TRACY CHRISTOPHER, Justice.
Appellant Garden Ridge, L.P. (Garden Ridge) sued Advance International, Inc., and Herbert A. Feinberg (collectively, Advance) for breach of contract and a declaratory judgment that Garden Ridge had
On appeal, Garden Ridge argues that the trial court committed reversible error when it (1) refused to submit a question on prior material breach, (2) improperly instructed the jury on damages, and (3) commented on the weight of the evidence in its instructions on breach of contract. We conclude that the chargeback provisions as applied in this case are unenforceable as a matter of law as penalties, and we overrule Garden Ridge's jury charge issues. We therefore affirm the trial court's judgment.
I. FACTUAL AND PROCEDURAL BACKGROUND
Garden Ridge is a Houston-based chain of housewares and home décor stores. Advance International, a company owned by Feinberg, is one of Garden Ridge's vendors. In 2009, Advance sent Garden Ridge quote sheets for lighted inflatable holiday snowmen, which included a color photo of each item and described its cost, weight, dimensions, and packaging. The two snowmen on the quote sheets each wore a scarf, held a broom that stated "Merry Christmas" on it, and waved; one stood eight feet tall, and the other stood nine feet tall. We refer to this snowman as "waving snowman." Advance then sent two sample snowmen
Garden Ridge sent Advance two purchase orders, one for approximately 950 nine-foot waving snowmen (PO '721), and the other for approximately 3,500 eight-foot waving snowmen (PO '743), based on the quote sheets. Garden Ridge planned to sell each nine-foot waving snowman for $59.99, and each eight-foot waving snowman for $39.00. Garden Ridge planned to mark down the eight-foot waving snowmen to $20.00 each during its one-day Thanksgiving Shop-a-Thon sale, and it prepared and had printed an advertising circular promoting this special price and picturing the eight-foot waving snowman.
Five days before Thanksgiving, Garden Ridge realized that the eight-foot snowmen that Advance sent were not waving snowmen, but instead were banner snowmen. The nine-foot snowmen that Advance sent were waving snowmen. Garden Ridge decided to honor the $20.00 Shop-a-Thon price on the nine-foot waving snowmen. There were no customer complaints, and both the eight-foot banner snowmen and the nine-foot waving snowmen sold well.
The parties' contracts consist of the purchase orders, the vendor cover letter, and the vendor compliance manual. Based on liquidated-damages provisions outlined in the vendor compliance manual, Garden Ridge assessed chargebacks against Advance for its alleged noncompliance violations. For Advance's "purchase order" violation — by sending the eight-foot banner snowman instead of the waving snowman, Garden Ridge charged back to Advance the entire merchandise cost plus the cost of freight on PO '743 as a "unauthorized substitution" chargeback, which totaled
Advance demanded payment for its snowmen and other items and staged protests at Garden Ridge's headquarters. Thereafter, Garden Ridge sued Advance for breach of contract and a declaratory judgment that Garden Ridge had complied with the contracts. Advance counterclaimed for breach of contract and asserted that Garden Ridge's claims were barred because the chargeback provisions are unenforceable as penalties. Garden Ridge defended against Advance's counterclaim by asserting that Advance breached the contracts first.
At trial, Garden Ridge's divisional merchandise manager/vice president Linda Troy admitted that Garden Ridge made approximately $113,000 in profit on the snowmen it received from Advance, and further testified that Garden Ridge made all the money it would have made if the snowmen were delivered exactly as ordered. One of Garden Ridge's buyers, Sheria Cole, admitted she did not know of any dollar amount that Garden Ridge was harmed by the snowmen shipment and that Garden Ridge had less-than-zero receipt cost for the snowmen. Cole also testified that she was unaware of anyone at Garden Ridge having done any actual-harm calculations from the unauthorized substitution of the eight-foot banner snowmen or any calculations to determine whether Garden Ridge's chargebacks were reasonably proportional to any actual harm it suffered. Garden Ridge acknowledges that it did not argue any amount of actual damages other than zero and that the record reflects no actual damages resulting from Advance's noncompliance violations.
