SP Terrace L.P. and Tyee Management, LLC v. Meritage Homes of Texas LLC

Opinion issued October 21, 2010

In The

Court of Appeals

For The

First District of Texas

NO. 01-09-00155-CV

SP TERRACE, L.P. AND TYEE MANAGEMENT, LLC, Appellants

V.

MERITAGE HOMES OF TEXAS, LLC, Appellee

On Appeal from the 165th District Court

Harris County, Texas

Trial Court Cause No. 2007-43637

OPINION ON REHEARING

In

this dispute over an earnest money contract to develop a plat of real estate, the

trial court granted summary judgment in favor of Meritage Homes of Texas, LLC

(Meritage) on its breach of contract claim against SP Terrace, LP, and Tyee

Management, LLC (collectively, SP Terrace).

The trial court summarily rejected SP Terrace’s counterclaims for breach

of contract against Meritage.

The

contract called for SP Terrace to file a subdivision plat by December 31,

2005. SP Terrace concedes that it did

not meet this deadline. But it argues that

the contract extended the deadline, or alternatively that its compliance was

excused. It claims fact issues exist on

its affirmative defenses of oral modification, waiver, delay and interference

by Meritage, on the amount of attorney’s fees, and on its counterclaim against

Meritage. We conclude that SP Terrace raises

a fact issue on the issues of waiver and delay, but not as to contract

modification or interference. We

therefore reverse the trial court’s summary judgment and remand the case for

trial. We grant rehearing and withdraw

our opinion and judgment dated May 6, 2010, to address an argument that SP

Terrace raises in its motion for rehearing.

Our disposition is unchanged.

Background

Underlying Facts

SP Terrace entered into an earnest

money contract with Meritage to develop and sell ninety-six lots in a proposed Harris

County subdivision. The development plan

required small and narrow lots, and Meritage was one of a few builders who

could construct houses to fit the particular lot sizes. The contract terms required SP Terrace to improve

the overall subdivision. In particular,

it required SP Terrace to file a subdivision plat with Harris County by a

December 31, 2005 substantial completion deadline. After substantial completion, Meritage would

then purchase the lots in a series of transactions. The total purchase price was $2,688,000. Meritage deposited ten percent of this price,

$268,000, with SP Terrace as earnest money.

If SP Terrace did not achieve substantial completion by December 31, 2005,

Meritage could terminate the contract and recover its earnest money

deposit. But, if Meritage delayed SP

Terrace’s performance of its contractual obligations, the substantial

completion deadline would “be extended to the extent of any such delay.”

On November 30, representatives from

Meritage and SP Terrace met to discuss the project. At this point, SP Terrace was ready to file

the subdivision plat. Meritage asked for

changes to the plat, and it requested that SP Terrace postpone filing the plat to

accommodate those changes. SP Terrace

agreed, but informed Meritage that a six-month extension of the substantial completion

deadline would be necessary to address these and any future changes to the

development. According to Tyler Todd,

the president of Tyee Management, SP Terrace’s general partner, and Kelly

Smalley, the project manager, the parties orally agreed to extend the substantial

completion deadline, and the representatives of Meritage agreed to sign a

written extension memorializing the oral modification. Smalley mailed a written agreement to Meritage

before December 31, 2005. She never

received a response.

The parties continued to work

together to make changes and improvements to the development into early February

2006. But on February 3, Meritage

informed SP Terrace that, due to SP Terrace’s failure to meet the substantial

completion deadline, Meritage was terminating the contract and demanding the

return of its earnest money deposit.

Procedural History

After SP Terrace refused to return

the earnest money deposit, Meritage sued for breach of contract. SP Terrace counterclaimed for breach of

contract, alleging that Meritage (1) delayed SP Terrace’s performance, (2)

failed to cooperate with SP Terrace, and (3) breached their oral agreement

to extend the substantial completion deadline by six months, all of which

entitled SP Terrace to retain the earnest money deposit and recover actual

damages in addition to the earnest money it kept.

Meritage moved for traditional and no-evidence

summary judgment on its claims against SP Terrace and on SP Terrace’s counterclaim. Meritage contended that the parties never agreed

to extend the substantial completion deadline.

Meritage argued that SP Terrace’s counterclaim failed as a matter of law

because it did not state a claim for affirmative relief and the liquidated

damages provision in the contract precluded SP Terrace from recovering actual

damages in excess of the earnest money deposit.

