By Michael C. Loulakis and Ashley P. Cullinan
Most construction contractors are familiar with the use of liquidated damages to address the financial consequences of unexcused project delays. What contractors may not know is that even though LDs are in the contract, they are not automatically enforceable. It is widely held that LDs must represent a reasonable forecast of the loss or damage actually sustained as a result of the delay. If they do not, then they are considered penalties, and penalties are not enforceable under U.S. law. This principle was recently addressed by a Texas appellate court in City of Colleyville v. Mart Inc.
The case
The city of Colleyville, Texas, entered into a $3.4 million contract with Mart Inc., a general contractor in Northern Texas, to renovate the city’s senior center. The contract required the project to be completed within 270 days and included a provision setting LDs in the amount of $5,000/day.
After commencing construction, Mart realized that the plans and specifications the city had submitted were “incomplete, inaccurate, or defective,” according to the decision. Under the contract, if Mart found discrepancies that might impact construction, it was obligated to seek clarification before undertaking any work on that component of the project. As a result, Mart sent many requests for information — more than 130 — asking the city’s architect to correct or modify the plans.
However, the architect was consistently late in responding; in several instances, responses were received more than a month later, per the decision. Mart contended that it was forced to stop work because it could not proceed without corrected plans or alternative instructions from the architect. The city did 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.”
While the city approved time extensions of 32 days, it also informed Mart that it would be withholding LDs from payments. The project ultimately finished almost a year late, and the city withheld a little over $1.1 million from Mart. Subsequently, Mart sued the city, claiming that the LD provision was unenforceable because it was “designed and intended as a penalty,” per the decision. Mart further argued that, even if the LD provision had been properly designed, it would still be unenforceable because the city “faced little to no actual damages resulting from the delays.”
The city argued that the parties had contractually agreed the LD amount 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,” according to the decision. In response to Mart’s arguments about the city facing little to no actual damages, the city responded that “(t)ax paying citizens of the City were deprived of the use of the property long beyond the timeframe authorized by the City Council.”
The trial court disagreed with the city and granted Mart’s motion for summary judgment that the LD provision was an unenforceable penalty. This prompted the city to appeal to the Texas Court of Appeals.
The ruling
The appeals court cited Texas case precedent on the enforceability of LDs, noting that courts carefully scrutinize LD provisions to ensure that they establish an acceptable measure of damages. The decision stated that parties seeking LDs bear the burden of showing that:
- The harm caused by the breach is incapable or difficult of estimation.
- The amount of LDs is a reasonable forecast of just compensation.
However, even if the burden of proof is met on these two considerations, the LD provision would still be unenforceable whenever the actual damages incurred are much less than the contractually imposed LD amount, per the decision.
The appeals court focused on the city’s failure to prove the second consideration — i.e., that the LD amount was a reasonable forecast of just compensation. The only evidence provided by the city on this point was that the LD provision stated that the parties agreed $5,000/day represented a reasonable estimation of the actual costs the city would incur. The appeals court found that this alone was insufficient to meet the city’s burden.
The decision stated that the city did not provide any “document, data, study, or analysis” to explain how it arrived at the $5,000/day amount. For example, there was no evidence that the LD amount was in some way derived from “reduced services or lack of benefits to the City’s citizens” or “the loss of income from non-residents who use the senior center and pay a fee.” The appeals court stated that it appeared that the $5,000/day number was “simply chosen at random,” and that for the LD amount to be a reasonable forecast of actual damages, “there must be at least some thought in their making.”
Because the city failed to meet the second consideration, the appeals court did not address the issue of whether the city’s actual damages were much less than the LD amount imposed. The decision also noted that there was evidence that the city repeatedly referred to the LD provision as a “penalty.” While the appeals court specifically stated that this was not a factor in its analysis, the city’s references to the provision being a penalty “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,” the decision stated.
The takeaways
This case was of high interest to the authors, as LD provisions are routinely integrated into construction contracts, and parties expect that they will be enforceable. The case is a good reminder of how important it is to demonstrate that there was a reasoned basis at the time of contracting for how the LD amount related to forecasted actual damages. As the decision explained, one should not simply slap a number on a page to fill in the blank and move on.
Two other takeaways come to mind. One is that the total amount of LDs assessed in this case was about a third of the overall contract value. The trial court may have been influenced by this, particularly because the delays appeared to be the responsibility of the city. Stated differently, a $5,000/day LD amount on a $3 million contract seems very high. The other takeaway is the evidence that the city used the term “penalty” repeatedly. While the appellate court stated that this did not factor into its decision, the fact that the decision referenced this suggests the contrary.
Penalties are not enforceable, and parties seeking to benefit from an LD clause should avoid using that term.
Michael C. Loulakis is the president and CEO of Capital Project Strategies LLC in Reston, Virginia.
Ashley P. Cullinan is an associate with Smith Currie Oles LLP in Tysons, Virginia.
This article first appeared in the March/April 2026 issue of Civil Engineering as “Liquidated Damages Provision Did Not ‘Reasonably Forecast’ Compensation for Project Delay.”
