Urban Television Network Corp. v. Creditor Liquidity Solutions, L.P., No. 05-07-01629-CV.
Westar Satellite Services, L.P. and Urban Television Network Corporation entered into a five year services agreement. The agreement contained a liquidated damages clause. After two years, Urban Television defaulted on its obligations and Westar sued to enforce the liquidated damages clause.
Urban Television tried to invalidate the liquidated damages clause by claiming it was an unenforceable penalty. A line of cases starting in the 1970’s allowed parties to invalidate liquidated damage clauses if they applied equally to the breach of trivial clauses as well as material clauses. Thus, attorneys now search a contract for any minor promise that could potentially trigger liquidated damages in hopes of declaring the provision a penalty.
The usual target of these searches is a provision usually found in contracts that provides for termination for basically any promise made in the contract. These general provisions are put in contracts to protect the drafting attorney from inadvertently failing to specify an important promise that could trigger liquidated damages. However, such provisions are so all-encompassing that any minor promise in the contract could be construed to trigger liquidated damages. Thus, attorneys would get rulings invalidating the clauses where they could find broad termination clauses that would include minor promises.
In this case, the Westar contract avoided such a problem by inserting “material” into the termination clause so as to read ‘either party fails to perform or observe any material term or obligation…” (Emphasis added). By adding “material,” the termination clause excluded any trivial promises that may have been in the contract. That key distinction made the liquidated damages provision enforceable and allowed Westar to win summary judgment in the trial court and affirm that judgment on appeal.
The opinion can be read here.