Texas Construction Law Updates
Liquidated-damage provision enforced by Houston Court of Appeals
Jason Cagle - Wednesday, April 18, 2018The First District Court of Appeals in Houston recently enforced a liquidated-damage provision. The opinion analyzes whether the liquidated damages constituted
an unenforceable “penalty” under Texas law.
A liquidated-damage provision permits a party enforcing a contract to recover damages based on an amount or formula agreed upon in advance. However, the
breaching party may invalidate the liquidated-damage provision if it demonstrates that it is a penalty for noncompliance rather than “just compensation”
for the actual loss caused. A liquidated-damage provision is enforceable (and is not a penalty) 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. These elements are evaluated from
the parties’ perspective at the time the contract was formed. The amount of actual damages incurred is also relevant; if the actual damages are far
less than the liquidated damages, then the liquidated damages might not be a reasonable forecast.
In this case, the court found that the harm caused by the breach was difficult to estimate due to the inherent fluctuations of the luxury-condominium real-estate
market, and that the parties reasonably estimated the damages.
Belfiore Developers, LLP v. Sampieri, No. 01-17-00847-CV (Tex. App.—Houston [1st Dist.] Mar. 6, 2018, no pet. h.).
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