The trial court granted Advance's motion for directed verdict on Garden Ridge's breach-of-contract claim because of lack of evidence on damages resulting from Advance's noncompliance violations, but did not grant Advance's motion for directed verdict on Garden Ridge's declaratory-judgment claim or Advance's motion for directed verdict seeking to have Garden Ridge's chargeback provisions declared legally unenforceable as penalties.
The trial court submitted to the jury questions on Garden Ridge's declaratory-judgment claim and on Advance's breach-of-contract claim, but refused to submit a question on Garden Ridge's prior-material-breach defense. On Garden Ridge's declaratory-judgment claim, the jury found that Garden Ridge did not comply with the terms of the three listed agreements (to purchase the eight-foot snowmen, to purchase the nine-foot snowmen, and to purchase other items listed in the "summary of chargebacks" exhibit). On Advance's breach-of-contract claim, the jury found that Garden Ridge failed to comply with these agreements by failing to pay for the eight-foot snowmen, the nine-foot snowmen, and other items listed in the chargeback exhibit. The jury, in separate findings, awarded Advance damages in the amount of $49,176.00 for the eight-foot snowmen, $29,781.00 for the nine-foot snowmen, and $500.00 for other items listed in the chargeback exhibit. The trial
Garden Ridge appeals the trial court's final judgment, arguing in three issues that the trial court committed reversible error in its jury charge. First, Garden Ridge contends that the trial court erred in refusing to submit a jury question on Garden Ridge's affirmative defense of prior material breach. Second, Garden Ridge argues that the trial court erred by improperly instructing the jury in the damages question on the reasonableness of Garden Ridge's chargebacks. Third, Garden Ridge complains that the trial court's inclusion of instructions on acceptance and contract price in the breach-of-contract question were improper comments on the weight of the evidence.
A. Refusal to submit prior-material-breach question
Garden Ridge concedes that it is not entitled to a jury question on prior material breach if this court determines that the chargeback provisions are unenforceable as penalties. Thus, we first proceed to address the legal question of whether the chargeback provisions are enforceable.
1. Do the chargeback provisions at issue assess liquidated damages or penalties?
The parties agree that this case is governed by the Uniform Commercial Code, as adopted by Texas, which applies to transactions involving goods. TEX. BUS. & COM.CODE ANN. § 2.102 (West 2009).
Id. § 2.718(a). The parties also agree that if the chargeback provisions governing Advance's noncompliance violations at issue are unenforceable as penalties, Garden Ridge no longer has any basis to argue that Advance committed any prior material breach.
a. Determining whether a liquidated-damages provision constitutes a penalty
Whether a contractual provision is an enforceable liquidated-damages provision
"Liquidated damages" ordinarily refers to an acceptable measure of damages that parties stipulate in advance will be assessed in the event of a contract breach. Flores v. Millennium Interests, Ltd., 185 S.W.3d 427, 431 (Tex.2005) (citing Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 664 (Tex.2005)). "The common law and the Uniform Commercial Code have long recognized a distinction between liquidated damages and penalties." Id. (citing TEX. BUS. & COM.CODE § 2.718(a), and Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 485-86 (1952)). Section 2.718(a) codified the common-law distinction between liquidated damages and penalties as part of Texas' adoption of the UCC's article on sales. Id. at 432.
In Phillips v. Phillips, the Texas Supreme Court restated the common-law test for determining whether to enforce a liquidated-damages provision. 820 S.W.2d at 788. "In order to enforce a liquidated damages clause, the court must find: (1) that the harm caused by the breach is incapable or difficult of estimation, and (2) that the amount of liquidated damages called for is a reasonable forecast of just compensation." Id. (citing Rio Grande Valley Sugar Growers, Inc. v. Campesi, 592 S.W.2d 340, 342 n. 2 (Tex.1979), and comparing to TEX. BUS. & COM.CODE § 2.718(a)). The Phillips court explained that one way a party can "show that a liquidated damages provision is unreasonable" is by showing that "the actual damages incurred were much less than the amount contracted for," which requires the party "to prove what those actual damages were." Id. Thus, in such a case, "factual issues must be resolved before the legal question can be decided." Id. Phillips, however, involved no fact issues because the contractual provision at issue "by which one party agrees to pay the other some multiple of actual damages for breach of the agreement does not meet either part of the legal test for an enforceable liquidated damages provision." Id. at 789. The Phillips court therefore declared the provision at issue — which called for "liquidated damages ten times the amount [the limited partner] loses as a result of" a breach of trust — unenforceable as a penalty on its face. Id. at 787, 789.
