When is a liquidated damages clause valid and enforceable?

  
WHAT IS A LIQUIDATED DAMAGES PROVISION IN A CONTRACT?
 
A valid liquidated damages clause estimates in advance the just compensation a party will accrue if the other party to the contract fails to perform. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 664 (Tex. 2005). “Whether a contractual provision is an enforceable liquidated damages provision or an unenforceable penalty is a question of law[.]” Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991).
 
ENFORCEABILITY OF CONTRACTUAL LIQUIDATED DAMAGES PROVISION
 
In determining whether a liquidated damages clause is enforceable, courts examine (1) whether the harm caused by the prospective breach of the contract is incapable or difficult of estimation and (2) whether the amount of liquidated damages called for is a reasonable forecast of just compensation. Id. If either element is lacking, the liquidated damages clause is unenforceable. Arthur’s Garage, Inc. v. Racal-Chubb Sec. Sys., Inc., 997 S.W.2d 803, 810 (Tex. App.—Dallas 1999, no pet.).
  
Evidence regarding the difficulty of estimating damages and whether the amount of liquidated damages is a reasonable forecast of just compensation, must be viewed as of the time the contract was executed. Baker v. Int’l Record Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. App.—Dallas 1991, no writ) (op. on reh’g); see also Oetting v. Flake Unif. & Linen Serv., Inc., 553 S.W.2d 793, 796 (Tex. App.—Fort Worth 1977, no writ). “If the liquidated damages are proven to be disproportionate to the actual damages, the liquidated damages can be declared a penalty and recovery limited to actual damages.” TXU Portfolio Mgmt. Co., L.P. v. FPL Energy, LLC, 328 S.W.3d 580, 589 (Tex. App.—Dallas 2010, pet. filed) (citing Baker, 812 S.W.2d at 55).
  
The burden of proving a penalty defense is on the party challenging the liquidated damages clause. Baker, 812 S.W.2d at 55; see also Urban Television Network Corp. v. Creditor Liquidity Solutions, L.P., 277 S.W.3d 917, 919 (Tex. App.—Dallas 2009, no pet.). Generally, the party asserting this defense must prove the amount of the other party’s actual damages, if any, to show that the liquidated damages set forth in the agreement were not an approximation of actual loss. Baker, 812 S.W.2d at 55; TXU Portfolio, 328 S.W.3d at 589. SOURCE: Beaumont Court of Appeals - 09-10-00361-CV - 5/19/11 (Thus, the liquidated damages provision for the payment of $20,000 was not a reasonable forecast of just compensation for any allowable damages resulting from [ PARTY'S ] breach of the agreement. We hold the liquidated damages clause is unenforceable.)
 
RELATED CASELAW CLIPS:
 
We enforce a liquidated damages clause if (1) the harm caused by the breach is incapable or difficult of estimation, and (2) the amount of liquidated damages is a reasonable forecast of just compensation. See Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991). An assertion that a liquidated damages provision constitutes an unenforceable penalty is an affirmative defense, and the party asserting penalty bears the burden of proof. See Urban Television Network Corp. v. Liquidity Solutions, 277 S.W.3d 917, 919 (Tex. App.-Dallas 2009, no pet.); Fluid Concepts, Inc. v. DA Apts., LP, 159 S.W.3d 226, 231 (Tex. App.-Dallas 2005, no pet.). Generally, that party must prove the amount of actual damages, if any, to demonstrate that "the actual loss was not an approximation of the stipulated sum." Baker v. Int'l Record Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. App.-Dallas 1991, no writ). If the amount stipulated in the liquidated damages clause is "shown to be disproportionate to actual damages," we should declare that the clause is a penalty and limit recovery to actual damages. Johnson Eng'rs, Inc. v. Tri-Water Supply Corp., 582 S.W.2d 555, 557 (Tex. Civ. App.-Texarkana 1979, no writ); see also TEX. BUS. & COM. CODE ANN. § 2.718(a) (Vernon 2009) ("A term fixing unreasonably large liquidated damages is void as a penalty.").

Whether a liquidated damages clause is an unenforceable penalty is a question of law for the court, but sometimes factual issues must be resolved before the court can decide the legal question. See Phillips, 820 S.W. 2d at 788. For example, in Phillips, the Texas Supreme Court observed that "to show that a liquidated damages provision is unreasonable because the actual damages incurred were much less than the amount contracted for, a defendant may be required to prove what the actual damages were." Id. SOURCE: Houston Court of Appeals - 01-09-00155-CV - 10/21/10 Whether a liquidated damages provision is an enforceable contractual provision or an unenforceable penalty is a question of law. Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991). To find a liquidated damages provision enforceable, a court must find that (1) the harm caused by the breach is incapable or difficult of estimation, and (2) the amount of liquidated damages called for is a reasonable forecast of just compensation. Phillips, 820 S.W.2d at 788 (quoting Rio Grande Valley Sugar Growers, Inc. v. Campesi, 592 S.W.2d 340, 342 n.2 (Tex. 1979)). The difficulty of estimation of harm must have existed at the time the contract was executed. See Murphy v. Cintas Corp., 923 S.W.2d 663, 666 (Tex. App.-Tyler 1996, writ denied).

SOURCE: Austin Court of Appeals - 03-09-00063-CV - 6/11/10

A valid liquidated damage provision estimates in advance the just compensation to a party accruing from the failure to perform certain contractual obligations. See Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 664 (Tex.2005); Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 486 (1952). In general, the issue of whether a contractual provision is an enforceable liquidated damage clause or an unenforceable penalty is a question of law for the court. See Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex.1991). In making this determination, we examine whether the harm caused by the prospective breach of the contract is incapable or difficult of estimation and whether the amount of liquidated damages is a reasonable forecast of just compensation. Id.; Baker v. Int'l Record Syndicate, Inc., 812 S.W.2d 53, 55 (Tex.App.-Dallas 1991, no writ). The evidence concerning the difficulty of estimation and the reasonableness of the damages forecast must be viewed as of the time the contract was executed. Baker, 812 S.W.2d at 55. The party asserting that the provision is an unenforceable penalty has the burden of proof. See Fluid Concepts, Inc. v. DA Apartments Ltd., P'ship, 159 S.W.3d 226, 230-31 (Tex.App.-Dallas 2005, no pet.). Where, as here, the parties have filed cross-motions for summary judgment, we may reverse and render the judgment that the trial court should have rendered. See CU Lloyd's of Tex. v. Feldman, 977 S.W.2d 568, 568 (Tex. 1998) (per curiam).
 
SOURCE: Dallas Court of Appeals - 05-08-01584-CV 7/27/10

Due Diligence in Service Requirement when suit filed at end of limitations period

Is a claim filed before expiration of the statute of limitations time-barred if citation is not served until after the limitations period has ended? A person must bring suit for personal injury no later than two years after the day the cause of action accrues. Tex. Civ. Prac. & Rem. Code Ann. § 16.003(a) (West Supp. 3 2010). “If a party files its petition within the limitations period, service outside the limitations period may still be valid if the plaintiff exercises diligence in procuring service on the defendant.” Ashley v. Hawkins, 293 S.W.3d 175, 179 (Tex. 2009). When a defendant affirmatively pleads the defense of limitations and shows that service was untimely, the burden shifts to the plaintiff to prove diligence. Id. The relevant question is “whether the plaintiff acted as an ordinarily prudent person would have acted under the same or similar circumstances and was diligent up until the time the defendant was served.” Proulx v. Wells, 235 S.W.3d 213, 216 (Tex. 2007). “Although a fact question, a plaintiff‟s explanation may demonstrate a lack of diligence as a matter of law, „when one or more lapses between service efforts are unexplained or patently unreasonable.‟” Ashley, 293 S.W.3d at 179 (quoting Proulx, 235 S.W.3d at 216). The plaintiff bears the burden of presenting evidence regarding the efforts made to serve the defendant, and explaining every lapse in effort or period of delay. Proulx, 235 S.W.3d at 216. SOURCE: Beaumont Court of Appeals - 09-11-00076-CV - 5/26/11

