City of Colleyville, Texas v. Mart, Inc.

In the
Court of Appeals
Second Appellate District of Texas
at Fort Worth
___________________________
No. 02-25-00276-CV
___________________________

CITY OF COLLEYVILLE, TEXAS, Appellant

V.

MART, INC., Appellee

On Appeal from the 236th District Court
Tarrant County, Texas
Trial Court No. 236-353845-24

Before Sudderth, C.J.; Wallach and Walker, JJ.
Memorandum Opinion by Justice Walker
MEMORANDUM OPINION

I. INTRODUCTION

This is an accelerated, permissive appeal from the trial court’s order granting in

part Appellee Mart, Inc.’s motion for partial summary judgment. See Tex. Civ. Prac.

& Rem. Code Ann. § 51.014(d), (f); Tex. R. App. P. 28.1. The trial court’s order

declared that the liquidated-damages provision in a contract between Mart and

Appellant City of Colleyville is an unenforceable penalty.

We granted the City’s petition for permissive appeal to determine whether the

trial court erred by declaring that the liquidated-damages provision is an

unenforceable penalty. See Tex. R. App. P. 28.3. Because the City did not satisfy its

burden to show that the amount of liquidated damages called for is a reasonable

forecast of just compensation, we will affirm.

II. FACTUAL AND PROCEDURAL BACKGROUND

On February 7, 2022, the City and Mart entered into a construction services

agreement (Contract) for renovations related to the City’s senior center (the Project).1

The Contract contained the following relevant provisions:

• [The City] agrees to pay [Mart] for all services authorized in writing
and properly performed by [Mart] in a total amount not to exceed
[three million four hundred and thirty-one thousand and no/100
dollars] ($3,421,000.00).”

1
The Contract incorporated other “Contract Documents,” including the City’s
plans, invitation for bid, and written notice to proceed.

2
• “If discrepancies are found that may impact construction of the
Project, it shall be [Mart’s] obligation to seek clarification as to which
requirements or provisions control before undertaking any work on
that component of the Project.”

• “The time for performance under this Agreement is Two Hundred
and Seventy (270) calendar days. Accordingly, [Mart] shall complete
all work related to the Project on or before the 270th calendar day
following the date of [the City’s] written notice to proceed to [Mart].”

• “In the event [Mart’s] performance of this Agreement is delayed or
interfered with by acts of the [City] or others, [Mart] may request an
extension of time for the performance of same as hereinafter
provided, but shall not be entitled to any increase in fee or price, or
to damages or additional compensation as a consequence of such
delays.”

• “No allowance of any extension of time, for any cause whatever
(including an event of force majeure), shall be claimed by or granted
to [Mart], unless (i) [Mart] shall have made written request to [the
City] for such extension within forty-eight (48) hours after the cause
for such extension occurred, and (ii) [the City] and [Mart] have agreed
in writing that such additional time shall be granted.”

• “[Mart] understands and agrees that time is of the essence of this
contract, and that for each day of delay beyond the number of
calendar days agreed upon for the completion of the work herein
specified and contracted for (after due allowance for such extension
of time as may otherwise be provided for extension of time herein),
[the City] may withhold permanently from the Contract Price an
amount equal to $5,000 per day, which the parties agree represents a
reasonable estimation of the actual costs that would be incurred by
the [City] in the event of such delay.”2

The City issued its written notice to proceed on March 9, 2022, obligating Mart

to complete the Project by December 4, 2022. However, after beginning

This portion of the Contract—the liquidated-damages provision—is Section
2

7(D).

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construction, Mart discovered that the City’s plans and specifications were

incomplete, inaccurate, or defective. Mart had to send numerous requests for

information to the City’s architect, seeking corrections or modifications to the plans.3

Mart contended that it had to halt construction on the Project because of the plan’s

defects and that it had to wait on the City’s architect to make corrections to the plans

or provide alternative instructions.4 By December 4, 2022, the Project remained

uncompleted. In the course of the project, Mart submitted five change orders

requesting various extensions of time. The City approved each of Mart’s requests,

and the Project was extended for a total of thirty-two days.

On February 17, 2023, the City notified Mart by letter of its intent to withhold

liquidated damages pursuant to Section 7(D) of the Contract.5 The relevant portions

of the letter read:

Section 7(D) of the Agreement states the City “may withhold
permanently from the Contract Price an amount equal to $5,000 per day,
which the parties agree represents a reasonable estimation of the actual
costs that would be incurred by the City in the event of such delay.”[ ]
Mart requested, and the City agreed to two change orders granting you a

3
Mart sent more than 130 requests for information to the City’s architect. The
City’s architect submitted late responses to many of Mart’s information requests,
several of which were more than a month past due.
4
The City “does not dispute that the corrections and modifications to the plans
were necessary and that it was not possible for Mart to continue work on the Project
until corrections were made.”