The common-law test as described in Phillips closely tracks the language of section 2.718(a) of the UCC. The code allows damages to be liquidated "only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy." TEX. BUS. & COM.CODE ANN. § 2.718(a). It further states: "A term fixing unreasonably large liquidated damages is void as a penalty." Id. The first clause of section 2.718(a) — "reasonable in the light of the anticipated or actual harm caused by the breach" — correlates to "reasonable forecast of just compensation," from the common-law test. See id.; Phillips, 820 S.W.2d at 788. The second and third clauses of section 2.718(a) — "the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy" — correlate to "that the harm caused by the breach is incapable or difficult of estimation," from the common-law test. See TEX. BUS. & COM.CODE ANN. § 2.718(a); Phillips, 820 S.W.2d at 788. Further, the sentence that "[a] term fixing unreasonably large liquidated damages is
b. Do actual damages matter?
Garden Ridge argues that the test is conducted entirely on an ex ante basis. That is, if, at the time the contract is formed, actual damages are difficult to estimate and the amount specified in the contract is a reasonable forecast of just compensation, a liquidated-damages term is enforceable. Garden Ridge contends that the test contains no ex post actual-harm assessment to determine reasonableness. Thus, according to Garden Ridge, Advance could only show that the chargeback provisions were unenforceable as penalties if, ex ante, actual damages are easy to estimate or the liquidated damages are based on an unreasonable forecast. Garden Ridge asserts that Advance did not meet its burden because Garden Ridge's CFO, Bill Uhrig, testified that the chargeback schedule was created because actual damages from noncompliance violations are difficult to calculate, and that the schedule was based on computations and estimations by Garden Ridge's executive and purchasing staff.
Garden Ridge primarily relies on two cases from the Dallas Court of Appeals. See GPA Holding, Inc. v. Baylor Health Care Sys., 344 S.W.3d 467 (Tex.App.-Dallas 2011, no pet.); Baker v. Int'l. Record Syndicate, Inc., 812 S.W.2d 53 (Tex.App.-Dallas 1991, no writ). Neither of these cases, however, supports Garden Ridge's position that the test is to be conducted solely on an ex ante basis.
In GPA Holding, the appellate court found that GPA, a third-party administrator for self-funded health plans, did not meet its burden to establish that a "clause requiring payment of normal billed charges [instead of the original provider discounted rates] after 45 days" in GPA's hospital services agreement with Baylor was an unenforceable penalty. 344 S.W.3d at 476. GPA did not prove that "the harm from late payment is [not] difficult to estimate, or that the normal billed charges were an unreasonable forecast of the loss actually sustained." Id. (emphasis added). Nothing in the GPA Holding court's analysis precludes a consideration of reasonableness based on actual damages; and in fact, the court assessed Baylor's actual damages, i.e., whether the normal billed charges were a "reasonable amount for the health care services and supplies provided in the charges at issue in this case." Id.
In Baker, while the appellate court noted that evidence related to the difficulty of estimation and the reasonableness of the damages forecast should be viewed as of the time the contract was executed, or the "anticipated harm" test, the court also expressly stated: "Additionally, liquidated damages must not be disproportionate to actual damages. If the liquidated damages are shown to be disproportionate to the actual damages, then the liquidated damages can be declared a penalty...." 812 S.W.2d at 55. The Baker court called this the "actual harm" test: "The party asserting this defense is required to prove the amount of the other party's actual damages, if any, to show that the actual loss was not an approximation of the stipulated sum." Id. This "actual harm" test is entirely consistent with what the Texas
This court also has recognized that actual harm factors into the test to determine whether a liquidated-damages provision is an enforceable penalty. In Chan v. Montebello Development Co., we described the Phillips test as follows: "The test for determining whether a provision is valid and enforceable as liquidated damages is (1) if the damages for the prospective breach of the contract are difficult to measure; and (2) the stipulated damages are a reasonable estimate of actual damages." Chan v. Montebello Dev. Co., No. 14-06-00936-CV, 2008 WL 2986379, at *3 (Tex.App.-Houston [14th Dist.] July 31, 2008, pet. denied) (citing Phillips, 820 S.W.2d at 788). Further, we stated:
Id. at *3-4 (citations omitted).