Use of fraud to get someone to sign contract is actionable

TEXAS LAW RECOGNIZES DUTY NOT TO USE FRAUD TO PROCURE ASSENT TO CONTRACT Under Texas law, a party to a contract has “a duty to abstain from inducing another to enter into a contract through the use of fraudulent misrepresentations.” Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 46 (Tex. 1998). ELEMENTS OF FRAUD At common law, fraud is generally considered to have occurred when (a) “a party makes a material misrepresentation,” (b) “the misrepresentation is made with knowledge of its falsity or made recklessly without any knowledge of the truth and as a positive assertion,” (c) “the misrepresentation is made with the intention that it should be acted on by the other party,” and (d) “the other party relies on the misrepresentation and thereby suffers injury.” Comm. on Pattern Jury Charges, State Bar of Tex., Texas Pattern Jury Charges: Business, Consumer, Insurance & Employment PJC 105.2 (2010). Also see --> fraudulent inducement of contract as distinct cause of action Rescission is an equitable remedy available in cases of fraud. See Bank One, Tex., N.A. v. Stewart, 967 S.W.2d 419, 455 (Tex. App.—Houston [14th Dist.] 1998, pet. denied). SOURCE: Beaumont Court of Appeals - 09-10-00364-CV - 5/26/11

Interpreting the fine print: Is the contractual language clear or ambiguous?

How do Texas courts deal with the contention that a contract is ambiguous? 

Whether a contract is ambiguous is a question of law. Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). If the contract is so worded that it can be given a certain or definite legal meaning or interpretation, then it is not ambiguous and a court should construe the contract as a matter of law. SAS Institute, Inc. v. Breitenfeld, 167 S.W.3d 840, 841 (Tex. 2005); ACS Investors, Inc. v. McLaughlin, 943 S.W.2d 426, 430 (Tex. 1997). [ The court construes ] an unambiguous contract according to the plain meaning of its express wording. Lyons v. Montgomery, 701 S.W.2d 641, 643 (Tex. 1985). Unambiguous contracts are enforced as written. Heritage Resources, Inc., 939 S.W.2d at 121.
 
WHAT MAKES A CONTRACT AMBIGUOUS?

 “A contract is ambiguous when its meaning is uncertain and doubtful or is reasonably susceptible to more than one interpretation.” Id. However, a contract is ambiguous when its meaning is uncertain and doubtful or it is reasonably susceptible to more than one meaning. Nevarez v. Ehrlich, 296 S.W.3d 738, 742 (Tex.App.--El Paso 2009, no pet.). Not every difference in the interpretation of a contract amounts to an ambiguity. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994). Mere disagreement over the meaning of a provision in the contract does not make the terms ambiguous. Richardson Lifestyle Association v. Houston, 853 S.W.2d 796, 800 (Tex.App.--Dallas 1993, writ denied).

Likewise, uncertainty or lack of clarity in the language chosen by the parties is insufficient to render a contract ambiguous. Preston Ridge Fin. Servs. Corp. v. Tyler, 796 S.W.2d 772, 777 (Tex.App.--Dallas 1990, writ denied). Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present when the contract was entered. Coker v. Coker, 650 S.W.2d 391, 394 (Tex. 1983).
 
When a contract contains an ambiguity, the granting of a motion for summary judgment is improper because the interpretation of the instrument becomes a fact issue. Id. We determine whether a contract is ambiguous by looking at the contract as a whole in light of the circumstances present when the parties entered the contract. Universal Health Servs., Inc. v. Renaissance Women’s Group, P.A., 121 S.W.3d 742, 746 (Tex. 2003). If a contract is determined to be ambiguous, then a court may consider extraneous evidence to ascertain the true meaning of the instrument. Nat’l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex.1995).
 
TWO CATEGORIES OF CONTRACT AMBIGUITY

An ambiguity may be either patent or latent. Id. A patent ambiguity is evident on the face of the contract. Id. A latent ambiguity arises when a contract that is unambiguous on its face is applied to the subject matter with which it deals and an ambiguity appears by reason of some collateral matter. Id. When a contract contains an ambiguity, either patent or latent, the interpretation of the instrument becomes a fact issue. Coker, 650 S.W.2d at 394; Quality Infusion Care, Inc. v. Health Care Service Corp., 224 S.W.3d 369, 379 (Tex.App.--Houston [1st Dist.] 2006, no pet.). The trier of fact [ jury or judge in bench trial ] must resolve the ambiguity by determining the true intent of the parties. Coker, 650 S.W.2d at 394-95.
 
SOURCE: El Paso Court of Appeals - 08-08-00343-CV - 4/20/11

No attorney's fees on fraud claim

Can a plaintiff be awarded attorney's fees when he or she obtains a judgment for fraud? Attorneys’ fees are not recoverable for prosecuting a fraud or negligent-misrepresentation claim. See Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d at 304 (citing New Amsterdam Cas. Co. v. Tex. Indus., 414 S.W.2d 914, 915 (Tex. 1967)); see also Tex. Civ. Prac. & Rem. Code Ann. § 38.001 (West 2008) (setting forth claims for which attorneys’ fees are recoverable). SOURCE: Houston Court of Appeals (Beaumont caselaw b/c of transfer) - 14-08-00329-CV - 5/26/11

Texas DJA: When is declaratory judgment an appropriate remedy?

CLAIM FOR DECLARATORY JUDGMENT UNDER THE TEXAS VERSION OF THE UNIFORM DECLARATORY JUDGMENTS ACT (UDJA, Texas DJA, TDJA)

Under what circumstances is it available?

A declaratory judgment is appropriate only if a justiciable controversy exists concerning the rights and status of the parties and the controversy will be resolved by the declaration sought. Bonham State Bank v. Beadle, 907 S.W.2d 465, 467 (Tex. 1995) (citing Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 446 (Tex. 1993)). “To constitute a justiciable controversy, there must exist a real and substantial controversy involving genuine conflict of tangible interests and not merely a theoretical dispute.” Id. If declaratory relief will not terminate a controversy between parties and would be irrelevant at the time judgment is rendered, a declaratory judgment will amount to no more than an advisory opinion, which the trial court lacks power to provide. Kenneth Leventhal & Co. v. Reeves, 978 S.W.2d 253, 259 (Tex. App.—Houston [14th Dist.] 1998, no pet.).

SOURCE: Houston Court of Appeals (Beaumont caselaw b/c of transfer) - 14-08-00329-CV - 5/26/11

Attorney's Fees in Breach-of-Contract Action

Texas follows "the American Rule" Attorneys’ fees are not recoverable in Texas unless allowed by statute or the parties’ contract. Chapa, 212 S.W.3d at 310–11; Dallas Cent. Appraisal Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77 (Tex. 1992). ATTORNEY'S FEES UNDER CHAPTER 38 OF THE CPRC: Prevailing plaintiffs only A party “may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for . . . an oral or written contract.” Tex. Civ. Prac. & Rem. Code Ann. § 38.001(8). Our court has held that a “valid claim” under this statute is not limited to an action for monetary damages and may include an action for specific performance. See Rasmusson v. LBC PetroUnited, Inc., 124 S.W.3d 283, 287 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) (citing Jones v. Kelley, 614 S.W.2d 95, 96, 100–01 (Tex. 1981)). No fees for successful defense of BoC claim under Chapter 38 [but that may change as a result of latest installment of legislative "tort" reform;---> Loser pays bill] Section 38.001(8) does not authorize recovery of attorneys’ fees for successfully defending a contract claim. See Tex. Civ. Prac. & Rem. Code Ann. § 38.001(8); Thottumkal v. McDougal, 251 S.W.3d 715, 719 (Tex. App.—Houston [14th Dist.] 2008, pet. denied). Prevailing defendant may recover fees if contractually authorized However, the above-quoted contractual provision entitling a “prevailing party” to recover attorneys’ fees does not distinguish between successful prosecution and successful defense of a claim. Therefore, we may uphold the trial court’s determination that [ litigant ] is entitled to some fees because it successfully defended [ opposing party's ] breach-of-contract counterclaim. SOURCE: Houston Court of Appeals (Beaumont caselaw b/c of transfer) - 14-08-00329-CV - 5/26/11 ATTORNEYS FEES UNDER THE DJA: The Texas Declaratory Judgment Act ("the ACT') [TDJA aka DJA] provides, “In any proceeding under this chapter, the court may award costs and reasonable and necessary attorney’s fees as are equitable and just.” Tex. Civ. Prac. & Rem. Ann. § 37.009 (West 2008). “The [Act] entrusts attorney fee awards to the trial court’s sound discretion, subject to the requirements that any fees awarded be reasonable and necessary, which are matters of fact, and to the additional requirements that fees be equitable and just, which are matters of law.” Bocquet v. Herring, 972 S.W.2d 19, 21 (Tex. 1998). SOURCE: Houston Court of Appeals (Beaumont caselaw b/c of transfer) - 14-08-00329-CV - 5/26/11

