493 F.Supp.3d 585
S.D. Tex.2020Background
- Three private developers (Binnacle, Lone Trail, SSLT) contracted with R. Hassell Properties to perform roadway/infrastructure work in Galveston County.
- Hanover issued payment and performance bonds for those projects and required Hassell to sign an indemnity agreement assigning to Hanover Hassell’s contract rights and remaining balances upon default.
- Hassell defaulted, Hanover paid bond claims (~$437,000) and received assignment of Hassell’s contract balances (Hanover says ~$570,000 remain).
- Each construction contract contained a $2,500 per diem liquidated-damages clause for late completion; defendants claim about $900,000 in accrued liquidated damages and seek to offset Hanover’s recovery.
- Hanover moved for partial summary judgment that the clauses are unenforceable penalties; defendants argued the clauses are authorized as “economic disincentives” under Tex. Water Code §49.271(e) or otherwise enforceable.
- The court held the Water Code did not apply and, under Texas common law, the $2,500/day clauses are unenforceable penalties and granted Hanover’s motion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Tex. Water Code §49.271(e) govern these contracts? | Water Code doesn't apply because these are private contracts and not contracts "made by the board" or with a district. | Contracts benefit a municipal utility district and thus are "district contracts" authorizing economic disincentives; parties may incorporate statutory rights. | Water Code does not apply; "district contract" means a contract with or by the district, and mere benefit or parroting of the statute is insufficient. |
| Are the $2,500/day liquidated-damages provisions unenforceable penalties? | Clauses are penalties: no study or reasonable forecast supports $2,500/day and actual damages are essentially zero, so the charge is grossly disproportionate. | Clauses are enforceable (and authorized by Water Code); otherwise defendants did not meaningfully rebut Hanover’s facts. | Clauses are unenforceable penalties under Texas law (fails reasonable-forecast and proportionality inquiries); summary judgment for Hanover. |
Key Cases Cited
- Atrium Med. Ctr., LP v. Hous. Red C LLC, 595 S.W.3d 188 (Tex. 2020) (reaffirming test for liquidated damages and when disparity renders clause unenforceable)
- Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991) (two-factor test: difficulty of estimation and reasonable forecast of just compensation)
- Garden Ridge, L.P. v. Advance Int’l., Inc., 403 S.W.3d 432 (Tex. App.—Houston [14th Dist.] 2013) (liquidated damages unenforceable where amount was unsupported and actual damages were zero)
- Loggins Constr. Co. v. Stephen F. Austin State Univ. Bd. of Regents, 543 S.W.2d 682 (Tex. App.—Tyler 1976) (per diem liquidated damages held penalty where actual damages were small)
- Caudill v. Keller Williams Realty, Inc., 828 F.3d 575 (7th Cir. 2016) (applying Texas law: liquidated-damages clause unenforceable where plaintiff sustained no actual damages)
- Stewart v. Basey, 245 S.W.2d 484 (Tex. 1952) (Texas principle limiting contractual damages to just compensation)