At the time of the City’s letter, Mart was sixty days beyond the Contract’s
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prescribed time for performance.

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fourteen-day time extension.[ ] Yet even including these approved
delays, Mart is [sixty] days past due. Pursuant to [S]ection 7(D), the City
is entitled to withhold $300,000 in liquidated damages as of today. The
Project was completed on December 29, 2023.

The City has had multiple conversations with you about the ongoing
delays, including an in-person meeting during which you estimated a
completion date of April 15, 2023. The purpose of this letter is to
formally notify you that the City reserves the right to withhold the above
amount and any additional amounts accrued after today and through the
date of Project completion from the final contract price.

As stated in the Agreement, time remains of the essence. Please proceed
with haste to complete the Project as agreed.

Following the City’s letter, Mart continued submitting requests for information

from the City’s architect but made no additional requests for extensions of time.

Because of the various delays, the Project was not completed until December 29,

2023.6 Relying on the Contract’s liquidated-damages provision, the City withheld

$1,106,503.86 from Mart. Mart sued the City for (1) breach of contract, (2) suit on

sworn account, (3) quantum meruit, (4) declaratory relief—that the liquidated-

damages provision is an unenforceable penalty, and (5) attorney’s fees. The City

brought counterclaims against Mart for (1) breach of contract, (2) breach of

warranties, (3) declaratory relief—that the liquidated-damages provision is

enforceable, and (4) attorney’s fees.

6
The Project was completed 358 days beyond the Contract’s prescribed time
for performance.

5
Mart moved for partial summary judgment on its claims of (1) declaratory

judgment, (2) breach of contract, and (3) suit on sworn account. With respect to its

declaratory-judgment claim, Mart argued that the liquidated-damages provision is an

unenforceable penalty because it was designed and intended as a penalty. In support

of its argument, Mart identified various statements made by the City’s officials and

staff that referred to the provision as the City’s right to “assess financial penalties.”7

Mart also maintained that, even if the provision was a properly designed liquidated-

damages provision, it is still unenforceable because the actual damages incurred were

much less than the liquidated damages imposed. Mart asserted that the City “faced

little to no actual damages resulting from the delays.”8

7
Mart pointed to comments made by the City’s mayor and assistant city
manager regarding the liquidated damages being a penalty. The City’s mayor stated—
in a social media video—that the “contract includes penalties of $5,000.00 a day for
not meeting the original deadline.” He explained that the “penalty currently totals
over a million dollars” and that the City had “stopped paying the contractor since the
anticipated penalties will be more than what’s left to pay on the contract.” The
assistant city manager sent Mart an email that stated “[t]he contract contains large
daily penalties ($5,000 per day beyond 270 calendar days). This should motivate
everyone on this email to make [the Project] a priority.” Mart also pointed to the
City’s invitation for bid—which was incorporated in the Contract—that stated the
City “reserves the right to assess financial penalties if the Bidder fails to complete the
project as promised.”
8
Mart argued that the City (1) owns the property where the Project is located,
(2) does not pay rent on the property, (3) does not pay taxes on the property, (4) has
no other carrying costs on the property, and (5) does not charge monthly fees for the
residents who use the senior center facility. With respect to the fees, Mart asserted
that the senior center is free and generates little to no revenue—much less than
$5,000 per day.

6
In response, the City argued that the parties had agreed that the “liquidated

damages was a reasonable forecast of just compensation in the event of delay, as the

actual costs and damages were incapable or difficult of estimation and time was of the

essence regarding this project.” As for damages, the City complained that it was

“unable to use its Senior Center, a vital facility to [the City] and its citizens, for the

entire time of the Project. Tax paying citizens of the City were deprived of the use of

the property long beyond the timeframe authorized by the City Council on the

citizens’ behalf.”

Following a non-evidentiary hearing, the trial court signed an order granting in

part Mart’s partial motion for summary judgment on its declaratory-judgment claim.9

The trial court’s order declared that “the liquidated[-]damages clause located in

Section 7(D) of the Contract is an unenforceable penalty.” The City moved to amend

the trial court’s order, requesting permission to appeal. Upon an agreed order, the

trial court granted the City permission to appeal the summary-judgment declaration.

The City filed a petition for permissive appeal with this court,10 and we granted the

petition.

The trial court denied summary judgment on Mart’s claims of breach of
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contract, suit on a sworn account, and quantum meruit. Following the trial court’s
denial of summary judgment on those claims, Mart filed an amended petition,
removing its claims for suit on a sworn account and quantum meruit.

In response to the City’s petition, Mart requested that we consider the City’s
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permissive appeal.

