595 S.W.3d 188
Tex.2020Background
- Atrium, a 60‑bed acute care hospital, entered a five‑year requirements contract with ImageFIRST for specialty laundry; the contract set an initial weekly “agreement value” of $2,616.66 but invoices varied with demand.
- Atrium stopped paying during financial distress; ImageFirst continued service; Atrium later canceled with about four years (222 weeks) remaining; the last weekly invoice was $8,066.79 and unpaid invoices totaled about $237,512 (undisputed).
- The contract’s cancellation clause required Atrium to pay a charge equal to 40% of the greater of (a) the agreement value or (b) the current invoice amount, multiplied by the remaining weeks; the clause recited it was "not punitive" but a reimbursement.
- Trial court awarded 40% of the last weekly invoice multiplied by 222 weeks (~$716,330.95) and allowed recovery of contractual profit; the court of appeals affirmed; the Texas Supreme Court granted review.
- Central legal question: whether the liquidated‑damages clause is an unenforceable penalty (facially or in operation at breach), and whether it is limited to reliance (reimbursement) or permits expectancy (lost profits).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Enforceability of liquidated damages (penalty) | Clause is a penalty because actual damages were calculable and clause awards more than just compensation | Damages were difficult to estimate at contracting; clause is a reasonable forecast of loss | Clause enforceable: at contracting damages were hard to estimate and the clause reasonably forecast compensation |
| Measure of recovery (reliance vs expectancy) | Clause is limited to reimbursement (reliance) for linens/supplies bought | Clause pays lost benefit of the bargain (expectancy) as written (percentage of weekly value × weeks) | Clause allows expectancy; not limited to reimbursement |
| Reasonableness of 40% forecast | 40% is unreasonable because it is a franchisor form number, not tailored to Atrium | 40% is supported by ImageFirst’s historical gross margins and company records | Evidence supports that 40% was a reasonable forecast for these parties |
| Operation at breach (unbridgeable discrepancy / mitigation) | Actual damages were much less; ImageFirst mitigated by repurposing linens, so liquidated amount is punitive | Atrium offered no proof quantifying actual expectancy damages or mitigation; burden is on breacher to show discrepancy | Atrium failed to prove an unbridgeable discrepancy or mitigation that would render clause a penalty |
Key Cases Cited
- Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991) (two‑part test for enforcing liquidated damages: difficulty of estimating harm and reasonable forecast of just compensation)
- FPL Energy, LLC v. TXU Portfolio Mgmt. Co., 426 S.W.3d 59 (Tex. 2014) (even a facially reasonable clause must be invalidated if an unbridgeable discrepancy exists between liquidated and actual damages at breach)
- Stewart v. Basey, 245 S.W.2d 484 (Tex. 1952) (liquidated damages must not exceed just compensation; unenforceable as a penalty if punitive)
- Flores v. Millennium Interests, Ltd., 185 S.W.3d 427 (Tex. 2005) (discussion of liquidated damages as agreed measure of damages)
- Quigley v. Bennett, 227 S.W.3d 51 (Tex. 2007) (describes expectancy, reliance, and restitution measures of contract recovery)