Meritage contended that SP Terrace’s waiver defense failed because

Meritage never renounced its right to terminate the contract, and the forty-eight

days that had passed between the substantial completion deadline and the date

Meritage demanded the return of its earnest money deposit was not long enough

to show that Meritage intended to yield its right to terminate. Meritage argued that any oral modification of

the contract is unenforceable because it materially altered the obligations of

the underlying written contract.

Meritage also noted that SP Terrace failed to present any evidence that

the amount of liquidated damages was an unreasonable forecast of the amount of

its damages.

SP Terrace responded with the Todd

and Smalley affidavits to show that fact issues existed regarding (1) an agreement

to extend the substantial completion deadline; (2) whether Meritage, through

its oral agreement to extend the deadline and its continued work with SP

Terrace after December 31, 2005, waived the deadline; and (3) whether Meritage

breached its duties to cooperate with SP Terrace and to not delay or interfere

with SP Terrace’s performance of its contractual obligations. SP Terrace also argued that the liquidated

damages provision of the contract, which limited SP Terrace’s recovery to

retention of the earnest money deposit, was unenforceable penalty because it hypothetically

would allow the forfeiture of the deposit due to any breach by Meritage, including

a trivial one.

The trial court granted Meritage’s

motions. Shortly thereafter, Meritage

moved for entry of a final judgment, asking the trial court to award it

$268,000 in damages, $71,170.50 in attorney’s fees incurred in prosecuting its

claims in the trial court proceedings, $40,000 in attorney’s fees if SP Terrace

appeals to an intermediate appellate court, and an additional $27,500 in

attorney’s fees if Meritage ultimately prevails after full briefing and oral

argument to the Texas Supreme Court.

SP Terrace moved the trial court to reconsider

the summary judgment. SP Terrace

attached excerpts from the deposition of Michael Pizzitola, taken after the

original submission of the summary judgment motions, to further support its

contentions. SP Terrace also attached

the affidavit of its counsel of record opposing Meritage’s requested amount of

attorney’s fees. The trial court’s

docket sheet includes the following entry for December 8, 2008: “D. (seller) Motion for leave of court to

file additional evidence granted.” The

trial court did not memorialize the docket entry in any order, even though SP

Terrace submitted a proposed order and requested that the trial court sign

it. The trial court entered a final

judgment in favor of Meritage, awarding the $268,000 earnest money deposit as

damages and the full amount of attorney’s fees requested by Meritage.

Discussion

Standard of Review

We

review de novo the trial court’s grant of a motion for summary judgment. Provident Life & Accid. Ins. Co. v. Knott ,

128 S.W.3d 211 , 215–16 (Tex. 2003). After an adequate time for discovery, a party

may move for no-evidence summary judgment if there is no evidence of one or

more essential elements of a claim or defense on which the adverse party bears

the burden of proof at trial. Tex. R. Civ. P. 166a( i). Once a party moves for no-evidence summary

judgment, the burden shifts to the non-movant to present evidence raising a

genuine issue of material fact on each element specified in the motion. Mack Trucks, Inc. v. Tamez , 206 S.W.3d 572, 582 (Tex. 2006). We review the evidence in the light most

favorable to the non-movant, crediting favorable evidence if reasonable jurors

could, and disregarding contrary evidence unless reasonable jurors could

not. Mann

Frankfort Stein & Lipp Advisors, Inc. v. Fielding , 289 S.W.3d 844, 848

(Tex. 2009) (citing City of Keller v.

Wilson , 168 S.W.3d 802, 827 (Tex. 2005)).

When

we construe a contract, we must “ascertain and give effect to the parties’

intentions as expressed in the document.”

Frost Nat’l Bank

v. L & F Distribs., Ltd. , 165 S.W.3d 310 , 311–12 (Tex. 2005) (per

curiam). We consider the contract

as a whole in order to give effect to all provisions of the contract. See id.

at 312 . We give

contractual terms their plain, ordinary, and generally accepted meaning unless

the contract shows that the parties intended a different meaning to

control. See Heritage Res. v. NationsBank , 939 S.W.2d 118,

121 (Tex. 1996).

