Court of Appeals of Texas

Case no.: 05-25-01046-CV
Date filed: September 3, 2026

A Texas appeals court has ruled that a contractor’s challenge to the enforceability of a liquidated damages clause was a claim for money owed under the contract, not an equitable claim outside the contract. The contractor had argued that the daily rate was an arbitrary amount, not a forecast of the owner's actual damages for late completion.

The Garland Independent School District awarded a contract to Reeder General Contractors Inc. for improvements at multiple school campuses, including Jackson Middle School. The contract called for liquidated damages for late completion of work. The court opinion did not indicate the daily rate stipulated in the contract.

Reeder’s work at Jackson Middle School was delayed when the contractor discovered undisclosed underground electrical feeder lines that conflicted with the foundation design. The contractor alleged that it took the school district and its architect, VLK Architects, 151 days to redesign the project.

Reeder completed the work, and the school district took occupancy of the school building. The district, however, refused to release the contract balance to the contractor. The district relied primarily on the liquidated damages clause to justify its position that no further money was owed under the contract.

The parties disputed the duration of the foundation delay and the responsibility for it. Reeder General Contractors also challenged the enforceability of the liquidated damages clause. Reeder said the daily rate of liquidated damages was an arbitrary one-size-fits-all amount the district had pulled off the shelf. There had been no effort to forecast, at the time of contract formation, the actual damages the district might incur as a result of the project's late completion. The clause was therefore an unenforceable penalty.

The school district defended Reeder’s breach of contract suit by arguing in part that the courts had no jurisdiction to hear the challenge to the liquidated damages clause. The Texas Legislature waives governmental immunity for local governments that enter into contracts for goods and services. Contractors are allowed to sue for money owed under a contract, including damages that might flow from breach of that contract. The district contended Reeder’s action was not for money owed under the contract. It was, in essence, an equitable demand that the contract terms be rewritten.

The Court of Appeals of Texas said Reeder was not seeking a rewrite of the construction contract. Nor was the contractor raising broad policy questions regarding liquidated damages clauses. The contractor was suing for money owed under the contract. The enforceability of the liquidated damages clause was a necessary and appropriate element in determining the balance due.

“Reeder alleges only a breach of contract claim against the District, which includes a challenge to the enforceability of the liquidated damages provisions of the contract.… The enforceability of a liquidated damages provision may be raised in a breach of contract action.… The District points us to no authority, and we have found none, providing that a challenge to the enforceability of a liquidated damages provision invokes some extraordinary power of the court for which there is no waiver of immunity here.”

The court rejected the school district’s characterization of Reeder’s argument as a broad matter of public policy outside the four corners of the contract agreed to by both parties. The contractor was simply challenging the enforceability of one clause.

“The District attempts to transform a merits dispute about the amount due under the contract into a jurisdictional hurdle for Reeder.… We observe that Reeder does not argue that liquidated damages provisions are prohibited generally, but only that the provisions here are unenforceable in this case. In so arguing, it relies on a well-developed body of case law regarding the enforceability of such provisions.”

The well-developed body of case law holds that, in establishing the daily rate of liquidated damages, the project owner must, prior to contract formation, make a reasonable forecast of the direct and consequential damages the owner will incur as a result of late project completion. That clause will be enforced even if the actual damages are less than the stipulated liquidated damages.

Public project owners that regularly award construction contracts should be aware that formulaic, off-the-shelf rates, even if promulgated as policy or regulation, may be difficult to enforce. Owners should have worksheets documenting the process of making a reasonable forecast for a particular project.

Participants: No attorneys of record listed

Before: Judges Goldstein, Barbare, and Lee

Opinion by: Judge Lee

Outcome: Project owner’s argument of lack of jurisdiction rejected

Source: Please click here to read the complete opinion.