What kind of remedy is specific performance?

SPECIFIC PERFORMANCE & CONTRACT CLAIMS Specific performance is an equitable remedy that may be awarded upon a showing of breach of contract. Blue Moon Venture, L.L.C. v. Horvitz, No. 14-09-00459-CV, 2010 WL 4013533, at *1 (Tex. App.—Houston [14th Dist.] Oct. 14, 2010, no pet.) (mem. op.) (citing Stafford v. S. Vanity Magazine, Inc., 231 S.W.3d 530, 535 (Tex. App.—Dallas 2007, pet. denied)). Elements of claim for specific performance A party seeking specific performance must plead and prove (1) compliance with the contract including tender of performance unless excused by the defendant’s breach or repudiation and (2) it was ready, willing, and able to perform at relevant times. Id. (citing DiGiuseppe v. Lawler, 269 S.W.3d 588, 593–94, 601 (Tex. 2008)). When do Texas courts award specific performance? Whether to award specific performance is a matter committed to the trial court’s discretion. Chapman v. Olbrich, 217 S.W.3d 482, 491 (Tex. App.—Houston [14th Dist.] 2006, no pet.) (citing Bell v. Rudd, 144 Tex. 491, 191 S.W.2d 841, 843 (1946); Roundville Partners, L.L.C. v. Jones, 118 S.W.3d 73, 79 (Tex. App.—Austin 2003, pet. denied)). A trial court abuses its discretion when it acts in an arbitrary or unreasonable manner or, stated differently, without reference to any guiding rules or principles. Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241–42 (Tex. 1985). Further, a clear failure by the trial court to analyze or apply the law correctly constitutes an abuse of discretion. Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992) (orig. proceeding). SOURCE: Houston Court of Appeals (case transferred from Beaumont) - 14-08-00329-CV - 5/26/11

Can informal relationship involving confidence and trust give rise to fiduciary duty?

BREACH OF FIDUCIARY DUTY: INFORMAL VS. FORMAL FIDUCIARY RELATIONSHIPS Fiduciary duties may arise from certain formal relationships that are considered to be fiduciary as a matter of law or from informal, “confidential” relationships. Id. at 275. To recover on a claim for breach of fiduciary duty, one of the elements that must be established is the existence of a fiduciary or confidential relationship. Id. The existence of such a relationship is ordinarily a question of fact, but it becomes a question of law when there is no evidence on the issue. Id. Texas courts are reluctant to recognize informal fiduciary relationships. See Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex. 1997); Jones v. Thompson, ___ S.W.3d ___, ___, 2010 WL 3157145, at *8 (Tex.App.--El Paso Aug. 11, 2010, pet. denied). Accordingly, not every relationship that involves a high degree of trust and confidence will give rise to a fiduciary duty. Meyer v. Cathey, 167 S.W.3d 327, 330 (Tex. 2005). Because subjective trust is insufficient to create a fiduciary relationship, the mere fact that one party trusts another does not transform a business arrangement into a fiduciary relationship. Id. at 331. The trust must be “justifiable.” Thigpen v. Locke, 363 S.W.2d 247, 253 (Tex. 1963). When “one person is accustomed to being guided by the judgment or advice of another or is justified in believing one will act in the best interest of another because of a family relationship, a confidential relationship may arise.” Trostle v. Trostle, 77 S.W.3d 908, 914 (Tex.App.--Amarillo 2002, no pet.). The existence of a confidential relationship depends on the “actualities” of the particular relationship. Thigpen, 363 S.W.2d at 253. The confidential relationship must exist prior to, and apart from, the transaction that forms the basis of the lawsuit. Meyer, 167 S.W.3d at 331; Hamblet v. Coveney, 714 S.W.2d 126, 129 (Tex.App.--Houston [1st Dist.] 1986, writ ref’d n.r.e.). One party’s lack of fluency in English does not create a confidential relationship. Salinas v. Beaudrie, 960 S.W.2d 314, 320 (Tex.App.--Corpus Christi 1997, no pet.). Nor do uncles and nephews necessarily have a confidential relationship. See Tex. Bank & Trust Co. v. Moore, 595 S.W.2d 502, 508 (Tex. 1980). And subjective trust will not suffice unless the trust was justified. See Meyer, 167 S.W.3d at 331. Compare Flanary v. Mills, 150 S.W.3d 785, 794 (Tex.App.--Austin 2004, pet. denied)(evidence sufficient where parties had uncle/nephew relationship, but they were more like brothers, one party worked for the other and had always “looked up” to him, and they had previously been business partners), and Dominguez v. Brackey Enters., Inc., 756 S.W.2d 788, 791 (Tex.App.--El Paso 1988, writ denied)(evidence sufficient where parties had a longstanding business and personal association and one party was accustomed to being guided by the other’s advice in legal and accounting matters), and Hamblet, 714 S.W.2d at 129 (evidence sufficient where two parties had aunt/niece relationship, they and their families had a close relationship spanning years, and one party counseled the other for years), with Thigpen, 363 S.W.2d at 249, 252-53 (evidence insufficient where parties were close friends who saw each other frequently and one party personally guaranteed a loan for the others and gave them business advice), and Trostle, 77 S.W.3d at 914 (evidence insufficient where parties had stepmother/stepson relationship, but they were not particularly close). SOURCE: El Paso Court of Appeals - 08-09-00084-CV - 4/29/11

Moving for summary judgment based on SoL: Who has the burden of proof on accrual?

  
The Date the Plaintiff's Claim Accrued - an element of proof in MSJ based on the applicable statute of limitations as an affirmative defense

“A defendant moving for summary judgment on the affirmative defense of limitations has the burden to conclusively establish that defense.” KPMG Peat Marwick v. Harrison Cnty. Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex. 1999). “Thus, the defendant must (1) conclusively prove when the cause of action accrued, and (2) negate the discovery rule, if it applies and has been pleaded or otherwise raised, by proving as a matter of law that there is no genuine issue of material fact about when the plaintiff discovered, or in the exercise of reasonable diligence should have discovered the nature of its injury.” Id. If the movant establishes that the statute of limitations bars the action, the respondent must then adduce summary judgment proof raising a fact issue in avoidance of the statute of limitations. Id.

Generally, when a cause of action accrues is a question of law. Provident, 128 S.W.3d at 221. “[A] cause of action accrues and the statute of limitations begins to run when facts come into existence that authorize a party to seek a judicial remedy.” Id. “In most cases, a cause of action accrues when a wrongful act causes a legal injury, regardless of when the plaintiff learns of that injury or if all resulting damages have yet to occur.” Id.