Late-Filed Summary Judgment Evidence

SP

Terrace initially contends that the trial court erred in granting summary

judgment because the late-filed deposition testimony of Meritage’s Michael

Pizzitola creates fact issues. Texas

Rule of Civil Procedure 166a(c) provides that “[e]xcept on leave of court, the

adverse party, not later than seven days prior to the day of hearing may file

and serve opposing affidavits or other written response.” Tex. R. Civ. P. 166a(c). A trial court may accept late-filed summary

judgment evidence, but it must affirmatively indicate that it accepted or

considered that evidence. See Stephens v. Dolcefino ,

126 S.W.3d 120, 133-34 (Tex. App.—Houston [1st Dist.] 2003, pet. denied). If no order in the record indicates that the court

gave leave to file untimely evidence, then we presume that the trial court did

not consider the evidence. See Benchmark Bank v. Crowder , 919

S.W.2d 657, 663 (Tex. 1996); Dixon v.

E.D. Bullard Co. , 138 S.W.3d 373 , 375–76 (Tex. App.—Houston [14th Dist.]

2004, pet. granted, judgm’t vacated w.r.m.); Farmer v. Ben E. Keith Co. , 919 S.W.2d 171, 176 (Tex. App.—Fort

Worth 1996, no writ).

SP

Terrace relies on the trial court’s docket entry as sufficient indication that

the trial court granted it leave to late-file the Pizzitola deposition as

summary-judgment evidence. We previously

have held, however, that a docket entry “forms no part of the record we may

consider; it is a memorandum made for the trial court and clerk’s

convenience. This rule results, in part,

from the inherent unreliability of docket entries.” Miller

v. Kendall , 804 S.W.2d 933, 944 (Tex. App.—Houston [1st Dist.] 1990, no writ)

(citing Energo Int’l Corp. v. Modern

Indus. Heating, Inc. , 722 S.W.2d 149 , 151–52 (Tex. App.—Dallas 1986, no writ)

(“Consequently, there is no indication in the record that permission of the

court was requested or obtained to file the amended answer and that the amended

answer was properly before the court.”)).

SP Terrace contends that our holding in Dolcefino supports its argument despite these cases. In Dolcefino ,

however, the trial judge stated on the record at the motion for reconsideration

hearing that “the court will include the evidence offered today in the summary

judgment record. The court, even taking

this evidence into the record, denies Plaintiff’s motion for new trial.” See

Dolcefino , 126 S.W.3d at 134 . We noted that the trial judge’s statement on

the record indicated that the judge had accepted the evidence as belatedly

offered summary judgment evidence. See id.

Here, in contrast, SP Terrace requested that the trial court sign an

order granting leave to file the additional evidence that it had attached to

the motion for reconsideration. It

attached the docket sheet and a proposed order, but the trial court never

entered the order. Following Miller , we decline to extend the Dolcefino analysis to docket sheet

entries, and thus hold that this evidence is not part of the summary judgment

record.

In

a similar vein, Meritage, in its response to SP Terrace’s motion for

reconsideration, attached excerpts from the deposition of Tyler Todd that it

had not previously filed with the trial court.

Meritage did not request leave of court to late-file these excerpts from

Todd’s deposition, and thus these excerpts do not form part of the summary

judgment record. See Tex. R.

Civ. P. 166a(c); Dolcefino , 126 S.W.3d at 133 .

Oral Modification of the Substantial Completion

Deadline

Turning

to the merits, SP Terrace first contends that an oral modification to the

contract exists and thus it is not liable for any breach associated with missing

the December 31 deadline. Under the

statute of frauds, a contract for the sale of real estate must be in writing

and signed by the party charged with compliance with its terms. Tex.

Bus. & Com. Code Ann. § 26.01(b )( 4)

(Vernon 2009). Generally, if a contract

falls within the statute of frauds, then a party cannot enforce any subsequent

oral material modification to the contract.

See Dracopoulas v. Rachal , 411

S.W.2d 719, 721 (Tex. 1967); see also

Walker v. Tafralian , 107 S.W.3d 665, 670 (Tex. App.—Fort Worth 2003, pet.

denied).

In Dracopoulas , the Texas Supreme Court held unenforceable an oral

modification that extended the time for performance indefinitely. See

Dracopoulas , 411 S.W.2d at 722 . The court reasoned that the termination date

of the contract was the “hinge upon which still other contractual rights and

duties turn,” and extending the termination date indefinitely would destroy

other contractual provisions that depended on the termination date to become

operative. See id. ; see also King v.

Texacally Joint Venture , 690 S.W.2d 618, 620 (Tex. App.—Austin 1985, writ

ref’d n.r.e.) (“It has been held that attempted alteration of the time for

performance in real estate contracts is a material alteration.” (citing Vendig v. Traylor , 604 S.W.2d 424 (Tex.

