57 F.4th 510
5th Cir.2023Background
- Three private developers (Binnacle, Lone Trail, SSLT) contracted with R. Hassell Properties using form MUD contracts "for Galveston County MUD No. 31"; the MUD managed the public bid and intended to purchase the infrastructure but was not a party to the contracts.
- Hassell defaulted; Hanover, which issued payment/performance bonds and had an indemnity assignment, completed the projects and sought contract balances from the developers (~$575,000 absent offsets).
- Each Hassell contract contained a liquidated-damages/economic-disincentive clause: $2,500 per day for delay (labeled an economic disincentive under Tex. Water Code §49.271(e)), which would offset Hanover’s recovery by roughly $900,000.
- Developers asserted an offset based on that clause and argued §49.271 applied (or was incorporable) to validate it; Hanover argued §49.271 applies only to contracts made by a district board and, absent that protection, the clause is an unenforceable penalty.
- The district court granted summary judgment for Hanover, holding §49.271 inapplicable because no district was a contracting party and the clause was an unenforceable penalty; the Fifth Circuit AFFIRMED.
Issues
| Issue | Plaintiff's Argument (Hanover) | Defendant's Argument (Developers) | Held |
|---|---|---|---|
| Whether Tex. Water Code §49.271 (economic incentives/disincentives) applies to the Hassell contracts | §49.271 applies only to contracts "made by the board" of a district; because the MUD never signed the contracts, the statute does not apply | The contracts were "for" the MUD and thus are district contracts (or may incorporate §49.271), so the economic-disincentive clause is authorized | §49.271 applies only where a district (board) is a contracting party; not applicable here |
| Whether the $2,500/day clause is enforceable (liquidated damages vs. limitation of liability) | The clause is a liquidated-damages provision and, under Texas law, functions as an unenforceable penalty here | The clause is an offset/limitation of liability (not liquidated damages) and therefore not subject to Texas liquidated-damages invalidation | The clause is substantively a liquidated-damages provision and, under Texas law, operates as an unenforceable penalty; clause invalidated |
Key Cases Cited
- Atrium Med. Ctr., LP v. Houston Red C LLC, 595 S.W.3d 188 (Tex. 2020) (liquidated-damages provisions must not operate as a penalty)
- TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432 (Tex. 2011) (if a statute is unambiguous, courts follow plain text)
- Balfour Beatty Constr., L.L.C. v. Liberty Mut. Fire Ins. Co., 968 F.3d 504 (5th Cir. 2020) (contract construction is a question of law)
- L & A Contracting Co. v. Southern Concrete Servs., Inc., 17 F.3d 106 (5th Cir. 1994) (de novo review for contract interpretation)
- Grigg v. C.I.R., 979 F.2d 383 (5th Cir. 1992) (statutory construction reviewed de novo)
- Cinel v. Connick, 15 F.3d 1338 (5th Cir. 1994) (appellate courts may decline to address alternative arguments not necessary to the decision)