Most importantly, the UCC reasonableness test explicitly refers to actual harm, providing that one way a liquidated-damages provision can be invalidated is where the stipulated amount proves unreasonable in light of "the anticipated or actual harm caused by the breach." TEX. BUS. & COM. CODE ANN. § 2.718(a) (emphasis added). In addition, the UCC expressly provides that "[a] term fixing unreasonably large liquidated damages is void as a penalty." Id.; see id. cmt. 1. In order to determine whether a term fixes unreasonably large liquidated damages, it follows that courts would need to consider what actual harm, if any, was caused by the breach and then compare it to the stipulated amount of liquidated damages.
Thus, both the common law and the UCC allow for courts to determine the reasonableness of a liquidated-damages clause by considering whether the defendant has shown that the stipulated amount was "unreasonably large" compared to the actual damages. See TEX. BUS. & COM.CODE ANN. § 2.718(a); Phillips, 820 S.W.2d at 788.
c. Comparing the amount of the chargebacks to Garden Ridge's actual damages
Advance argues that it proved that the harm anticipated from its alleged noncompliance was not difficult to estimate, that Garden Ridge did not even attempt to determine a chargeback amount that was reasonable in light of the anticipated or actual harm, and that the liquidated damages Garden Ridge assessed are disproportionate to its actual damages. We conclude Advance met its burden to show that the chargeback amounts constituted a disproportionate estimation of Garden Ridge's actual damages; therefore, the chargeback provisions are void as penalties under the UCC.
Advance elicited evidence from Garden Ridge employees Troy and Cole sufficient to prove that Garden Ridge suffered no actual damages as a result of Advance's substitution of the eight-foot banner snowmen. The trial court also determined that Garden Ridge suffered no actual damages from any of Advance's noncompliance violations when the court directed a verdict against Garden Ridge on its breach-of-contract claim; Garden Ridge does not challenge that ruling. And Garden Ridge
Thus, Advance has shown that the chargebacks assessed by Garden Ridge for Advance's "unauthorized substitution" and "merchant initiated" noncompliance violations — 100% of the invoiced merchandise cost plus freight for the eight-foot banner snowmen and the nine-foot waving snowmen, for a total of $79,457.00 — were unreasonably large when compared to Garden Ridge's actual damages of zero. Advance also has shown that the additional chargebacks assessed by Garden Ridge for Advance's "short or incomplete order," "carton markings," and "cartons not numbered correctly" noncompliance violations on other merchandise — totaling approximately $13,000 — were unreasonably large when compared to Garden Ridge's actual damages of zero. Therefore, as a matter of law, we conclude that, under these circumstances,
d. Whether the amount of the chargebacks is reasonable in light of Garden Ridge's anticipated harm
Even if the concurring opinion is correct that Advance also had to prove the stipulated damages were unreasonable in light of the anticipated harm in order for us to conclude that the chargeback provisions are unreasonable under section 2.718(a), we conclude that Advance has done so in this case. As explained in subsection II.A.1.c., Advance has shown that the stipulated amounts are unreasonable in light of the actual harm — zero — suffered by Garden Ridge. Further, Advance has shown that the stipulated amounts are unreasonable in light of the harm anticipated by Garden Ridge.