However, two exceptions may defer accrual of a claim: the discovery rule and the doctrine of fraudulent concealment. The discovery rule is “a very limited exception to statutes of limitations” and applies “only when the nature of the plaintiff’s injury is both inherently undiscoverable and objectively verifiable.” Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732, 734 (Tex. 2001). “[W]hen the discovery rule applies, accrual is tolled until a claimant discovers or in the exercise of reasonable diligence should have discovered the injury and that it was likely caused by the wrongful acts of another.” Childs v. Haussecker, 974 S.W.2d 31, 40 (Tex. 1998) (emphasis added).
 
Similarly, the doctrine of fraudulent concealment defers accrual of a cause of action because “a person cannot be permitted to avoid liability for his actions by deceitfully concealing wrongdoing until limitations has run.” S.V. v. R.V., 933 S.W.2d 1, 6 (Tex. 1996).

Under the discovery rule, once a plaintiff discovers or in the exercise of reasonable diligence should have discovered the injury and that it was likely caused by the wrongful acts of another, “limitations commences, even if the plaintiff does not know the exact identity of the wrongdoer.” Childs, 974 S.W.2d at 40; see also Exxon Corp. v. Emerald Oil & Gas Co., No. 05-1076, 2011 WL 1226100, at *8 (Tex. Apr. 1, 2011) (“Once a claimant learns of a wrongful injury, the statute of limitations begins to run even if the claimant does not yet know ‘the specific cause of the injury; the party responsible for it; the full extent of it; or the chances of avoiding it.’”) (quoting PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd., 146 S.W.3d 79, 93 (Tex. 2004)) (emphasis added). That is, the plaintiff must be aware that his injury was caused by someone’s wrongful act, but need not necessarily know who performed the wrongful act. The discovery rule is written into the statute of limitations for misappropriation of trade secrets. See Tex. Civ. Prac. & Rem. Code Ann. § 16.010(a) (West 2002) (“A person must bring suit for misappropriation of trade secrets not later than three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.”).

SOURCE: San Antonio Court of Appeals - 04-10-00243-CV - 5/25/11

ADDITIONAL CASELAW SNIPPETS: 

When the defendant bases a summary judgment motion on the statute of limitations, he must conclusively prove each element of that affirmative defense as a matter of law. KPMG Peat Marwick v. Harrison County Housing Finance Corp., 988 S.W.2d 746, 748 (Tex. 1999); Shah, 67 S.W.3d at 842. Ryland Group, Inc. v. Hood, 924 S.W.2d 120, 121 (Tex. 1996). A plaintiff suffers a “legal injury” when facts come into play which would authorize him to seek a judicial remedy. Apex Towing Co. v. Tolin, 41 S.W.3d 118, 120 (Tex. 2001). Once a claimant learns of a wrongful injury, the statute of limitations begins to run even if the claimant does not yet know “the specific cause of the injury; the party responsible for it; the full extent of it; or the chances of avoiding it.” PPG Industries, Inc. v. JMB/Houston Centers. Partners Ltd. Partnership, 146 S.W.3d 79, 93-94 (Tex. 2004); Velsicol Chemical Corp. v. Winograd, 956 S.W.2d 529, 531 (Tex. 1997).

How and when does the discovery rule provide relief against affirmative defense of limitations?

  
Discovery rule defers accrual of claim when it applies, triggering the running of the SoL at the point of discovery

“As a general rule, a cause of action accrues and the statute of limitations begins to run when facts come into existence that authorize a party to seek a judicial remedy.” Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 221 (Tex. 2003). The discovery rule operates to defer accrual of a claim until the plaintiffs knew or, in the exercise of reasonable diligence, should have known of the wrongful act causing their injury. Salinas v. Gary Pools, Inc., 31 S.W.3d 333, 336 (Tex.App.--San Antonio 2000, no pet.).

The discovery rule always applies to DTPA claims. Id.; see also Tex.Bus.&Com.Code Ann. § 17.565 (stating that DTPA suits must be filed “within two years after the date on which the false, misleading, or deceptive act or practice occurred or within two years after the consumer discovered or in the exercise of reasonable diligence should have discovered the occurrence of the false, misleading, or deceptive act or practice.”). Beyond that, the discovery rule is “a very limited exception to statutes of limitations” and applies only when the plaintiffs’ injury is inherently undiscoverable and objectively verifiable. Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732, 734 (Tex. 2001).

 “An injury is inherently undiscoverable if it is, by its nature, unlikely to be discovered within the prescribed limitations period despite due diligence.” Id. at 734-35. “Inherently undiscoverable” does not mean that particular plaintiffs did not discover their particular injuries within the limitations period. Id. at 735. The issue is whether the injury is of a type that generally is discoverable in the exercise of reasonable diligence. Id. “Knowledge of facts, conditions, or circumstances that would cause a reasonable person to make inquiry . . . is equivalent to knowledge of the cause of action for limitation purposes.” Southwest Olshan Found. Repair Co., LLC v. Gonzales, ___ S.W.3d ___, ___, 2011 WL 149870, at *4 (Tex.App.--San Antonio Jan. 19, 2011, no pet.h.).
 
When plaintiffs plead the discovery rule, a defendant who moves for summary judgment on the affirmative defense of limitations must prove as a matter of law that there is no genuine issue of material fact about when the plaintiffs should have discovered their injury in the exercise of reasonable diligence. See KPMG Peat Marwick v. Harrison County Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex. 1999); Salinas, 31 S.W.3d at 336. If the defendant conclusively establishes that the statute of limitations bars the plaintiffs’ claims, the plaintiffs must then submit summary judgment proof raising a fact issue in avoidance of the statute of limitations. See KPMG Peat Marwick, 988 S.W.2d at 748; Salinas, 31 S.W.3d at 336. 
 
SOURCE: El Paso Court of Appeals - 08-09-00116-CV - 4/27/11

Fraudulent Inducement claim requires proof of additional element

FRAUD RELATING TO A ENTRY INTO CONTRACT

In a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Esty v. Beal Bank S.S.B., 298 S.W.3d 280, 303 (Tex.App.--Dallas 2009, no pet.). The elements of fraud are (1) a material false representation, (2) that was made with knowledge or recklessness as to its falsity, (3) with the intent to induce reliance, and (4) that the other party “actually and justifiably relied upon,” causing him injury. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001); Wil-Roye Inv. Co. II v. Wash. Mut. Bank, FA, 142 S.W.3d 393, 411 (Tex.App.--El Paso 2004, no pet.).

RELIANCE ON REPRESENTATION: Was it reasonable, justifiable? 

Whether reliance is justifiable depends on the nature of the contract and the parties’ relationship. Coastal Bank SSB v. Chase Bank of Tex., N.A., 135 S.W.3d 840, 843 (Tex.App.--Houston [1st Dist.] 2004, no pet.). A party must generally exercise ordinary care for the protection of his own interests and is charged with knowledge of all facts that would have been discovered by a reasonably prudent and similarly situated person. Thigpen, 363 S.W.2d at 251; Wil-Roye, 142 S.W.3d at 411. Since he failed to raise a fact issue regarding the existence of a fiduciary duty, Garcia’s avowed subjective trust in Vera is insufficient to show that his reliance was justifiable. See Thigpen, 363 S.W.2d at 253; see also DRC Parts & Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854, 858 (Tex.App.--Houston [14th Dist.] 2003, pet. denied)(“[R]eliance upon an oral representation that is directly contradicted by the express, unambiguous terms of a written agreement between the parties is not justified as a matter of law.”).

 SOURCE: El Paso Court of Appeals - 08-09-00084-CV - 4/29/11

Distinguishing different types of fraud claims in Texas

  
COMMON-LAW FRAUD, FRAUD IN THE INDUCEMENT, STATUTORY FRAUD 

Common Law Fraud Claim To bring a claim for common law fraud, a plaintiff must show the following: (1) a material misrepresentation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 758 (Tex. 2001) (orig. proceeding).

