets no punitive award. And a plaintiff who elects to have its recovery multiplied under another statute, such as the treble damages provision of the Deceptive Trade Practices Act, may not also recover exemplary damages for the same conduct.

The cap

Section 41.008(b) limits exemplary damages against a defendant to the greater of two amounts:

1. Two times the amount of economic damages, plus an amount equal to any noneconomic damages found by the jury, not to exceed $750,000; or
2. $200,000.

Economic damages are compensatory damages for actual economic or pecuniary loss. Noneconomic damages are those for mental anguish, injury to reputation and similar non-pecuniary harm, which rarely feature in business fraud cases between companies. For a typical commercial fraud case, then, the practical cap is twice the economic damages, with the fixed floor controlling in cases where the economic loss was small.

Example

Suppose a Dallas jury finds that a seller committed fraud in the sale of a company and awards the buyer $1,000,000 in economic damages, with no noneconomic damages. The jury then awards a far larger sum in exemplary damages. The court will reduce the exemplary award to $2,000,000, which is two times the economic damages and more than the alternative floor. If the economic damages had been small, say a tenth of that, the floor in the second alternative would be the cap instead, because it would exceed twice the economic damages.

Two features of the cap are easy to miss. Under section 41.008(e), the jury is never told about it; the cap is applied by the judge after the verdict. And under section 41.006, where there are several defendants the award must be specific to each, and each is liable only for the amount awarded against it, so the cap applies defendant by defendant.

When the cap does not apply

Section 41.008(c) removes the cap when the plaintiff seeks exemplary damages based on conduct described as a felony in listed sections of the Penal Code, committed knowingly or intentionally. Several of the listed offenses describe business fraud:

• Forgery (Penal Code § 32.21)
• Commercial bribery (§ 32.43)
• Misapplication of fiduciary property or property of a financial institution (§ 32.45)
• Fraudulent securing of document execution (§ 32.46)
• Fraudulent destruction, removal or concealment of a writing (§ 32.47)
• Theft (chapter 31) at the level of a third-degree felony or higher

No criminal conviction is required. The civil jury decides whether the conduct met the elements of the offense, and if it did, the exemplary award stands at whatever amount the jury found, subject to constitutional limits on excessiveness. For a fiduciary who diverted company funds, or a seller who forged a document to close, this exception can transform the exposure, and it is one reason the allegations in a fraud petition are drafted with the Penal Code in view.

How the amount is decided

Section 41.011 tells the jury what to consider in setting the amount: the nature of the wrong, the character of the conduct, the degree of the wrongdoer's culpability, the situation and sensibilities of the parties, the extent to which the conduct offends a public sense of justice and propriety, and the defendant's net worth.

Net worth is the factor that makes exemplary damages claims procedurally distinctive. Under section 41.0115 a plaintiff may obtain discovery of the defendant's net worth only after a hearing at which the court finds a substantial likelihood of success on the exemplary damages claim, and then only by the least burdensome method. Under section 41.009 a defendant may require a bifurcated trial: the jury first decides liability and compensatory damages, and only if it finds liability for exemplary damages does it hear the net worth evidence and set the amount. Section 41.007 adds that no prejudgment interest accrues on the exemplary award.

Statutory fraud, the DTPA and fiduciary claims

Chapter 41 interacts differently with each related claim.

• Statutory fraud under section 27.01 of the Business and Commerce Code authorizes exemplary damages against a person who acted with actual awareness of the falsity. Section 41.003(c) then requires that mental state to be proven by clear and convincing evidence, and the section 41.008 cap applies. Details are in statutory fraud in real estate and stock transactions.
• The Deceptive Trade Practices Act is outside chapter 41 entirely. Section 17.50(g) says so, and the DTPA has its own enhanced recovery: up to three times economic damages for knowing conduct. A plaintiff elects between the DTPA multiplier and exemplary damages on a common-law claim; it cannot have both.
• Breach of fiduciary duty supports exemplary damages only where actual fraud, malice or gross negligence is proven. Its equitable remedies, disgorgement and fee forfeiture, are not punitive and are not capped, as explained in remedies for breach of fiduciary duty.

Can a contract waive punitive damages?

Between sophisticated commercial parties, yes. In Bombardier Aerospace Corp. v. SPEP Aircraft Holdings (Tex. 2019) the Texas Supreme Court enforced a clause in an aircraft purchase agreement waiving punitive damages, even though the jury had found fraud, reasoning that the parties were sophisticated, represented by counsel, and had allocated the risk deliberately. The court distinguished a waiver of punitive damages from an attempt to escape liability for fraud altogether: the buyer kept its actual damages. A business reviewing its exposure, or its contracts, should read the limitation-of-remedies clause with this decision in mind.

What this means in practice

For a plaintiff, exemplary damages are real but bounded. In a case with substantial economic loss and no felony-level conduct, the realistic ceiling is twice the economic damages, reached only with clear and convincing proof and a unanimous jury. For a defendant, the exposure is actual damages plus up to that multiple, the risk of an uncapped award if the conduct fits a listed offense, and the prospect of net worth discovery if the claim is strong. Both sides tend to settle fraud cases with these numbers in view. Tina Wysk litigates business fraud claims, including exemplary damages claims and defenses, in Dallas state and federal courts.