Civ. App.—Dallas 1980, writ ref’d n.r.e.))).

But see Triton Comm’l Props., Ltd.

v. Norwest Bank Tex., N.A. , 1 S.W.3d 814, 819 (Tex. App.—Corpus Christi

1999, pet. denied) (holding that extending the time for performance does not,

by itself, materially alter the underlying obligations, even if the contract

would otherwise terminate). In the right

circumstances, an extension for the time for performance can be a material

alteration.

This case presents one of those

circumstances. Even if the oral modification

extending performance would not ordinarily materially alter the underlying written

contract, when a party relies on the modification to assert that the other

party is in material breach to excuse further performance, the modification then

becomes material and unenforceable unless in writing. See

Walker , 107 S.W.3d at 670 ; King , 690 S.W.2d at 620 .

Todd

and Smalley described the November 30 meeting between Meritage and SP Terrace

representatives. Each averred that, at

this meeting, Meritage representatives requested that SP Terrace delay filing

the subdivision plat to allow the parties to continue making changes to the

development. SP Terrace agreed, but requested

a six-month extension of the December 31 deadline. According to Todd and Smalley, Meritage’s

representatives agreed to extend the deadline and to sign a written agreement

confirming that extension. Smalley mailed

a written extension to Meritage before December 31, and although Meritage never

returned a signed extension, it also never objected.

Meritage points to a January 20, 2006,

letter from Smalley to Steve Harding as evidence that the parties did not agree

to extend the deadline:

I had previously sent you an addendum to the Earnest

Money Contract prior to the end of the year extending the date of the contract

to June 30, 2006. As of this date, I

have not received an executed addendum.

I know there are still questions to be answered, but we need some assurance

that we can reach an agreement and declare some sort of modified substantial completion.

It is thus undisputed that the

parties never signed a written agreement to extend the deadline beyond December

31. In addition, SP Terrace viewed the

extension of time to be a material alteration to the contract, sufficient to

excuse it from further performance, stating to the trial court:

Meritage agreed to extend the substantial completion

date and/or caused a default or delay in the substantial completion. Meritage then refused to perform under the

Contract by its February 3, 2006 letter.

This evidence is sufficient to show a prior or anticipatory breach by

Meritage, which would excuse further performance by SP Terrace.

SP Terrace thus asserts that

Meritage’s breach of the alleged oral extension of the substantial completion

deadline was sufficient to excuse any further performance by SP Terrace. The modification here is a material term—as

such, it is unenforceable because it was never reduced to writing. See

Walker , 107 S.W.3d at 670 ; King , 690 S.W.2d at 620 . We

hold that the trial court correctly granted summary judgment on SP Terrace’s

affirmative defense of modification.

Waiver of the Substantial Completion Deadline

SP

Terrace next contends that a fact issue exists regarding Meritage’s waiver of

the December 31 deadline. A party establishes

waiver by demonstrating (1) the express renunciation of a known right or (2) silence

or inaction for so long as to show the intent to yield a known right. See

Motor Vehicle Bd. v. El Paso Indep. Auto Dealers , 1 S.W.3d 108, 111 (Tex. 1999). Waiver can also result from acts that induce

the other party to believe that the party will not insist on exact performance

within the contractual time limits. See Kennedy Ship & Repair, LP v. Pham ,

210 S.W.3d 11, 20 (Tex. App.—Houston [14th Dist.] 2006, no pet.); see also KMI Continental Offshore Prod. Co. v. ACF Petrol. Co. , 746 S.W.2d 238, 243 (Tex.

App.—Houston [1st Dist.] 1987, writ denied) (“[A] waiver can occur if a party

knowingly possessing the right acts in such a manner that the party misleads the

opposing party into believing that a waiver has occurred.”); Alfred, Meroney & Co. v. Rowe , 619

S.W.2d 210, 213 (Tex. App.—Amarillo 1981, writ ref’d n.r.e.).