Fraud in the Inducement Cause of Action To bring a claim for fraud in the inducement, a plaintiff must show the elements of fraud, see Balogh v. Ramos, 978 S.W.2d 696, 701 (Tex. App.—Corpus Christi 1998, pet. denied), and must show that she has been fraudulently induced to enter into a binding agreement. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001) (“Without a binding agreement, there is no detrimental reliance, and thus no fraudulent inducement claim. That is, when a party has not incurred a contractual obligation, it has not been induced to do anything.”).

Statutory Fraud [real estate transaction] To bring a claim for statutory fraud, [ Plaintiff ] must show the following: (1) the transaction involved real estate; (2) [ Defendant ]. made a false representation of a material fact or made a false promise to do an act to [ Defrauded Party ], or benefited by not disclosing that a third party’s representation or promise was false; (3) the false representation was made for the purpose of inducing [ Defrauded Party ] [ Name ] to enter into a contract; (4) [ Defrauded Party ] relied on the false representation or promise in entering into the contract; and (5) the reliance caused [ Defrauded Party ] injury. See Tex. Bus. & Com. Code Ann. § 27.01 (West 2009) (titled “Fraud in Real Estate and Stock Transactions”); Fletcher v. Edwards, 26 S.W.3d 66, 77 (Tex. App.—Waco 2000, pet. denied) (“A plaintiff establishes a statutory fraudulent inducement claim under section 27.01 of the Business and Commerce Code by showing: a false representation of a material fact; made to induce a person to enter a contract; and relied on by that person in entering the contract.”). The statutory cause of action differs from the common law only in that to recover actual damages, it does not require proof that the defendant made a material false representation knowing it to be false or made it recklessly as a positive assertion without any knowledge of its truth. Fletcher, 26 S.W.3d at 77.

 SOURCE: San Antonio Court of Appeals - 04-10-00616-CV - 5/11/11

CPRC Chapter 10 Sanctions: When can they be imposed?

Sanctions Under Chapter 10 of the Texas Civil Practice and Remedies Code Tex. Civ. Prac. & Rem. Code Ann. § 10.001. The trial court found that the petition was signed for an improper purpose and that its implicit assertion that the lawsuit was timely filed under the applicable statutes of limitations was frivolous because it was not warranted by existing law, had no basis in fact, or was unlikely to have any basis in fact. Although Rule 13 requires a party to have filed a groundless pleading brought in bad faith or a groundless pleading for harassment, sanctions under Chapter 10 can be awarded if the suit was filed for an improper purpose, even if the suit was not frivolous. Save Our Springs Alliance, Inc., 198 S.W.3d at 321. Compare Tex. R. Civ. P. 13 with Tex. Civ. Prac. & Rem. Code Ann. § 10.001. We construe the phrase “improper purpose” as the equivalent of “bad faith” under Rule 13. See Tex. R. Civ. P. 13; Save Our Springs Alliance, Inc., 198 S.W.3d at 321. For the reasons stated earlier in this opinion, there is no evidence of an improper purpose. Under Section 10.001, the signer of a pleading certifies that each claim and allegation is based on the signatory’s best knowledge, information, and belief, formed after reasonable inquiry. Low, 221 S.W.3d at 615. Each allegation and factual contention in a pleading must have, or be likely to have, evidentiary support after a reasonable investigation. Id. In Low, the Texas Supreme Court found sanctions were justified when the petition claimed physicians prescribed the drug Propulsid to White. White’s attorney was in possession of White’s medical records before he filed the lawsuit; those records did not indicate that the physicians prescribed or administered the drug to White. Id. at 616. Further, both physicians filed affidavits swearing that they did not in any way provide Propulsid to White. Id. at 617. The evidence, therefore, supported the trial court’s conclusion that the allegations against the physicians were without evidentiary support. Chapter 10 provides that: The signing of a pleading or motion as required by the Texas Rules of Civil Procedure constitutes a certificate by the signatory that to the signatory’s best knowledge, information, and belief, formed after reasonable inquiry: (1) the pleading or motion is not being presented for any improper purpose, including to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) each claim, defense, or other legal contention in the pleading or motion is warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; (3) each allegation or other factual contention in the pleading or motion has evidentiary support or, for a specifically identified allegation or factual contention, is likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and (4) each denial in the pleading or motion of a factual contention is warranted on the evidence or, for a specifically identified denial, is reasonably based on a lack of information or belief. SOURCE: Texarkana Court of Appeals - 06-10-00080-CV - 4/1/11

Sanctions Claim under Rule 13 and CPRC

  
CLAIM FOR FRIVOLOUS SUIT SANCTIONS UNDER RULE 13 AND CPRC

SANCTIONS UNDER TRCP 13 

Rule 13 authorizes the imposition of sanctions against an attorney, a represented party, or both, who filed a pleading that is either: (1) groundless and brought in bad faith; or (2) groundless and brought to harass. Tex. R. Civ. P. 13; see also Rudisell v. Paquette, 89 S.W.3d 233, 236 (Tex. App.—Corpus Christi 2002, no pet.). The rule defines “groundless” as having “no basis in law or fact and not warranted by good faith argument for the extension, modification, or reversal of existing law.” Tex. R. Civ. P. 13.

Sanctions may only be imposed for good cause under Rule 13, the particulars of which must be stated in the order. Tex. R. Civ. P. 13; Rudisell, 89 S.W.3d at 237. To impose sanctions under Rule 13 of the Texas Rules of Civil Procedure, the proponent of sanctions must establish that the suit was groundless and brought (1) in bad faith or (2) for purposes of harassment. Tex. R. Civ. P. 13.

A pleading is groundless when it has no basis in law or in fact. Tex. R. Civ. P. 13. The burden is on the party moving for sanctions to overcome the presumption that the pleading was filed in good faith. GTE Commc’ns Sys. Corp. v. Tanner, 856 S.W.2d 725, 731 (Tex. 1993). A groundless pleading is not sanctionable unless it is also brought in bad faith or for the purpose of harassment. Id. Bad faith does not exist when a party exercises bad judgment or negligence. Rather, bad faith means “the conscious doing of a wrong for dishonest, discriminatory, or malicious purposes.” Campos, 879 S.W.2d at 71; Mattly v. Spiegel, Inc., 19 S.W.3d 890, 896 (Tex. App.—Houston [14th Dist.] 2000, no pet.). In deciding whether a pleading was filed in bad faith or for the purpose of harassment, the trial court must measure a litigant’s conduct at the time the relevant pleading was signed. Texas-Ohio Gas, Inc. v. Mecom, 28 S.W.3d 129, 139 (Tex. App.—Texarkana 2000, no pet.). Rule 13 generally requires that the trial court hold an evidentiary hearing to make a determination about the motives and credibility of the person signing the petition. R.M. Dudley Constr. Co. v. Dawson, 258 S.W.3d 694 (Tex. App.—Waco 2008, pet. denied); see, e.g., Low, 221 S.W.3d at 613, 617 (referring to trial court’s evidentiary hearing on motion for Chapter 10 sanctions).

Rule 13 requires sanctions based on the acts or omissions of the represented party or counsel, and not merely on the legal merit of the pleading. Parker v. Walton, 233 S.W.3d 535, 539 (Tex. App.—Houston [14th Dist.] 2007, no pet.). This is true because improper motive is an essential element of bad faith. Elkins, 103 S.W.3d at 669; Alejandro v. Bell, 84 S.W.3d 383, 393 (Tex. App.––Corpus Christi 2002, no writ) (no evidence presented at sanctions hearing from which the trial court could determine lawsuit filed in bad faith).

SANCTIONS UNDER CHAPTER 10 OF THE CPRC 

Similarly, to award sanctions under Chapter 10, it must be shown that: (1) the pleading or motion was brought for an improper purpose; (2) there were no grounds for the legal arguments advanced; or (3) the factual allegations or denials lacked evidentiary support. See Tex. Civ. Prac. & Rem. Code Ann. § 10.001 (Vernon 2002); Low, 221 S.W.3d at 614; Armstrong v. Collin County Bail Bond Bd., 233 S.W.3d 57, 62 (Tex. App.—Dallas 2007, no pet.).

