Opinion ID: 21495
Heading Depth: 1
Heading Rank: 3

Heading: punitive damages and pre-judgment interest

Text: Because we conclude that the district court did not err in entering judgment on DMSI’s fraudulent inducement claim, we turn to Gammex’s challenges to the lower court’s punitive damages and pre-judgment interest decisions. With regard to punitive damages, Gammex contends that the district court erred in not enforcing a contractual provision in which DMSI explicitly released claims for punitive damages, and that DMSI is not entitled to such damages because it has not met its statutory 24 burden of proof. The parties’ Settlement Agreement provides that As to any and all claims that may be asserted by Dunbar Medical or Dunbar arising from or in any way relating to this Settlement Agreement, including but not limited to the Equipment, in no event shall Dunbar Medical or Dunbar be entitled to recover special, consequential or punitive damages, and recovery of special, consequential or punitive damages shall be absolutely precluded. Gammex contends that this language must be interpreted as a release of DMSI’s punitive damages claim, and that because the clause was freely negotiated, it bars DMSI’s recovery of such damages. In general, a party is not bound by a fraudulently induced contract. See Formosa, 960 S.W.2d at 46; Prudential Ins., 896 S.W.2d at 162. Underlying this rule is the notion that a party induced by fraud to enter into an agreement has not provided the assent necessary to make a binding contract. See Dallas Farm Mach. Co., 307 S.W.2d at 240; Edward Thompson Co. v. Sawyers, 111 Tex. 374, 234 S.W. 873, 874 (1921) (“Contracts, though reduced to writing, are avoided when induced by material promises, never intended to be kept, not because one is allowed to vary his written contract, but because real assent is essential to a binding contract.”). “One who is entitled to avoid an entire written contract because it lacked his assent can no longer be held bound by any of its stipulations . . . .” Sawyers, 234 S.W. at 874-75. 25 Because a party is not bound by a contract he was induced by fraud to enter, we find inapplicable Memorial Medical Center v. Keszler, 943 S.W.2d 433 (Tex. 1997), a case Gammex relies upon to support its contention that the punitive damages provision is enforceable. In Memorial Medical, the Texas Supreme Court determined, inter alia, that a post-injury release of claims for gross negligence is not against public policy. See id. at 435. The settlement agreement and release at issue in the case were considered valid documents. See id. at 434 (“The parties . . . have not contested the validity of the release or claimed ambiguity or fraud in its execution.”). Thus, the issue regarded the enforceability of a clause within the contract, not the validity of the contract. Here, we consider whether a clause in a contract otherwise unenforceable against DMSI may nonetheless preclude punitive damages. We hold that it cannot. Because DMSI was found to have been induced into entering the Settlement Agreement by Gammex’s fraud, the district court did not err in concluding that the Agreement’s punitive damages provision was not binding on DMSI. Gammex next argues that DMSI has not met its burden under section 41.003 of the Texas Civil Practice and Remedies Code, and therefore is not entitled to a punitive damages award. Section 41.003(a) provides that a claimant prove “by clear and convincing evidence that the harm with respect to which the claimant seeks recovery of exemplary damages results from (1) fraud, (2) malice, 26 or (3) wilful act or mission or gross neglect in wrongful death actions . . . .” Gammex attacks the lack of “clear and convincing” evidence supporting a finding of no intent to perform on the part of Ms. Lescrenier, and argues that this case exhibits neither the “evil mind,” Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 18 (Tex. 1994), nor the “extraordinary harm,” id. at 24, that are required under Texas law to award punitive damages. Gammex’s reliance on Moriel and other cases building on its principles is misplaced. The cases cited each deal with allegations of bad faith. See State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42 (Tex. 1998) (involving allegations that insurance company breached its duty of good faith and fair dealing); Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Tex. 1997) (same); Moriel, 879 S.W.2d at 14 (same). As subsequent Texas Supreme Court decisions have recognized, Moriel “clarified the requirements for the imposition of punitive damages in a bad faith case.” Simmons, 963 S.W.2d at 47; see also Giles, 950 S.W.2d at 54 (noting Moriel limits recovery of punitive damages in bad faith cases to, among others, those able to show fraudulent conduct in addition to bad faith). This is a fraud case. Under section 41.003(a), DMSI had the burden of demonstrating that its harm was due to Gammex’s fraud. The statute defines fraud to be “fraud other than constructive fraud.” TEX. CIV. PRAC. & REM. CODE ANN. § 41.001(6). As the Texas Supreme Court has noted, “[a] finding of intent to harm or 27 conscious indifference to the rights of others will support an award of exemplary damages. In [Trenholm v. Ratcliff, 646 S.W.2d 927, 933 (Tex. 1983)], this court held that a fraudulent inducement was enough to support at least a finding of conscious indifference.” Spoljaric, 708 S.W.2d at 436 (internal citations omitted). DMSI did not also need to show malice, as the statute is explicit in providing that a claimant needs to show harm from fraud or malice. DMSI was required to show by clear and convincing evidence the elements of punitive damages provided in section 41.003(a). See TEX. CIV. PRAC. & REM. CODE ANN. § 41.003(b). Clear and convincing evidence is “that measure or degree of proof which will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established.” Id. § 41.001(2). Gammex contends only that evidence is insufficient to support a finding that Ms. Lescrenier had no intent to perform when she assured Ms. Dunbar of the condition of the equipment to be transferred. We have considered the evidence under the clear error standard and have rejected Gammex’s argument. It fares no better under the standard applicable here. Thus, we conclude that the district court did not err in awarding punitive damages. The final argument Gammex raises before us challenges the district court’s award of pre-judgment interest. The court’s judgment provides that DMSI “is also entitled to recover pre28 judgment interest at the rate of 10% per annum from November 18, 1996 until entry of judgment . . . .” Gammex contends that this is an award of pre-judgment interest on punitive damages in addition to compensatory damages. Under Texas law, pre-judgment interest is not recoverable on an award of punitive damages. See TEX. CIV. PRAC. & REM. CODE ANN. § 41.007. We hold that DMSI is entitled to pre-judgment interest at the rate of 10% per annum assessed on only the compensatory damages portion of its award.16