The

surrounding facts and circumstances must plainly demonstrate a party’s intent

to waive a known right. See El Paso Indep. Auto

Dealers , 1 S.W.3d at 111. Waiver may result when: (1) a party assents to the other party’s

continued performance without objection to the delay; (2) a party states that

it will not require strict compliance with a deadline or acts such that the

other party reasonably believes strict compliance will not be required; or (3) a

party insists on performance by the other party even after breach of the

agreement. See Delgado v. Methodist Hosp. , 936

S.W.2d 479, 485 (Tex. App.—Houston [14th Dist.] 1996, no writ); Fairfield Fin. Group, Inc. v. Gawerc ,

814 S.W.2d 204, 209 (Tex. App.—Houston [1st Dist.] 1991, no writ); Seismic & Digital Concepts, Inc. v.

Digital Res. Corp. , 590 S.W.2d 718, 721 (Tex. Civ. App.—Houston [1st Dist.]

1979, no writ). Ordinarily waiver

is a fact question; however, we decide a waiver issue as a matter of law if the

facts and circumstances are admitted or established. See El

Paso Indep. Auto Dealers , 1

S.W.3d at 111.

Todd

and Smalley aver that, at the end of November, SP Terrace was prepared to file

the subdivision plat, but delayed the filing at Meritage’s request. They both averred that they told Meritage

that delaying the filing of the plat would require a six-month extension of the

substantial completion deadline and that Meritage orally agreed to this

extension, which suggested to them that Meritage would not insist upon the

December 31 deadline. Smalley further

averred that she mailed the written extension prior to December 31 and never received any objections to the extension. Todd and Smalley continued to work with

Meritage on the development into February 2006.

Smalley participated in a January 10, 2006, meeting with Steve Harding

of Meritage to “discuss the proposed subdivision changes.”

Meritage

cites Beal Bank, S.S.B. v. Schleider ,

124 S.W.3d 640 (Tex. App.—Houston [14th Dist.] 2003, pet. denied), to support

its contention that SP Terrace does not raise a fact issue on waiver. In Beal

Bank , the Fourteenth Court of Appeals held that representations that “an

extension would not be a problem,” the parties were “set to go,” and the bank

would “get back to” Schleider were insufficient to establish waiver. See id.

at 654 . In

contrast, here, Todd and Smalley aver that Meritage continued to participate in

meetings with SP Terrace representatives and work with SP Terrace on further

changes to the development even after the December 31 deadline, indicating that

it continued to insist on performance after breach of the agreement. In his affidavit, Tyler Todd states that SP

Terrace “continued to work with [Meritage] under the Contract and to

accommodate changes requested by [Meritage] throughout December 2005, January

2006, and into February 2006.” Kelly

Smalley states that a Meritage representative participated in a meeting to

discuss the proposed subdivision changes on January 10, 2006, after the

deadline. We hold that SP Terrace raises

a fact issue as to whether Meritage waived the December 31 substantial

completion deadline and its right to terminate the contract on this basis,

particularly in light of the contract provision that the substantial completion

deadline “would be extended” to the extent of any delay caused by

Meritage. See Delgado , 936 S.W.2d at 485 (“A party

to a contract may effectively waive a breach by the other party by continuing

to insist on performance by the other party even after a breach.”).

Delay and Interference by Meritage

SP Terrace contends that fact issues

exist as to whether Meritage caused delays and interfered with SP Terrace’s

performance of its contractual obligations thus breaching an implied duty to

cooperate.

We examine the written contract to

determine the obligations of the parties.

See Bank One, Tex., N.A. v.

Stewart , 967 S.W.2d 419, 435 (Tex. App.—Houston [14th Dist.] 1998, pet. denied),

cited with approval in Keck v. Nat’l

Union Fire Ins. Co. , 20 S.W.3d 692, 701 (Tex. 2000); Nalle v. Taco Bell Corp. , 914 S.W.2d 685, 687 (Tex. App.—Austin

1996, writ denied). We do not imply a

covenant regarding a matter specifically covered by the terms of the written

contract, but we imply a duty to cooperate to the extent necessary for the

contract’s performance. See Stewart , 967

S.W.2d at 434 . Thus, a party

cannot “hinder, prevent, or interfere with [another’s] ability to perform [its]

duties under [the] agreement.” See id. at

435 . The implied covenant to cooperate

differs from the broader implied covenant of good faith and fair dealing, which

the Texas Supreme Court has rejected. See Case Corp. v. Hi-Class Bus. Sys. of Am., Inc. , 184 S.W.3d

760, 770 (Tex. App.—Dallas 2005, pet. denied) (citing Tex. Nat’l Bank v. Sandia Mtg. Corp. , 872 F.2d 692 , 698–99 (5th

Cir. 1989)).