Chapter 10 specifies that one of the aims for imposition of sanctions for the filing of frivolous or groundless pleadings is to “deter repetition of the conduct or comparable conduct by others similarly situated.” Tex. Civ. Prac. & Rem. Code Ann. § 10.004(b) (Vernon 2002). We construe the phrase “improper purpose” as the equivalent of “bad faith” under Rule 13. See Tex. R. Civ. P. 13; cf. Save Our Springs Alliance, Inc. v. Lazy Nine Mun. Util. Dist. ex rel. Bd. of Directors, 198 S.W.3d 300, 321 (Tex. App.—Texarkana 2006, pet. denied) (“nonfrivolous” requirement is same as “good faith” requirement); Elwell v. Mayfield, No. 10-04-00322-CV, 2005 WL 1907126, at *5 (Tex. App.—Waco Aug. 10, 2005, pet. denied) (mem. op.) (same). An order imposing a sanction under Chapter 10 “shall describe . . . the conduct the court has determined violated Section 10.001 and explain the basis for the sanction imposed.” Tex. Civ. Prac. & Rem. Code Ann. § 10.005 (Vernon 2002).

In determining whether sanctions are appropriate, the trial court must examine the facts available to the litigant and the circumstances existing when the litigant filed the pleading. Robson v. Gilbreath, 267 S.W.3d 401, 405 (Tex. App.—Austin 2008, pet. denied); Alejandro v. Robstown Indep. Sch. Dist., 131 S.W.3d 663, 669 (Tex. App.—Corpus Christi 2004, no pet.). Courts should presume parties and their counsel file all papers in good faith, and the party seeking sanctions must overcome that presumption. See Tex. R. Civ. P. 13; GTE Commc’ns Sys. Corp. v. Tanner, 856 S.W.2d 725, 731 (Tex. 1993). The party seeking sanctions has the burden of showing its right to relief. Tanner, 856 S.W.2d at 731; Elkins v. Stotts-Brown, 103 S.W.3d 664, 668 (Tex. App.—Dallas 2003, no pet.).

SOURCE: Texarkana Court of Appeals - 06-10-00080-CV - 4/1/11

CPRC CHAPTER 10 SANCTIONS 

Chapter 10 provides that: The signing of a pleading or motion as required by the Texas Rules of Civil Procedure constitutes a certificate by the signatory that to the signatory’s best knowledge, information, and belief, formed after reasonable inquiry: (1) the pleading or motion is not being presented for any improper purpose, including to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) each claim, defense, or other legal contention in the pleading or motion is warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; (3) each allegation or other factual contention in the pleading or motion has evidentiary support or, for a specifically identified allegation or factual contention, is likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and (4) each denial in the pleading or motion of a factual contention is warranted on the evidence or, for a specifically identified denial, is reasonably based on a lack of information or belief. 

SOURCE: Texarkana Court of Appeals - 06-10-00080-CV - 4/1/11

Statute of Frauds (one-year performace timeframe)

STATUTE OF FRAUDS AS TO AGREEMENTS THAT CANNOT BE PERFORMED WITHIN ONE-YEAR 

The statute of frauds, set forth in Section 26.01 of the Texas Business and Commerce Code, provides that to be enforceable, a promise or agreement which cannot be performed within one year from the date of making the agreement must be in writing and signed by the person to be charged with the promise. Tex. Bus. & Com. Code Ann. § 26.01(b)(6); Niday v. Niday, 643 S.W.2d 919, 920 (Tex. 1982). Whether a contract falls within the statute of frauds is a question of law. Beverick v. Koch Power Co., 186 S.W.3d 145, 149 (Tex. App.—Houston [1st Dist.] 2005, pet. denied).
 
A contract that could possibly be performed within a year, however improbable performance within one year may be, does not fall within the statute of frauds. Niday, 643 S.W.2d at 920 (stating that if an agreement, either by its terms or by the nature of the required acts, cannot be performed within one year, it falls within the statute of frauds and must be in writing). The fact that the entire performance within one year is not required or expected will not bring an agreement within the statute. Id. The statute of frauds does not apply if performance could conceivably be completed within one year of the agreement’s making. Miller v. Riata Cadillac Co., 517 S.W.2d 773, 776 (Tex. 1974) (contract to pay employee bonus after approximately one year could theoretically be performed before year expired); Young v. Fontenot, 888 S.W.2d 238, 241 (Tex. App.—El Paso 1994, writ denied) (agreement to transfer stocks at unspecified date in future was performable within one year and therefore not within statute). The duration of the agreement here was one which coincided with the duration of [ party's ] membership in the Club. This could be for a lifetime or some other indefinite duration. Agreements to last during the lifetime of one of the parties do not require a signed writing because the party on whose life the duration of the contract is measured could die within a year of the agreement’s making. Young v. Ward, 917 S.W.2d 506, 510 (Tex. App.—Waco 1996, no pet.). Likewise, agreements requiring performance of indefinite duration are generally not within the statute because such agreements could conceivably be performed within a year of their making. Bratcher v. Dozier, 162 Tex. 319, 346 S.W.2d 795, 796 (1961). 
 
The Texas Supreme Court has also held that where an agreement cannot be completed within one year, either by its terms or by the nature of the required acts, that agreement falls within the statute and must be in writing. Niday, 643 S.W.2d at 920. That is, where an oral contract omits the performance term, duration may properly be implied from extrinsic evidence. If that evidence conclusively proves that the contract cannot be completed within one year, the contract violates the statute of frauds as a matter of law. Id. There is no evidence here, extrinsic or otherwise, which conclusively proves the contract could not be completed within one year. It is, in fact, possible that the contract could be performed in one year in the circumstance the share and lake house were sold within that time. [ Party ] points out that the restriction was in place for over two years at the time of trial. The objective determination of whether the contract could be performed within one year does not permit consideration of this factor. See Keystone Int’l, Inc. v. Ingham, 593 S.W.2d 354, 357 (Tex. Civ. App.—Texarkana 1979, no writ). “Texas courts . . . have generally held that, in the absence of a known date when performance will be completed, the statute of frauds does not apply if performance could conceivably be completed within one year of the agreement’s making.” Young, 917 S.W.2d at 509

 SOURCE: Texarkana Court of Appeal - 06-10-00047-CV - 4/26/11

How to prove fraud in the inducement of sale-purchase agreement

ELEMENTS OF FRAUD 

CAUSE OF ACTION FOR FRAUD, FRAUDULENT INDUCEMENT OF CONTRACT - 
WHAT DOES THE PLAINTIFF HAVE TO PROVE? 
 
A party commits fraud by (1) making a false, material representation (2) that the party either knows to be false or asserts recklessly without knowledge of its truth (3) with the intent that the misrepresentation be acted upon, (4) and the person to whom the misrepresentation is made acts in reliance upon it and (5) is injured as a result. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001); All Am. Tel., Inc. v. USLD Commc’ns, Inc., 291 S.W.3d 518, 527 (Tex. App.—Fort Worth 2009, pet. denied).
 
MATERIALITY OF THE FRAUDULENT REPRESENTATION 
 
A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction in question. Miller v. Kennedy & Minshew, Prof’l Corp., 142 S.W.3d 325, 345 (Tex. App.—Fort Worth 2003, pet. denied). Materiality thus centers on whether a reasonable person would attach importance to and would be induced to act on the information in determining his choice of actions in the transaction in question. Burleson State Bank v. Plunkett, 27 S.W.3d 605, 613 (Tex. App.—Waco 2000, pet. denied).

Proof that a defendant made a statement knowing of its falsity or without knowledge of its truth may be proved by either direct or circumstantial evidence. Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 526 (Tex. 1998). Intent may be inferred from a party’s actions before and after the fraudulent conduct and may also be established by either direct or circumstantial evidence. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434–35 (Tex. 1986). A defendant who acts with knowledge that a result will follow is considered to intend the result. Ernst & Young, L.L.P., 51 S.W.3d at 579.
 
