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.