When one party prevents another from

timely performing its contractual obligations, the failure to timely perform is

excused. See Anderson Dev. Corp. v. Coastal States Crude Gathering Co. , 543

S.W.2d 402, 406 (Tex. Civ. App.—Houston [14th Dist.] 1976, writ ref’d n.r.e.); see also Dorsett v. Cross , 106 S.W.3d

213, 217 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (“Prevention of

performance by one party excuses performance by the other party.”). According to Todd and Smalley, SP Terrace prepared

to file the subdivision plat in November 2005, but at Meritage’s request, it

delayed filing it. Smalley also stated

the following:

The development was often delayed by lack of

information, delays in approvals and changes in plans and designs from

[Meritage]. For example, I could not

obtain timely approval from [Meritage] for finalizing the design of the fences,

the location of the electrical service, Steve Harding’s failure to attend a

meeting on November 16, 2005 with CenterPoint Energy and failure to respond to

CenterPoint Energy on various issues.

These failures and delays caused a delay in the substantial completion

of the subdivision.

Section 16(k) of the contract

provides that: “Seller [SP Terrace]

shall not be responsible for any damage or delay caused by Purchaser [Meritage]

or Purchaser’s agent . . . and the

time limits for Seller’s performance hereunder shall be extended to the extent

of any such delay.” [1] We hold that SP Terrace’s summary judgment

evidence raises a fact issue as to whether a delay caused by Meritage extended

the substantial completion deadline.

Summary Judgment on SP Terrace’s Counterclaim

SP Terrace also sues Meritage for

breach of contract, and seeks damages beyond the earnest money deposit. The trial court rejected this claim, and SP

Terrace appeals. Meritage responds that

SP Terrace’s counterclaim is not one for affirmative relief, but in any event,

SP Terrace’s recovery is limited to the earnest money contract.

A.

Claim for Affirmative Relief

Meritage argues that SP Terrace’s asserted

contractual defense to the refund of Meritage’s earnest money deposit is not an

affirmative claim for relief. To qualify

as a claim for affirmative relief, the defendant must allege a cause of action

independent of the plaintiff’s claim, on which the defendant can recover

benefits, compensation, or relief, even though the plaintiff may abandon or

fail to establish its claim. See Gen. Land Office v. OXY USA, Inc. , 789 S.W.2d 569, 570 (Tex. 1990). If the defendant only resists the plaintiff’s

right to recover, then it does not state a claim for affirmative relief. See id.

In

its “Second Amended Answer and First Amended Counterclaim,” SP Terrace stated

that Meritage’s “actions, promises and representations” constituted a prior

breach of the contract by Meritage, which excused SP Terrace from further

performance and entitled SP Terrace to retain the earnest money deposit and

recover actual damages, including lost profits, of at least $1,400,000.

Meritage argues that because SP Terrace

always possessed the earnest money deposit, and if SP Terrace prevailed or

Meritage abandoned its claim, SP Terrace would simply retain the earnest money. Therefore, SP Terrace’s counterclaim, which

asks the trial court to determine that SP Terrace is entitled to the earnest

money, is essentially a claim for declaratory relief. We disagree.

SP Terrace asked the trial court to determine it has a right to the

earnest money deposit, but it also seeks actual damages beyond the earnest

money deposit. See Howell v. Mauzy , 899 S.W.2d 690, 706 (Tex. App.—Austin 1994,

writ denied) (“A court may allow a declaratory-judgment counterclaim, however,

if it is something more than a mere denial of the plaintiff’s claim and has

greater ramifications than the original suit.

A counterclaim has greater ramifications than the original suit if it

seeks affirmative relief.”) ( internal citations omitted). We hold that SP Terrace’s allegations state a

claim for relief independent of Meritage’s breach of contract claim. If the trier of fact concludes that Meritage

has waived performance of the substantial completion deadline and was in breach

of the agreement, then SP Terrace is entitled to pursue its claim for breach.

B.

Earnest Money as Liquidated Damages

SP Terrace asked the trial court to

set aside the earnest money liquidated damages provision for a breach by

Meritage, contending that it penalizes Meritage because it requires Meritage to

forfeit its earnest money no matter how trivial its breach. SP Terrace requests this interpretation of

the contract so that its damages claim against Meritage can exceed the earnest

money deposit it kept after Meritage terminated the contract. The clause in question provides that, upon

default by Meritage, SP Terrace, as its sole remedy, may terminate the contract

and retain the earnest money deposit.