DETRIMENTAL RELIANCE BY DECEIVED PARTY

The plaintiff must show actual and justifiable reliance on the misrepresentation. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010). To determine justifiability, courts inquire whether, “given a fraud plaintiff’s individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud[,] it is extremely unlikely that there is actual reliance on the plaintiff’s part.” Id. (quoting Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014, 1026 (5th Cir. 1990)). In other words, a person may not justifiably rely on a representation if there are “red flags” indicating such reliance is unwarranted. Id. (quoting Lewis v. Bank of Am. NA, 343 F.3d 540, 546 (5th Cir. 2003)); see Gen. Motors Corp., Pontiac Motor Div. v. Courtesy Pontiac, Inc., 538 S.W.2d 3, 6 (Tex. Civ. App.—Tyler 1976, no writ) (citing Prosser on Torts for the contention that a person of ordinary intelligence may not “put faith in representations which any such normal person would recognize at once as preposterous . . . or which are shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth”).
   
REMEDIES FOR FRAUDULENT INDUCEMENT OF CONTRACT 
 
“[I]t is well settled that one who is induced by fraud to enter into a contract has his choice of remedies. ‘He may stand to the bargain and recover damages for the fraud, or he may rescind the contract, and return the thing bought, and receive back what he paid.’” Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 10, 307 S.W.2d 233, 238–39 (Tex. 1957). We agree with Hannon’s observation that “rescission was the remedy sought to be crafted by the court in this case.” Rescission is an equitable remedy that extinguishes legally valid contracts that must be set aside because of, among other things, fraud. City of The Colony v. N. Tex. Mun. Water Dist., 272 S.W.3d 699, 732 (Tex. App.—Fort Worth 2008, pet. dism’d).

Upon rescission, the rights and liabilities of the parties are extinguished; any consideration paid is returned, together with such further special damage or expense as may have been reasonably incurred by the party wronged; and the parties are restored to their respective positions as if no contract had ever existed. Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 855 (Tex. App.—Houston [14th Dist.] 2001, pet. denied); see Johnson v. Cherry, 726 S.W.2d 4, 8 (Tex. 1987); Smith v. Nat’l Resort Cmtys. Inc., 585 S.W.2d 655, 660 (Tex. 1979); Holt v. Robertson, No. 07-06-00220-CV, 2008 WL 2130420, at *6 (Tex. App.—Amarillo May 21, 2008, pet. denied) (mem. op.).

While a trial court may not grant relief to a party in the absence of pleadings to support that relief, Texas courts have traditionally construed pleadings liberally, and in the case of rescission, at least one court has held that “factual allegations in the petition, coupled with a prayer for general relief, are sufficient to support a decree granting rescission.” Green Tree Acceptance, Inc. v. Pierce, 768 S.W.2d 416, 421 (Tex. App.—Tyler 1989, no writ); see Tex. R. Civ. P. 301. Moreover, when the claims and defenses are those which contemplate a particular remedy, a party may be entitled to that remedy despite a failure to specifically plead for such relief. See Perez v. Briercroft Serv. Corp., 809 S.W.2d 216, 218 (Tex. 1991).

SOURCE: Fort Worth Court of Appeals - 02-10-00012-CV

Unambiguous Contract enforced as written

CONTRACT CONSTRUCTION PRINCIPLES: AMBIGUOUS VS. UNAMBIGUOUS CONTRACT LANGUAGE
 
Unambiguous Contract given effect & enforced as written: as a matter of law 

The interpretation of an unambiguous contract is a question of law for the court. MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 650-51 (Tex. 1999). The court's primary concern in interpreting a written contract is to determine the mutual intent of the parties as manifested in the contract. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). The parties' intent must be taken from the agreement, and the agreement must be enforced as written. Wells Fargo Bank, Minn., N.A. v. N. Cent. Plaza I, L.L.P., 194 S.W.3d 723, 726 (Tex. App.-Dallas 2006, pet. denied). We favor an interpretation that affords some consequences to each part of the agreement so that none of the provisions will be rendered meaningless. Coker, 650 S.W.2d at 394. Unless the agreement shows that the parties used a term in a technical or different sense, we give the terms their plain, ordinary, and generally accepted meaning. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). Under generally accepted principles of contract interpretation, all writings that pertain to the same transaction will be considered together, even if they were executed at different times and do not expressly refer to one another. DeWitt Cnty. Elec. Co-op., Inc. v. Parks, 1 S.W.3d 96, 102 (Tex. 1999). This rule, however, is a device for ascertaining and giving effect to the intention of the parties and cannot be applied arbitrarily. Id. 
 
SOURCE: Dallas Court of Appeals - 05-09-00586-CV - 5/18/11

How does Fraudulent Inducement Cause of Action differ from Fraud?

    FRAUDULENT INDUCEMENT DEFINED:
    The fraud / fraudulent conduct must be relevant to contract-formation. 

“Fraudulent inducement . . . is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties.” Haase v. Glazner, 62 S.W.3d 795, 798–99 (Tex. 2001).

Detrimental reliance by Plaintiff on deliberate falsehood by Defendant 

The elements of fraud are that a material representation was made, the representation was false, the speaker knew the statement was false when made, the statement was made to induce reliance, it did induce reliance, the reliance was justifiable, and the relying party suffered injury as a result. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010); Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768, 774 (Tex. 2009). [A] party who has actual knowledge of specific facts cannot have relied on a misrepresentation of the same facts. See Camden Mach. & Tool, Inc. v. Cascade Co., 870 S.W.2d 304, 311 (Tex. App.—Fort Worth 1993, no writ) (stating, in case where seller failed to disclose prior foundation repair but buyer discovered foundation settling in independent investigation, “When a person makes his own investigation of the facts, and knows the representations are false, he cannot, as a matter of law, be said to have relied upon the misrepresentations of another.”). The issue, then, is whether the [ name of litigants ] presented any evidence of reliance to support their claim for fraudulent inducement. See Grant Thornton, 314 S.W.3d at 923 (reliance is necessary element of fraud claims); Aquaplex, 297 S.W.3d at 774 (same). In the context of fraudulent inducement, this requires evidence that the claimant would not have entered into the contract but for the alleged misrepresentation or fraudulent nondisclosure. See ISG State Operations, Inc. v. Nat’l Heritage Ins. Co., 234 S.W.3d 711, 716 (Tex. App.—Eastland 2007, pet. denied) (stating that ordinary detrimental reliance is not sufficient to support fraudulent inducement claim; claimant must show that it was induced into executing contract) (citing Haase, 62 S.W.3d at 798); Procter v. RMC Capital Corp., 47 S.W.3d 828, 834 (Tex. App.—Beaumont 2001, no pet.) (holding that home buyer seeking to avoid effect of “as is” clause on basis of fraudulent inducement must put forth some evidence that he would not have assented to “as is” clause in contract but for seller’s misrepresentations about property condition at issue); see also Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 12–13, 307 S.W.2d 233, 240 (1957) (adopting the rule: “If one is induced to go through the form of making a contract because of some fraud or misrepresentation made by the other party or his agent, relative to a material element of the agreement, such that if he had known the truth he would not have given his assent, the contract may be avoided by him.”) (quoting 1 Elliot on Contracts § 70 (1913), emphasis added).

SOURCE: Houston Court of Appeals for the First Appellate District – 01-10-00492-CV – 5/19/11

RELATED LEGAL TERMS: fraud vs. fraudulent inducement of contract, fraudulent misrepresentation, fraudulent concealment, failure to disclose material fact,

May Parol Evidence be considered in interpreting a contract?