Here, according to the challenged liquidated-damages provisions, Garden Ridge anticipated at the time of contract that an unauthorized substitution of any type would result in harm of 100% of the cost of the merchandise, plus freight. In fact, Garden Ridge's buyer Cole testified that Garden Ridge had the discretion to assess the full 100% chargeback, even if the only deviation in the snowmen had been green versus red buttons. Cole further testified that she was not aware of any instance where Garden Ridge had decided not to issue a chargeback because there was "no harm, no foul" or where Garden Ridge had exercised its discretion to not charge back "fully" for an unauthorized substitution. Garden Ridge's CFO Uhrig agreed that a button-color substitution would constitute noncompliance, for which Garden Ridge could charge back the full 100% of merchandise cost. In other words, no matter what the degree of substitution, and no matter whether the substitution is even anticipated to result in any harm, Garden Ridge's unauthorized-substitution rule provides that Garden Ridge keeps the merchandise without paying the vendor anything
Even though, according to Uhrig, Garden Ridge is "very good at estimating our costs," he admitted that at the time it was developing the chargeback schedule Garden Ridge did not perform any actual studies on what costs it would incur due to vendor noncompliance. Further, Uhrig could not explain any specifics on how Garden Ridge "figure[d] out what the costs are and what would be appropriate charge-backs." Cole also testified that she was not aware of Garden Ridge having performed any analysis as to whether the 100% chargeback amount reasonably approximates the anticipated harm that Garden Ridge would suffer from an unauthorized substitution. Despite this lack of detail regarding the 100% chargeback amount for anticipated harm from vendor violations, Uhrig testified that "on average" charging back 100% somehow reflected Garden Ridge's costs for unauthorized substitutions. Uhrig further indicated that Garden Ridge's chargebacks communicate to vendors, "Don't do this"; and Garden Ridge's CEO, Tim Kibarian, agreed that chargebacks are the "penalty" if its vendors do not follow its rules.
We therefore conclude that Advance has proven that Garden Ridge's liquidated-damages provisions do not reasonably reflect Garden Ridge's anticipated harm for an unauthorized substitution, where the challenged provisions allowed Garden Ridge to charge back 100% of merchandise cost plus freight for any unauthorized substitution, no matter how slight and no matter if Garden Ridge even anticipated incurring any harm.
B. Instruction on damages
Garden Ridge next argues that the trial court committed reversible error by including the following instruction as part of its question on Advance's damages:
During the charge conference, Garden Ridge objected to the inclusion of this instruction as improper because whether the chargeback provisions constitute penalties was a question reserved for the court, not the jury. Garden Ridge further objected that the trial court should not include this instruction because it would permit the jury to assess damages on a basis that is not permitted in the law — that is, there is no actual-damages component to whether a liquidated damages provision is unreasonable and thus constitutes a penalty.
We review a trial court's decision whether to submit a particular instruction in its charge for abuse of discretion. Id. at 687 (citing In re V.L.K., 24 S.W.3d 338, 341 (Tex.2000)); City of Houston v. Proler, 373 S.W.3d 748, 760 (Tex. App.-Houston [14th Dist.] 2012, no. pet. h.) (citing Shupe v. Lingafelter, 192 S.W.3d 577, 579 (Tex.2006)). The trial court has considerable discretion to determine proper jury instructions, and "[i]f an instruction might aid the jury in answering the issues presented to them, or if there is any support in the evidence for an instruction, the instruction is proper." Thota, 366 S.W.3d at 687 (quoting La.-Pac. Corp. v. Knighten, 976 S.W.2d 674, 676 (Tex.1998)). "An instruction is proper if it (1) assists the jury, (2) accurately states the law, and (3) finds support in the pleadings and evidence." Id. (citing Columbia Rio Grande Healthcare, L.P. v. Hawley, 284 S.W.3d 851, 855-56 (Tex.2009)). We will not reverse a judgment for a charge error unless that error was harmful because it "probably caused the rendition of an improper judgment" or "probably prevented the petitioner from properly presenting the case to the appellate courts." Id. (citing Tex. R.App. P. 44.1(a) and 61.1); Proler, 373 S.W.3d at 760 (citing La.-Pac. Corp., 976 S.W.2d at 676 (Tex.1998)); see also Bed, Bath & Beyond, Inc. v. Urista, 211 S.W.3d 753, 757 (Tex.2006). We examine the entire record to determine whether the instruction probably caused an improper judgment. Thota, 366 S.W.3d at 686-87; Urista, 211 S.W.3d at 757.