We enforce a liquidated damages

clause if (1) the harm caused by the breach is incapable or difficult of

estimation, and (2) the amount of liquidated damages is a reasonable forecast

of just compensation. See Phillips v. Phillips , 820 S.W.2d 785, 788 (Tex. 1991). An assertion that a liquidated damages

provision constitutes an unenforceable penalty is an affirmative defense, and the

party asserting penalty bears the burden of proof. See Urban

Television Network Corp. v. Liquidity Solutions , 277 S.W.3d 917, 919 (Tex.

App.—Dallas 2009, no pet.); Fluid

Concepts, Inc. v. DA Apts., LP , 159 S.W.3d 226, 231 (Tex. App.—Dallas 2005,

no pet.). Generally, that party must

prove the amount of actual damages, if any, to demonstrate that “the actual

loss was not an approximation of the stipulated sum.” Baker v. Int’l Record Syndicate, Inc. , 812 S.W.2d 53, 55 (Tex.

App.—Dallas 1991, no writ). If

the amount stipulated in the liquidated damages clause is “shown to be

disproportionate to actual damages,” we should declare that the clause is a

penalty and limit recovery to actual damages.

Johnson Eng’rs, Inc. v. Tri-Water

Supply Corp. , 582 S.W.2d 555, 557 (Tex. Civ. App.—Texarkana 1979, no writ);

see also Tex. Bus. & Com. Code Ann. § 2.718(a) (Vernon 2009) (“A term fixing

unreasonably large liquidated damages is void as a penalty.”). Whether a liquidated damages clause is an

unenforceable penalty is a question of law for the court, but sometimes factual

issues must be resolved before the court can decide the legal question. See

Phillips, 820 S.W. 2d at 788 . For

example, in Phillips , the Texas

Supreme Court observed that “to show that a liquidated damages provision is

unreasonable because the actual damages incurred were much less than the amount

contracted for, a defendant may be required to prove what the actual damages

were.” Id.

SP Terrace adduced no evidence in the

trial court that Meritage’s forfeit of its earnest money operated as a penalty

because Meritage’s breach was a trivial one.

Its aim was just the opposite—it was to prove that Meritage’s breach

caused damages far higher than the earnest money amount, although it offered no

proof of that theory either. We decline

to remove a limitation of remedy provision absent any evidence that the

liquidated amount in the contract is unreasonably high or low in light of the

alleged breach. See Urban Television , 277 S.W.3d at 919 ; Fluid Concepts, Inc. , 159 S.W.3d at 231 .

SP Terrace relies on cases in which

courts have disregarded liquidated damages provisions as unreasonable in their

approximation of actual damages for trivial breaches. See

Stewart v. Basey , 245 S.W.2d 484, 487 (Tex. 1952) (“Our conclusion is that,

since the contract provided the same reparation for the breach of each and

every covenant, and since it would be unreasonable and a violation of the

principle of just compensation to enforce it as to some of them, the provision

for stipulated damages should be treated as a penalty.”); Community Dev. Serv., Inc. v. Replacement Parts Mfg., Inc. , 679

S.W.2d 721, 727 (Tex. App.—Houston [1st Dist.] 1984, no writ) (holding that liquidated

damages clause in earnest money contract was unenforceable penalty, because

even though it provided reasonable damages for major breaches of the contract,

it also allowed unreasonable damages for trivial breaches); Bethel v. Butler Drilling Co. , 635 S.W.2d 834 , 837–38 (Tex.

App.—Houston [14th Dist.] 1982, writ ref’d n.r.e.) ( holding

same). These cases are distinguishable

in that either it was the breaching party who argued that the provision was a

penalty, or in that the party seeking to set aside the provision adduced

evidence that the liquidated damages clause was not a reasonable approximation

of damages caused by the breach. See Stewart, 245 S.W.2d at 487 (where

actual damages incurred by breaching party amounted to $38.50, “stipulation to pay

several thousand dollars . . . would be so unreasonable that no court would

lend its power to enforce it”); Community Dev. , 679 S.W. 2d at 727 (jury

findings and evidence supported claim that earnest money provision operated as

penalty); Bethel, 635 S.W.2d at 843 (upholding trial court’s determination

that liquidated damages clause was penalty against breaching party, and

limiting plaintiff’s recovery to actual damages).