CONTRACT CONSTRUCTION AND THE PAROL EVIDENCE RULE When is parol evidence [verbal, oral, affidavit testimony] proper in contract construction? The construction of an unambiguous contract is a question of law for the court to determine. MCI Telecomms. Corp. v. Tex. Util. Elec. Co., 995 S.W.2d 647, 650 (Tex. 1999). An unambiguous contract will be enforced as written, and parol evidence will not be received for the purpose of creating an ambiguity or to give the contract a meaning different from that which its language imports. David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 450 (Tex. 2008) (citing Universal C.I.T. Credit Corp. v. Daniel, 243 S.W.2d 154, 157 (Tex. 1951)). What is the role of extraneous evidence (outside the four corners of the contract)? Only where a contract is ambiguous may a court consider the parties’ interpretation and admit extraneous evidence to determine the true meaning of the instrument. Haden, 266 S.W.3d at 450 (citing Nat'l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex.1995)). SOURCE: Houston Court of Appeals - 01-09-00856-CV – 5/19/11 RELATED TERMS AND PHRASES: contract interpretation, construction, enforcement - parol [ not parole ] evidence rule - not the best evidence objection - explaining what the contract language means

Breach of fiduciary duty based on informal vs formal relationship

   

BREACH OF FIDUCIARY DUTY: FORMAL AND INFORMAL RELATIONSHIPS GIVING RISE TO DUTY

To recover on a breach of fiduciary duty claim, the plaintiff must first establish the existence of a duty, that is, the existence of a fiduciary relationship. See Meyer v. Cathey, 167 S.W.3d 327, 330–31 (Tex. 2005) (discussing interchangeably whether fiduciary relationship exists and whether fiduciary duty existed); Priddy v. Rawson, 282 S.W.3d 588, 599 (Tex. App.—Houston [14th Dist.] 2009, pet. denied) (identifying first element of fiduciary duty claim as existence of fiduciary relationship and second element as breach of duty created by that relationship).

There are two categories of fiduciary relationships. Meyer, 167 S.W.3d at 330–31; Priddy, 282 S.W.3d at 599. The first is a formal fiduciary relationship, such as attorney-client, principal-agent, and trustee-beneficiary relationships, as well as partners in a partnership. Chapman Children’s Trust v. Porter & Hedges, L.L.P., 32 S.W.3d 429, 439 (Tex. App.—Houston [14th Dist.] 2000, pet. denied). The second is an informal fiduciary relationship, “where one person trusts in and relies on another, whether the relation is a moral, social, domestic, or purely personal one.” Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 176 (Tex. 1997). This second category is also known as a “confidential relationship.” Chapman Children’s Trust, 32 S.W.3d at 439.

Kelly’s live petition asserted a claim for breach of a partnership agreement. This claim was not submitted to the jury, however. Accordingly, it has been waived. See Tex. R. Civ. P. 279 (providing “[u]pon appeal all independent grounds of recovery or of defense not conclusively established under the evidence and no element of which is submitted or requested are waived”). For purposes of this appeal, then, there was no partnership agreement between the parties and, by extension, no formal fiduciary relationship based on any such partnership.

A fiduciary relationship is an extraordinary one and will not be lightly created. Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App.—Houston [14th Dist.] 1997, pet. denied). “It is well settled that ‘not every relationship involving a high degree of trust and confidence rises to the stature of a fiduciary relationship.’” Meyer, 167 S.W.3d at 330 (quoting Schlumberger, 959 S.W.2d at 176–77). “A person is justified in placing confidence in the belief that another party will act in his or her best interest only where he or she is accustomed to being guided by the judgment or advice of the other party, and there exists a long association in a business relationship, as well as personal friendship.” Hoggett, 971 S.W.2d at 488.

Additionally, courts remain cautious to create informal fiduciary relationships in business arrangements.

The fact that one businessman trusts another, and relies upon his promise to perform a contract, does not rise to a confidential relationship. Every contract includes an element of confidence and trust that each party will faithfully perform his obligation under the contract. Neither is the fact that the relationship has been a cordial one, of long duration, evidence of a confidential relationship.Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 594–95 (Tex. 1992), superseded by statute on other grounds as noted in Subaru of Am., Inc. v. David McDavid Nissan, Inc., 84 S.W.3d 212, 225–26 (Tex. 2002).

Courts review a variety of facts for determining whether an informal fiduciary relationship exists. The overarching consideration, however, is the nature of the relationship between the parties. See Thigpen v. Locke, 363 S.W.2d 247, 253 (Tex. 1962) (holding “[t]he existence of the fiduciary relationship is to be determined from the actualities of the relationship between the persons involved”).

In reviewing the relationship between the parties, one factor we consider is whether the party claiming to be owed a fiduciary relationship justifiably placed special confidence in the other party to act in his best interest. See Trostle v. Trostle, 77 S.W.3d 908, 915 (Tex. App.—Amarillo 2002, no pet.) (holding, to establish fiduciary relationship, evidence must demonstrate plaintiff actually relied on purported fiduciary “for moral, financial, or personal support or guidance”); Lee v. Hasson, 286 S.W.3d 1, 14–15 (Tex. App.—Houston [14th Dist.] 2007, pet. denied) (same). An informal fiduciary relationship requires proof that, because of a close or special relationship, the plaintiff “is in fact accustomed to be guided by the judgment or advice” of the other. Thigpen, 363 S.W.2d at 253.

SOURCE: Houston Court of Appeals – NO. 01-09-00685-CV – 5/19/11

Liquidated Damages vs. Unenforceable Penalty

ARE LIQUIDATED DAMAGES CLAUSES ENFORCEABLE? – STIPULATED DAMAGES OR UNENFORCEABLE PENALTY?

“The term 'liquidated damages' ordinarily refers to an acceptable measure of damages that parties stipulate in advance will be assessed in the event of a contract breach.” Flores v. Millenium Interests, Ltd., 185 S.W.3d 427, 431 (Tex. 2005); see also Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 664 (Tex. 2005) (“[l]iquidated damages clauses fix in advance the compensation to a party accruing from the failure to perform specified contractual obligations”). Whether a contract term is a liquidated damages clause is a question of law for the court. Valence Operating Co., 164 S.W.3d at 664.

 

If a court determines that a contract term is a liquidated damages clause, the court may then determine whether the clause is enforceable, or whether it is an unenforceable penalty. The policy underlying the prohibition against penalties is to ensure that a party to a contract receives “just compensation,” that is, “neither more nor less than his actual damages.” Phillips, 820 S.W.2d at 788 (quoting Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 485-86 (1952)). In order to enforce a liquidated damages provision and determine the provision is not a penalty, “the court must find: (1) that the harm caused by the breach is incapable or difficult of estimation, and (2) that the amount of liquidated damages called for is a reasonable forecast of just compensation.” Phillips, 820 S.W.2d at 788 (quoting Rio Grande Valley Sugar Growers, Inc. v. Campesi, 592 S.W.2d 340, 342 n.2 (Tex. 1979)).

 

The party asserting that a liquidated damages clause is an unenforceable penalty bears the burden of proof. Urban Television Network Corp. v. Liquidity Solutions, Ltd., 277 S.W.3d 917, 919 (Tex. App.-Dallas 2009, no pet.) (citing Murphy v. Cintas Corp., 923 S.W.2d 663, 665-66 (Tex. App.-Tyler 1996, writ denied)).

CONTENTION MUST BE RAISED AND PLEADED AS AN AFFIRMATIVE DEFENSE
  
Whether a contractual provision is an unenforceable penalty and not a liquidated damage clause is an affirmative defense. See Tex. R. Civ. P. 94; Phillips v. Phillips, 820 S.W.2d 785, 789 (Tex. 1991) (“Although penalty is not among the affirmative defenses enumerated in Rule 94, Tex. R. Civ. P., the listing in that rule is not exclusive. Penalty is, in the language of the rule, a 'matter constituting an avoidance or affirmative defense' [citations omitted].”)
  
SOURCE: Dallas Court of Appeals - 05-09-00586-CV - 5/18/11