Should you include a liquidated damages clause in your contract? A liquidated damages clause in a contract refers to a specific amount of damages that parties agree upon in advance will be assessed in the event of a contract breach. Liquidated damages clauses are common in construction contracts, usually in relation to the timeliness of performance.
These types of clauses are acceptable when the purpose is to compensate the designated party for certain damages. In Texas, these clauses are weakly enforceable as they must show some relationship to the actual damages, usually by delay or failure to perform. Liquidated damage clauses cannot be used as an incentive to motivate faster performance.
How do you determine if the clause should be allowed in a contract? The test to determine the validity by the court will consist of an analysis to ensure that:
- The harm caused by the breach is difficult or impossible to estimate, and
- The amount of liquidated damages is a reasonable estimate of just compensation.
Where one party seeks to avoid enforcement of a liquidated damages clause by declaring it as a penalty, it is up to the defendant of the claim to prove the facts of the case. In the situations discussed below, the courts almost always looks to see whether the defendant submitted sufficient evidence of actual damages for the purpose of analyzing the liquidated
damages. During the analysis, the court makes their decision based off whether the damages were seen:
- At the time of the contracting or anticipated harm, or
- At the time of the breaching or actual harm
If it is the second, the court will compare the liquidated damages amount in the contract with the actual damages incurred by the non-breaching party as part of its analysis.
If you have any questions regarding the validity of your contract or a liquidated damages clause, we invite you to contact us to speak with a board-certified real estate attorney. Our number is 713-572-4900.