As discussed above in subsection II.A.1.b, a party can prove that a liquidated-damages clause is unenforceable and void as a penalty if it shows that the actual damages incurred by the other party are much less than or disproportionate to the contracted-for amount. The complained-of instruction here essentially tracks the language from Phillips — that a liquidated-damages provision is unreasonable and unenforceable as a penalty "because the actual damages incurred were much less than the amount contracted for." See 820 S.W.2d at 788. Therefore, the instruction properly stated the "actual harm" portion of the common-law test. Id.; see also Chan, 2008 WL 2986379, at *3. Further, the complained-of instruction correlates to the equivalent portion of the UCC test that "[a] term fixing unreasonably large liquidated damages is void as a penalty." TEX. BUS.CODE ANN. § 2.718(a).
However, because the instruction concerns whether the chargeback provisions are unreasonable and thus unenforceable as penalties, which is a legal issue for the trial court to decide, Phillips, 820 S.W.2d at 788, we conclude that the trial court improperly submitted this instruction
Our review of the record reveals, however, that this abuse of discretion was harmless.
Nor did including the improper instruction mislead or confuse the jury in its determination of damages on Advance's breach-of-contract claim. Advance presented evidence relating to over $92,000 in chargebacks Garden Ridge assessed, and evidence that these chargebacks reflected what Garden Ridge deducted from Advance's merchandise invoices. The jury's answers to what was "the difference between what Garden Ridge agreed to pay and what it actually paid for [the] snowmen" reflect that the jury considered the contract rate as what Garden Ridge agreed to pay for the nine-foot and eight-foot snowmen within PO '721 and PO '743, which included collection of freight, and that Garden Ridge actually paid nothing whatsoever to Advance for these snowmen. Thus, the jury found that for the snowmen Advance had proven its full amount of damages — that the differences reflected the exact amounts Garden Ridge charged
C. Instructions on breach of contract
In its final issue, Garden Ridge argues that the trial court's inclusion of the UCC's definition regarding what constitutes the acceptance of goods — section 2.606(a)
This is a UCC breach-of-contract case in which Advance pleaded, and presented evidence, that Garden Ridge breached by accepting and then not paying the contract price for the snowmen and other goods at issue. The parties do not dispute that their contracts are governed by the UCC. Section 2.606(a) and section 2.607(a), the sources of the trial court's instructions, are located in the UCC subchapter concerning "Breach, Repudiation, and Excuse." Further, both of these instructions properly state the law. TEX. BUS. & COM.CODE ANN. § 2.606(a) & 2.607(a) (West 2009). These instructions thus are proper because they (1) assisted the jury in answering the breach question, (2) accurately stated the law, and (3) found support in the pleadings and evidence. See Thota, 366 S.W.3d at 687 (citing Hawley, 284 S.W.3d at 855-56). We therefore conclude that the trial court did not abuse its discretion by submitting the complained-of trial instructions.
Accordingly, having overruled all of Garden Ridge's issues, we affirm the trial court's judgment.
FROST, J., concurring.
KEM THOMPSON FROST, Justice, concurring.
In an issue of first impression in this court, the majority construes Texas Business and Commerce Code Section 2.718(a) in a manner that conflicts with the unambiguous language of that provision and with opinions from two sister courts of appeals. By allowing a breaching party to show that a liquidated-damages provision is unreasonable based only upon a comparison between the amount of the stipulated damages and the amount of the actual damages incurred, the majority exposes liquidated-damages provisions in sale-of-goods contracts to a legal standard that may bar enforcement of many such provisions based upon a hindsight analysis that the Texas Legislature never intended.
Text of the Applicable Statute
Appellant/plaintiff Garden Ridge, L.P. asserts that the liquidated-damages provisions in its contracts for the sale of goods with appellee/defendant Advance International, Inc. are enforceable. Advance maintains that these provisions are void as penalties and unenforceable. Both sides agree, and the law provides, that this issue is governed by Texas Business and Commerce Code section 2.718(a), which provides in its entirety as follows:
TEX. BUS. & COMM.CODE ANN. § 2.718(a) (West 2013).
We review the trial court's interpretation of applicable statutes de novo. See
Interpretation of the Statutory Text
Advance, as the party asserting that the liquidated-damages provisions are penalties, had the burden of proving that these provisions do not satisfy the applicable legal standard for an enforceable liquidated-damages provision under Section 2.718(a). Baker v. International Record Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. App.-Dallas 1991, no writ). Under the plain meaning of Section 2.718(a), it was incumbent upon Advance to establish that the amount of damages set by the provisions in question was not reasonable in light of the anticipated harm and the actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. See TEX. BUS. & COMM. CODE ANN. § 2.718(a).
