Court Opinion

ID: 2987222
Source: CourtListenerOpinion
Date Created: 2015-09-23 00:46:45.331628+00
Date Added: 2024-06-11T11:44:49.695942
License: Public Domain

Affirmed and Opinion and Concurring Opinion filed April 9, 2013.

                                     In The

                    Fourteenth Court of Appeals

                             NO. 14-11-00624-CV

                      GARDEN RIDGE, L.P., Appellant
                                       V.
  ADVANCE INTERNATIONAL, INC., AND HERBERT A. FEINBERG,
                       Appellees

                   On Appeal from the 164th District Court
                           Harris County, Texas
                     Trial Court Cause No. 2009-80706

                 CONCURRING OPINION
      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:
      (a) Damages for breach by either party may be liquidated in the
      agreement but 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. A term fixing unreasonably large
      liquidated damages is void as a penalty.

Tex. Bus. & Comm. Code Ann. § 2.718(a) (West 2013).

      We review the trial court’s interpretation of applicable statutes de novo. See
Johnson v. City of Fort Worth, 774 S.W.2d 653, 655–56 (Tex. 1989).               In
construing a statute, our objective is to determine and give effect to the
Legislature’s intent. See Nat’l Liab. & Fire Ins. Co. v. Allen, 15 S.W.3d 525, 527
(Tex. 2000). If possible, we must ascertain that intent from the language the
Legislature used in the statute and not look to extraneous matters for an intent the
statute does not state.     Id.    If the meaning of the statutory language is
unambiguous, we adopt the interpretation supported by the plain meaning of the
provision’s words. St. Luke’s Episcopal Hosp. v. Agbor, 952 S.W.2d 503, 505
(Tex. 1997). We must not engage in forced or strained construction; instead, we
must yield to the plain sense of the words the Legislature chose. See id.

                                             2
                       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
                                         3
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 professor’s analysis concluding that under Section 2.718(a) a
liquidated-damages provision is valid if reasonable with respect to either
anticipated harm or actual harm caused by the breach). Under the unambiguous
meaning of the word “or” in the statute, a liquidated-damages provision may be
reasonable based upon either anticipated harm or actual harm caused by the
breach. See Comdisco, Inc. v. Tarrant County App. Dist., 927 S.W.2d 325, 327
(Tex. App.—Fort Worth 1996, writ ref’d) (holding, in Supreme Court of Texas
precedent, that unambiguous meaning of “or” in statute was the disjunctive).1 If a
liquidated-damages provision may be reasonable based upon either anticipated
harm or actual harm caused by the breach, then Advance, as the party with the

1
  In cases decided after June 14, 1927, the Supreme Court of Texas’s notation of “writ refused”
or “petition refused” denotes that the court of appeals’s opinion is the same as a precedent of the
Supreme Court of Texas. See Yancy v. United Surgical Partners Int’l, Inc., 236 S.W.3d 778, 786
n.6 (Tex. 2007).

                                                4
burden   of   proving   the   provision       is   unenforceable,   had   to   establish
unreasonableness under both anticipated harm and actual harm caused by the
breach. See Tex. Bus. & Comm. Code Ann. § 2.718(a).

      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. 7–12. 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. 9 (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

                                          5
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. See 820 S.W.2d at 788. The Phillips court addressed the legal standard
under Texas common law. See id. Determining the proper legal standard under
Section 2.718(a) was not before the Phillips court, and the court did not address
this issue. See id. The Phillips court did not state that the legal standards under
Section 2.718(a) and the common law are the same. See id. Instead, after reciting
the legal standard under Texas common law, the Phillips court cited 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. See id. The Phillips
court did not address the difference between the two legal standards, and this
difference was not necessary to the disposition of that case. See id. The Phillips
case does not support the majority’s analysis regarding the legal standard under
Section 2.718(a).

      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

                                            6
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-

                                         7
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 time of contracting, unknown factors often make estimation and
calculation of potential damages uncertain.2 This uncertainty at the time of
contracting is often what makes the determination of liquidated damages difficult.
Hindsight has a way of making estimations that were reasonable at the time seem
unreasonable after a breach. By the time a breach has occurred and the dispute has
come to court, the costs and valuations are often easier to estimate and, with
hindsight, honest estimates made at the inception of the contract might prove to be
too high or too low. This is part of the risk of doing business that parties embrace
when agreeing to a liquidated-damages provision. In evaluating these provisions,
courts should not lose sight of important principles of freedom of contract and
must uphold the sanctity of contract unless the liquidated-damages provision is
shown to be a penalty under the standard articulated by the Legislature in Section
2.718(a). See id.
       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
2
  A retail merchant that advertises its products in mass media has a distinct need for the seller to
provide conforming goods because the retail merchant must be able to furnish conforming goods
to the public. Patrons who see an advertisement and come to the retail merchant’s store
reasonably may expect to be able to purchase the item advertised. Garden Ridge testified that
when the product is not as advertised, the merchant suffers loss of customer goodwill. It may
often be difficult to estimate the amount of damages from the loss of goodwill and patronage
accompanying the breach of a seller who fails to deliver conforming goods the retail merchant
had advertised.

                                                 8
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 p. 6–12, 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.

                                     Conclusion

      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, though I respectfully decline to join the majority opinion, I concur in

                                          9
the court’s judgment.

                                   /s/    Kem Thompson Frost
                                          Justice

Panel consists of Justices Frost, Christopher, and Jamison.   (Christopher, J.,
majority).

                                     10