Opinion ID: 702553
Heading Depth: 2
Heading Rank: 4

Heading: Enforceability of the liquidated damages clause

Text: 17 The buyout agreement entered by Anros and BSC required Anros to establish a $5 million letter of credit in favor of BSC to secure its obligation to fund the sale. The contract provided further, in section 3, that if [i]nvestor [Anros] fails to fund Investor's Closing Contribution as aforesaid, the sole and exclusive remedy of BSC, TMC and the partnership [TTP] shall be to retain the Investor L/C [letter of credit] proceeds ... as liquidated damages (and not as a penalty) .... 16 BSC retained the $5 million it received from presentation of the letter of credit as damages. Below and on appeal, Anros argues that this liquidated damages provision is unenforceable as a penalty. 18 Under Texas law, a liquidated damages clause can only be enforced if it meets three requirements. First, the anticipated damages for a breach must be difficult or impossible to estimate. 17 Also, the amount of liquidated damages must be a reasonable forecast of the amount necessary to render just compensation. 18 In addition, liquidated damages must not be disproportionate to actual damages, as measured at the time of the breach. 19 Thus, if the liquidated damages are disproportionate to the actual damages, the clause will not be enforced and recovery will be limited to the actual damages proven. 20 The party seeking to prevent enforcement bears the burden of proof on these issues. 21 19 Anros points to an internal memorandum of BSC which estimated the damages BSC would suffer as a result of a breach by Anros at $1.4 million. Anros argues that $5 million could not be a reasonable estimate of just compensation in the light of the estimate contained in this memorandum. Further, Anros argues that BSC, due to its experience in this type of transaction, could have estimated its damages at the time the buyout agreement was signed. 20 We disagree. Texas courts have consistently held that damages for breach of a contract to buy or sell real estate are uncertain and not easily estimated with accuracy. 22 And, although the contract at issue today is between two purchasers, the factors which make damages difficult to predict with regard to contracts between sellers and purchasers of real estate apply equally to this case. For example, as noted by the district court, the total amount of commissions and fees associated with the closing cannot be ascertained in advance. Also, the value of the property and, therefore, the profits to be gained from purchase varies with the market. In addition, in the internal memorandum cited by Anros, BSC contemplated additional damages as a result of possible damage to its business reputation if Anros failed to complete the sale. Thus, the district court did not err when it concluded that BSC's damages were difficult to determine in advance. 21 Neither did the district court err in holding, as a matter of law, that $5 million was a reasonable estimate of just compensation. BSC, according to its memo, faced approximately $1.4 million in damages if Anros failed to fund the sale. Also, in the event of a breach, BSC lost the $3.8 million Anros agreed to pay for a 10 percent interest in TMC. These estimates do not include the possible damage to BSC's reputation mentioned above. The $5 million in liquidated damages constitutes only 3 percent of the total sale price for Thanksgiving Tower, $165 million. 23 In the light of the anticipated damages discussed above and the large sums of money at issue in this transaction generally, Anros has failed to show that $5 million was not a reasonable estimate of just compensation. 22 Finally, Anros alleges that the $5 million in liquidated damages is disproportionate to the actual damages BSC suffered and, therefore, the liquidated damages clause is unenforceable. Anros cites the post-breach purchase of the Thanksgiving Tower by BSC and the resulting profit. As noted by BSC, however, the measure of actual damages is considered at the time of breach. 24 Anros bears the burden of showing that BSC's actual damages were disproportionate to the $5 million in liquidated damages. It has failed to do so. Therefore, we affirm the district court's decision that the liquidated damages clause is enforceable under Texas law. 23