Both Section 2.718(a) and Texas common law provide that a liquidated-damages provision is enforceable as long as it is not a penalty. See id.; Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex.1991) (discussing legal standard under Texas common law). But, to prove that a provision is a penalty under Texas common law, a party must prove that (1) the harm caused by the breach is not incapable or difficult of estimation, or (2) that the amount of liquidated damages called for is not a reasonable forecast of just compensation. See Phillips, 820 S.W.2d at 788. The Supreme Court of Texas has indicated that a party may prove that the amount of liquidated damages is not a reasonable forecast of just compensation under the common-law test only by showing that the actual damages incurred were much less than the liquidated-damage amount. See id.
As can be seen by comparing the legal standard under Section 2.718(a) and the legal standard under Texas common law, the two legal standards are significantly different. See McFadden v. Fuentes, 790 S.W.2d 736, 737-38 (Tex.App.-El Paso 1990, no writ) (holding that the legal standard under Section 2.718(a) is different from and supersedes the legal standard under Texas common law in sales-of-goods cases); George E. Henderson, A New Chapter 2 for Texas: Well-Suited or Ill-Fitting? 41 TEX. TECH. L.REV. 235, 488-91 (2009) (attaching law professor's analysis concluding that the legal standard under Section 2.718(a) is different from the legal standard under Texas common law). See also Phillips, 820 S.W.2d at 788 (reciting the legal standard from Texas common law and then citing Section 2.718(a) with a "Cf." signal, indicating that the statute is different from the common law but deals with an analogous subject matter).
Under Section 2.718(a), Advance had the burden of proving that the amount of damages set by the provisions in question was not reasonable in the light of both the anticipated harm and actual harm caused by the breach. See Tex. Bus. & Comm. Code Ann. § 2.718(a); Henderson, supra, 41 TEX. TECH. L.REV. at 491 (attaching law
The majority concludes that the legal standard under Section 2.718(a) is the same as the legal standard under Texas common law and that Advance did not have to show that the liquidated-damages provision was not reasonable in light of the anticipated harm. See ante at pp. 437-40. This conclusion is contrary to the plain meaning of the statutory text, under which the liquidated-damages amount may be reasonable based upon either anticipated harm or actual harm caused by the breach. See id. The majority treats the statutory sentence "[a] term fixing unreasonably large liquidated damages is void as a penalty" as equivalent to the following sentence from Phillips's articulation of the common law rule: "a liquidated damages provision is unreasonable because the actual damages incurred were much less than the amount contracted for." See ante at p. 439 (considering second sentence from Section 2.718(a) as equivalent to this sentence from Phillips); Tex. Bus. & Com. Code Ann. § 2.718(a); Phillips, 820 S.W.2d at 788. In the second sentence of Section 2.718(a), the Legislature did not address the legal standard by which courts are to determine whether a liquidated-damages provision is void as a penalty; that standard is addressed in the first sentence of Section 2.718(a). See Tex. Bus. & Com.Code Ann. § 2.718(a).
The majority relies upon the Supreme Court of Texas's decision in Flores v. Millennium Interests, Ltd. See 185 S.W.3d 427 (Tex.2005). The Flores court addressed the circumstances under which a seller of real property under a contract for deed may be liable for the statutory "liquidated damages" afforded in Texas Property Code section 5.077(c). See id. at 429-33. In a general discussion of the meaning of the term "liquidated damages," the Flores court correctly stated that both Texas common law and Section 2.718(a) recognize a distinction between an enforceable liquidated-damages provision and a void penalty. See id. at 431. The Flores court did not state that the legal standards under Section 2.718(a) and the common law are the same, nor did the Flores court address the legal standard a party must satisfy to show that a liquidated-damages provision is a penalty under Section 2.718(a). See id. at 429-33. The Flores case does not support the majority's analysis.
The majority also relies upon the Supreme Court of Texas's decision in Phillips.
