Liquidated damages are a predetermined sum agreed upon by owners and contractors to deter either party from breaching the contract. Once agreed upon, this amount is cemented in a liquidated damages clause in the all-important construction contract. Knowing what makes a liquidated damages clause valid in your state is critical for safeguarding your bottom line and protecting your business.
In this brief article, we discuss if liquidated damages are enforceable in the Lone Star State. If you are faced with challenging a liquidated damages clause, you are going to need a Houston construction attorney in your corner who knows Texas law inside and out.
What Are Liquidated Damages?
Liquidated damages are meant to be an estimate of the damages that would be actually incurred if there was a breach of contract — usually resulting from the failure for a contractor or subcontractor to complete work on time. In a contract, liquidated damages clauses are usually written as a sort of formula. For example, a contractor may end up only getting the (Contract Value) – (Number of Days Late) x (Cost).
Are They Enforceable?
If you expected a clear cut answer to whether or not these clauses are enforceable, you’re in for a big surprise. This is Texas, home to some of the most complex construction laws in the United States. However, to answer your question, yes, liquidated damages are enforceable in Texas under certain circumstances.
For a liquidated damages clause to be enforceable, it must satisfy two points:
- The harm caused by the breach of contract is difficult to estimate
- The liquidated damages are a reasonable compensation (not a penalty)
If liquidated damages don’t align with the actual damages, recovery may be limited to actual damages.
How Contractors Can Protect Themselves
Make no mistake, the burden of proving a penalty defense is on you. It will be up to you to either prove that the liquidated damages were not an actual approximation of the actual damages or that you were not responsible for a breach of contract. Only with the aid of a Houston construction attorney can you build your case and mount an effective defense. However, that’s not the only way that an attorney can help you.
Related: The Cost of Litigation
The contents of a liquidated damages clause are determined by you and the owner during the contract drafting phase. It’s during this time that you must fight for what is in you and your company’s best interest and try to limit adverse contract language that may end up harming your company down the road. For a legal team that can draft, review, and negotiate contracts on your behalf, partner with the Houston construction attorneys from Cotney Law.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.