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III. STANDARD OF REVIEW

We review a summary judgment de novo. Travelers Ins. v. Joachim, 315 S.W.3d

860, 862 (Tex. 2010). We consider the evidence presented in the light most favorable

to the nonmovant, crediting evidence favorable to the nonmovant if reasonable jurors

could and disregarding evidence contrary to the nonmovant unless reasonable jurors

could not. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848

(Tex. 2009). We indulge every reasonable inference and resolve any doubts in the

nonmovant’s favor. 20801, Inc. v. Parker, 249 S.W.3d 392, 399 (Tex. 2008). A plaintiff

is entitled to summary judgment on a cause of action if it conclusively proves all

essential elements of the claim. See Tex. R. Civ. P. 166a(a), (c); MMP, Ltd. v. Jones,

710 S.W.2d 59, 60 (Tex. 1986).

When, as here, the trial court does not specify the grounds relied upon in

granting the motion for summary judgment, the reviewing court must affirm if any of

the summary judgment grounds are meritorious. Dow Chem. Co. v. Francis, 46 S.W.3d

237, 242 (Tex. 2001).

IV. DISCUSSION

In a single issue, the City contends that because Mart did not satisfy its burden

to show that the City’s actual damages were much less than the liquidated damages

imposed, the trial court erred by declaring that the liquidated-damages provision is an

unenforceable penalty. We disagree. Because the City did not satisfy its burden to

show that the liquidated damages is a reasonable forecast of just compensation, we

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need not reach whether Mart met its burden to show an unbridgeable discrepancy

between the City’s actual damages and the Contract’s liquidated damages.

A. APPLICABLE LAW

Notwithstanding its otherwise wide regard for freedom of contract, Texas law

reasonably limits damages for a contractual breach to “just compensation for the loss

or damage actually sustained.” Stewart v. Basey, 245 S.W.2d 484, 486 (Tex. 1952).

Accordingly, courts “carefully review liquidated[-]damages provisions to ensure” that

they adhere to that principle. Atrium Med. Ctr., LP. v. Hous. Red C LLC, 595 S.W.3d

188, 192 (Tex. 2020). A provision that violates the principle is deemed an

unenforceable penalty. Id.

An enforceable liquidated-damages contract provision establishes an

“acceptable measure of damages that parties stipulate in advance will be assessed in

the event of a contract breach.” Id. (quoting Flores v. Millennium Interests, Ltd.,

185 S.W.3d 427, 431 (Tex. 2005)). Courts enforce liquidated-damages provisions

when (1) “the harm caused by the breach is incapable or difficult of estimation,” and

(2) “the amount of liquidated damages called for is a reasonable forecast of just

compensation.” Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991); see Atrium Med.

Ctr., 595 S.W.3d at 192. When applying these first two rules, known as the Phillips

prongs, courts examine the circumstances at the time the agreement is made; this

inquiry may include the consideration of factual evidence. See Atrium Med. Ctr., 595

S.W.3d at 192–93; see also FPL Energy, LLC v. TXU Portfolio Mgmt. Co., 426 S.W.3d 59,

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69-70 (Tex. 2014). “The party seeking liquidated damages bears the burden of

showing that the provision, as drafted, accounts for these two considerations.”

Atrium Med. Ctr., 595 S.W.3d at 192.

But even when a liquidated-damages provision is “properly designed” under

those two considerations, it is still unenforceable when “the actual damages incurred

were much less” than the liquidated damages imposed, measured at the time of the

breach. See id. at 192–93 (“Liquidated damages must not be punitive, neither in design

nor operation.”); see also Phillips, 820 S.W.2d at 788. In other words, even if a

liquidated-damages provision satisfies the two Phillips prongs, when there is an

“unbridgeable discrepancy” between the provision as written and the reality of its

application, the provision cannot be enforced. FPL Energy, 426 S.W.3d at 72. The

breaching party challenging the liquidated-damages provision must demonstrate this

“unbridgeable discrepancy.” Atrium Med. Ctr., 595 S.W.3d at 193.

The ultimate question of whether a liquidated-damages provision is enforceable

is a question of law for the court to decide. FPL Energy, 426 S.W.3d at 70.

B. UNENFORCEABLE PENALTY

With respect to the first Phillips prong—whether the harm caused by the breach

is incapable or difficult of estimation—the City claims that “the estimated actual

damages were difficult to quantify” because it is “impossible to predict what services

the City will be unable to provide, or the taxable value of such services.” Assuming

satisfaction of the first prong, the City did not satisfy the second prong—that the

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amount of liquidated damages was “a reasonable forecast of just compensation.” See

Phillips, 820 S.W.2d at 788; Stewart, 245 S.W.2d at 486.