A liquidated damages provision is a

penalty if it punishes the breaching party by subjecting it to a

disproportionately high amount of damages relative to reasonably anticipated

actual damages. Absent evidence that the

earnest money amount here was not a reasonable approximation of an anticipated

breach, limiting recovery to the earnest money deposit and preventing a party

from recovering actual damages in excess of the bargained for liquidated amount

does not constitute a penalty to the breaching party. [2] We decline to hold as a matter of law that

the earnest money provision in this case is a penalty. Cf. Phillips, 820 S.W.2d at 788 – 89 (no fact issue that provision was penalty against breaching party because

it provided that actual damages be determined and multiplied tenfold).

Required Notice to Recover Earnest Money

Finally,

SP Terrace contends that it did not receive thirty days’ notice and an

opportunity to cure the default. Section

9(c) of the contract states:

In the event Seller shall default in Seller’s

obligations hereunder . . . Purchaser shall give Seller

thirty (30) days written notice and opportunity to cure such default. If Seller fails to cure its default within

the thirty day period provided in the notice, Purchaser, as its sole and

exclusive remedies, may either (i) terminate this Contract and obtain the

return of its Earnest Money or (ii) enforce specific performance of Seller’s

obligation to convey the Lot(s) upon payment of the Purchase Price.

Meritage responds that the contract

does not require notice and an opportunity to cure because section 4(i) states

that if “Substantial Completion does not occur by December 31, 2005 at option

of Purchaser this Contract shall terminate and Purchaser is relieved of any obligation hereunder .” We agree, and hold that once Meritage

exercised its option to terminate due to SP Terrace’s failure to meet the

deadline, Meritage was relieved of further contractual obligations, including

the requirement of providing notice and an opportunity to cure. Reading the contract to

require notice and an opportunity to cure before recovering the earnest money,

even if SP Terrace did not achieve substantial completion by December 31, would

render section 4(i)’s provision that failure to achieve substantial completion

by December 31 relieves Meritage of any contractual

obligation a nullity. See J.M. Davidson, Inc. v. Webster , 128

S.W.3d 223, 229 (Tex. 2003) (“[W]e must examine and consider the entire writing

in an effort to harmonize and give effect to all the provisions of the contract

so that none will be rendered meaningless.”).

We therefore hold that SP Terrace was not entitled to notice and a

thirty day opportunity to cure any failure to comply with the substantial

completion deadline.

Conclusion

We

hold that SP Terrace failed to raise a fact issue on its affirmative defenses

of modification and interference by Meritage, but raises fact issues whether

Meritage waived performance of the December 31 substantial completion deadline

and whether Meritage caused delay that extended the time for performance. We further hold that SP Terrace’s counterclaim

states a claim for affirmative relief, but that SP Terrace fails to prove on

this record that the earnest money provision of the contract is unenforceable

as a matter of law. We therefore reverse

and remand the case for further proceedings. [3]

Jane Bland

Justice

Panel consists of Chief Justice

Radack and Justices Bland and Massengale.

[1] The contract provides in section 16(k) that the

substantial completion deadline “would be extended” if Meritage caused the

delay of the deadline. Meritage argued

in the trial court that SP Terrace’s reference to section 16(k) in an amended

pleading filed after its motion for partial summary judgment was filed came too

late to support its contractual defenses.

We disagree, in so much as SP Terrace expressly

argued in its summary judgment response that “by words, actions and inaction,

Meritage caused the default and/or delay in the substantial completion.”

[2] Other jurisdictions that have addressed this issue

have held similarly, and refused to strike the liquidated damages provision on

the ground that it is an unenforceable penalty.

See, e.g. , Mahoney v. Tingley , 529 P.2d 1068, 1070

(Wash. 1975) (“A penalty exists where there is an attempt to enforce an

obligation to pay a sum fixed by agreement of the parties as a punishment for

the failure to fulfill some primary contractual obligation. In this case, it is not the party in default

who seeks relief from an excessively high liquidated damages provision. Rather, the provision operates to limit the

recovery of the party who incurred a loss as a result of the other parties’

breach. There being no element of

punishment involved, it cannot be said that plaintiff is being penalized in any

sense.”)(internal citations omitted); Margaret

H. Wayne Trust v. Lipsky , 846 P.2d 904, 910 (Idaho 1993) (following Mahoney and refusing to strike down

liquidated damages provision as penalty when non-breaching party sought damages

in excess of provision amount).

[3] SP Terrace also contends that the trial court awarded

unreasonable and excessive attorney’s fees to Meritage. Because we reverse and remand on the merits,

we vacate the award of attorney’s fees.