Liquidated-damage provision enforced by Houston Court of Appeals

April 18, 2018

The 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.

Texas Supreme Court refuses to look beyond the contract language to determine a party’s obligations

April 3, 2018

The Texas Supreme Court recently declined to look beyond an agreement’s clear language to trigger one party’s obligations. This was despite the other party’s insistence that pre-contract negotiations proved that the obligations had to be triggered. As a result, the other party did not get the performance that it thought was included in its bargain.

In URI, Inc. v. Kleberg County, the parties entered into an agreement in which URI could resume its uranium-mining operations, provided URI restored water quality in certain wells. At the time the agreement was formed, data suggested that multiple wells would meet the criteria to qualify for restoration. However, later data showed that no wells met the criteria. Kleberg County argued that URI should be required to restore wells based on the earlier data and not the later data.

The Texas Supreme Court disagreed, finding that the agreement was unambiguous as to URI’s obligations. Under the parol-evidence rule, facts and circumstances surrounding a unambiguous contract’s execution can be used to determine the context and meaning of the contract language, but cannot be used to augment, alter, or contradict the contract’s terms. Here, the parties’ expectation that the data would show that some wells’ water was suitable for specified uses before mining was extrinsic evidence that contradicted the agreement’s language requiring actual data showing that the water met the criteria to trigger URI’s restoration obligation. The Court therefore determined the parties’ intent based on the unambiguous language in the agreement, even though that language excused URI from performing any well restorations prior to resuming its mining activities and despite Kleberg County’s expectations.

This case illustrates the importance of carefully drafting contract provisions, particularly when one party’s obligations are conditioned on facts that will not be fully known until a later date.

URI, Inc. v. Kleberg Cty., No. 16-0336, 2018 Tex. LEXIS 253 (Tex. Mar. 23, 2018).

This blog entry was written by Eric Etheridge and Jason Cagle.