The majority further relies upon this court's opinion in Chan v. Montebello Development Company. See No. 14-06-00936-CV, 2008 WL 2986379, at *3-6 (Tex. App.-Houston [14th Dist.] July 31, 2008, pet. denied) (mem. op.). The Chan court addressed the legal standard under Texas common law. See id. Because the determination of the proper legal standard under Section 2.718(a) was not before the Chan court, the court did not address this issue. See id. Nor did the Chan court state that the legal standards under Section 2.718(a) and the common law are the same. See id. The Chan case does not support the majority's analysis regarding the legal standard under Section 2.718(a).
An Unwarranted Hindsight Analysis
Under the legal standard the majority adopts today, parties breaching sale-of-goods contracts may avoid enforcement of liquidated-damages provisions based upon a hindsight analysis. This approach not only contravenes the statutory text but also undermines important freedom-of-contract values that are a cornerstone of Texas jurisprudence.
Texas has a fundamental public policy in favor of a broad freedom of contract. See Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84, 95 (Tex.2011) (stating that "[a]s a fundamental matter, Texas law recognizes and protects a broad freedom of contract"). Liquidated-damages provisions in commercial transactions benefit both sides by providing certainty and predictability. By including Section 2-718(a) in Texas's version of the Uniform Commercial Code, the Texas Legislature recognized the utility of liquidated-damages clauses and parties' willingness and desire to choose this remedy in transactions involving the sale of goods. See Tex. Bus. & Com.Code Ann. § 2.718(a). The Legislature also recognized that in certain situations, liquidated-damages provisions should not be enforceable, and the Legislature crafted a specific legal standard for making this determination. See id.
When a buyer and a seller agree to a liquidated-damages provision, both parties have a potential upside and a potential downside. The idea is that, even though the non-breaching party's expectation damages may be far greater than the amount specified in the liquidated-damages clause, the non-breaching party's recovery is capped at the amount of specified liquidated damages. Under freedom-of-contract principles, courts must honor the parties' agreement unless the stipulated amount is shown to be unreasonable under Section 2.718(a). See id. Under this standard, as discussed above, the party asserting that the provision is void as a penalty must prove that the stipulated amount is unreasonable based both on the harm anticipated at the time of contracting and the actual harm caused by the breach. At the
With the legal standard adopted by the majority today, the court fails to honor the Legislature's intent of providing leeway for the parties to have stipulated to an amount of liquidated damages that was reasonable under conditions prevailing at the time of contracting but that ends up not measuring damages in a completely accurate manner in a particular case. Enforcing liquidated-damages provisions when they accurately gauge actual damages and not enforcing them when they do not deprives the non-breaching party of the remedy it bargained to receive, contrary to Section 2.718(a). See id.
A Possible Resolution on the Horizon
The Supreme Court of Texas has yet to address the legal standard a party must satisfy to show that a liquidated-damages provision is a penalty under Section 2.718(a). With today's opinion from this court, there are now three different and conflicting views on this question from the three intermediate appellate courts that have addressed this issue. Compare ante at pp. 437-40, with TXU Portfolio Management Co. v. FPL Energy, LLC, 328 S.W.3d 580, 587-88 (Tex.App.-Dallas 2010, pet. granted), and with McFadden, 790 S.W.2d at 737-38. The Supreme Court of Texas has granted review in a case in which this issue has been presented. See Petition for Review, FPL Energy, LLC v. TXU Portfolio Management Co., No. 11-0050 (Tex. granted Feb. 17, 2012). If this issue is not addressed in the Supreme Court of Texas's opinion in the FPL Energy case, uniformity and predictability in the application of Section 2.718(a) would be served by high-court review of this issue in this case or another.
The majority's interpretation of Section 2.718(a) is more restrictive than the legal standard provided by the Legislature under the plain meaning of that statute. But, because no error asserted by Garden Ridge probably caused the rendition of an improper judgment or probably prevented Garden Ridge from properly presenting this case on appeal, the trial court's judgment should be affirmed. Accordingly,
See TEX. BUS. & COM.CODE ANN. § 2.718(a). We note that this instruction also properly references "actual harm" as a component of the reasonableness test.
TEX. BUS. & COM.CODE ANN. § 2.606(a).