The City’s evidence that the amount of liquidated damages was a reasonable

forecast of just compensation consists of one item: the Contract’s liquidated-damages

provision. The City points to the following language in the provision: “[the City] may

withhold permanently from the Contract Price an amount equal to $5,000 per day,

which the parties agree represents a reasonable estimation of the actual costs that

would be incurred by [the City].” Relying on that provision, the City argues that

Mart’s agreement—that the liquidated damages was a reasonable estimation of the

actual costs incurred by the City—is sufficient to satisfy the second prong and make

the provision enforceable. We disagree.

The City has cited no authority for the proposition that the parties’ agreement,

standing on its own, is sufficient evidence that the amount of liquidated damages is a

reasonable forecast of just compensation. Cf. Atrium Med. Ctr., 595 S.W.3d at 192

(holding that a liquidated-damages amount in a contract was a reasonable forecast of

just compensation when it was based on a percentage of the enforcing party’s

previous invoices); BMB Dining Servs. (Willowbrook), Inc. v. Willowbrook I Shopping Ctr.

L.L.C., No. 01-19-00306-CV, 2021 WL 2231258, at *5 (Tex. App.—Houston [1st

Dist.] June 3, 2021, no pet.) (holding that a liquidated-damages provision in a lease

agreement was a reasonable forecast of just compensation when based on a

percentage of the total future rent due under the lease); Baker v. Int’l Record Syndicate,

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Inc., 812 S.W.2d 53, 55 (Tex. App.—Dallas 1991, no pet) (holding that a liquidated-

damages provision in a contract under which a photographer was to take photos was

reasonable based on previous amounts that the photographer had been paid for photo

sessions and previous earnings for photos sold).

Apart from Mart’s agreement to the provision, the City offered no evidence

that the liquidated damages is a reasonable forecast of just compensation. The

summary-judgment evidence—or lack thereof—shows that no document, data, study,

or analysis went into the City’s $5,000 per diem damages determination. For

liquidated damages to be “reasonable forecasts,” there must be at least some thought

in their making. See, e.g., Garden Ridge, L.P. v. Advance Int’l., Inc., 403 S.W.3d 432, 439

(Tex. App.—Houston [14th Dist.] 2013, no pet.) (noting that the party attempting to

enforce the liquidated-damages clause “did not perform any actual studies on what

costs it would incur due to vendor noncompliance” and “could not explain any

specifics” as to how it came up with the figure).

It is unclear how the City calculated the per diem damages. For example, there

is no evidence that the damages forecast was in some way derived from (1) the

reduced services or lack of benefits to the City’s citizens—such as having to offer

“half of its regular programming due to lack of sufficient space”—or (2) the loss of

income from non-residents who use the senior center and pay a fee. In other words,

there is no articulated nexus between the amount of liquidated damages and the City’s

purportedly reasonable forecast of just compensation.

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Instead, it appears that there is no rational basis for the $5,000 per diem

damages and that the number was “simply chosen at random” without any relation to

a reasonable forecast of just compensation. In other words, at the time of

contracting, there seems to have been no attempt to tie the liquidated-damages

provision to the anticipated damages that the City would incur in the event of a

breach, and we are unable to ascertain how the City arrived at its $5,000 per diem

damages. See id. Because the City put forth no evidence that shows the amount of

liquidated damages was a “reasonable forecast of just compensation,” the provision

resembles a punitive measure to ensure Mart’s timely completion of the Project.11

See FPL Energy, LLC, 426 S.W.3d at 69.

Although the Contract expressly declares that the parties agreed to the

difficulty of ascertaining actual damages and the reasonableness of the liquidated

damages, there is no evidence before us to show that the parties actually attempted to

determine damages or, in the alternative, fix liquidated damages that would be a

reasonable forecast of just compensation. We therefore conclude that, at the time of

contracting, the liquidated-damages provision did not reasonably forecast just

compensation for a delay in the Project’s completion. The City thus did not meet the

second Phillips prong. Accordingly, we hold that the trial court did not err in its

11
Although not a factor in our analysis of the second prong, we note that the
City has repeatedly referred to the liquidated-damage provision as a “penalty,” which
further evidences its intended purpose—at the time of contracting—of being a
punitive measure rather than a forecast of the City’s just compensation.

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summary-judgment declaration because the Contract’s liquidated-damages

provision—Section 7(D)—is indeed an unenforceable penalty.12

We overrule the City’s sole issue.

V. CONCLUSION

Having overruled the City’s sole issue, we affirm the trial court’s order

declaring “that the liquidated damages clause located in Section 7(D) of the Contract

is an unenforceable penalty.”

/s/ Brian Walker

Brian Walker
Justice

Delivered: October 23, 2025

12
Because we hold that the City did not satisfy the second prong, we do not
determine whether, at the time of the alleged breach, an unbridgeable discrepancy
existed between the actual damages and the liquidated damages. See Tex. R. App. P.
47.1

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