Texas Liquidated Damages Clauses: Are They Enforceable?
Understanding Liquidated Damages in Texas
A liquidated damages clause pre-sets the amount of compensation owed if a breach occurs. These clauses are common in Texas construction contracts, oil and gas agreements, real estate transactions, and commercial leases.
Texas's Two-Part Test
Texas courts apply a two-part test to determine whether a liquidated damages clause is an enforceable pre-estimate of damages or an unenforceable penalty. The Texas Supreme Court in Phillips v. Phillips (1992) established that a liquidated damages clause is enforceable if:
- The harm caused by the breach is difficult to estimate at the time of contracting — The parties must face genuine difficulty in predicting actual damages
- The amount is a reasonable forecast of just compensation — The liquidated amount must bear some reasonable relationship to the anticipated harm
If either prong fails, Texas courts will treat the clause as a penalty and refuse to enforce it.
Additional Considerations
- Hindsight review — While some jurisdictions look only at reasonableness at the time of contracting, Texas courts have sometimes considered whether the liquidated amount is grossly disproportionate to actual damages that occurred
- Construction contracts — Liquidated damages for project delays are particularly common and generally well-accepted in Texas, especially in government contracts
- Election of remedies — If the contract allows the non-breaching party to choose between liquidated damages and actual damages, courts may refuse to enforce the liquidated damages provision as it suggests the clause is a penalty
Red Flags
- Actual damages from the type of breach are easily calculable, undermining the first prong
- The liquidated amount bears no reasonable relationship to foreseeable harm
- The contract allows the non-breaching party to choose between liquidated and actual damages
- The same liquidated amount applies to all breaches regardless of severity
When to Consult a Lawyer
Consider consulting a Texas attorney if you are subject to a liquidated damages clause in a construction or energy contract, or if the stated damages seem disproportionate to the potential harm. A lawyer can evaluate whether both prongs of the Texas test are satisfied.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.