Phillips v. Phillips

• Decision Date: 11 December 1991
• Docket Number: No. D-0107,D-0107
• Parties: Martha Jean PHILLIPS, Petitioner, v. Harry S. PHILLIPS, et al., Respondents.
• Court: Texas Supreme Court

Page 785

820 S.W.2d 785

Martha Jean PHILLIPS, Petitioner, v. Harry S. PHILLIPS, et al., Respondents.

No. D-0107.

Supreme Court of Texas.

Dec. 11, 1991.

Rehearing Overruled Jan. 29, 1992.

Michael S. Wilk, Anna L. Stock, Jay N. Gross, Houston, for petitioner.

Patrick Kelley, Otis Carroll, Tyler, for respondents.

OPINION

HECHT, Justice.

We granted the applications for writ of error in this case to decide whether a contractual provision that requires payment of a multiple of actual damages for breach of trust is an unenforceable penalty, and if so, whether the defense of penalty was waived because it was not pleaded. The trial court and court of appeals refused to enforce the provision. 792 S.W.2d 269 (Tex.App.1990). We affirm the judgment of the court of appeals.

During 32 years of marriage, Harry and Martha Phillips accumulated over $18 million in community property, primarily through the oil and gas business Harry managed. When they divorced, rather than break up their oil and gas holdings, they created Phillips & Phillips, Ltd., a limited partnership, and transferred the bulk of their assets to it. Each had an equal interest in the partnership. Harry, the only general partner, agreed to work for the partnership full-time without salary and to offer Martha the option to participate in any business opportunities he pursued outside the partnership. Martha, the only limited partner, agreed that she would have no right to participate in Harry's business decisions for the partnership and that she would leave each of her four children by Harry at least one-sixth of her estate.

The partnership agreement required Harry to pay himself and Martha each a minimum of $21,000 per month for 24 months, and then minimum monthly distributions adjusted for inflation and for oil and gas prices. It also required Harry to furnish Martha certain financial information about the partnership and to cooperate with her in auditing its affairs. The agreement contained the following provision: "If the general partner breaches his trust hereunder, he shall pay to the limited partner as liquidated damages ten times the amount she loses as a result of such breaches of trust. Errors of judgment shall not be considered breaches of trusts."

The value of the partnership increased under Harry's management, but Harry did not fully comply with the terms of the written agreement. In particular, after the first 20 months Harry distributed much less than the required minimum amounts, never actually calculating what payments the agreement required. He also failed to provide timely annual statements of operations and refused to cooperate fully with Martha's attempts to audit the partnership.

Martha eventually sued Harry for dissolution of the partnership and damages based upon Harry's breach of contractual and fiduciary duties. The case was tried to a jury, who found that Harry breached the partnership agreement by favoring himself in paying his personal expenses and encumbering partnership assets, thus endangering partnership distributions. The jury also found that Harry breached both the partnership agreement and his fiduciary duty to Martha by failing to keep current and complete partnership books, failing to prepare required annual statements, and interfering with Martha's efforts to examine partnership books and records. ¹ The jury assessed Martha's actual damages at $300,000. None of the jury's findings are challenged by the parties on appeal.

During the trial the parties stipulated that a reasonable fee for legal services necessary for Martha's prosecution of the case was $235,302.14. The jury was aware of this stipulation, and the trial court surmised that the jury included this amount in its $300,000 finding. Accordingly, the trial court rendered judgment for Martha for a total of $300,000, $235,302.14 against the partnership and $64,697.86 against Harry, and refused to award Martha any additional amount for attorney fees. The trial court also ordered the partnership dissolved.

Martha appealed; Harry did not. The court of appeals held that the trial court erred in refusing to award Martha the $235,302.14 stipulated attorney fees in addition to the $300,000 damages found by the jury, but that the trial court did not err in refusing to award Martha decuple damages under the partnership agreement. Consequently, the appeals court reversed the judgment of the trial court in part and rendered judgment against Harry for a total of $535,302.14, plus interest. ² Martha contends that she is entitled to recover liquidated damages equal to ten times the actual damages found by the jury, as provided by the limited partnership agreement. Harry contends that the contractual provision is not an enforceable agreement for liquidated damages but an unenforceable penalty. Martha argues that even if Harry is correct, he has waived any defense of penalty by failing to plead it as an affirmative defense.

We first considered the difference between an enforceable liquidated damages provision and an unenforceable penalty in Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 485-486 (1952). There we explained:

Volumes have been written on the question of when a stipulated damage provision of a contract should be enforced as liquidated damages and when enforcement should be denied because it is a penalty provision.... All agree that to be enforceable as liquidated damages the damages must be uncertain and the stipulation must be reasonable.

. . . . .

The right of competent parties to make their own bargains is not unlimited. The universal rule for measuring damages for the breach of a contract is just compensation for the loss or damage actually sustained. By the operation of that rule a party generally should be awarded neither less nor more than his actual damages. A party has no right to have a court enforce a stipulation which violates the principle underlying that rule.

More recently, in Rio Grande Valley Sugar Growers, Inc. v. Campesi, 592 S.W.2d 340, 342 n. 2 (Tex.1979), we restated the two-part Stewart test for determining whether to enforce a contractual damages provision as follows: "In order to enforce a liquidated damage clause, the court must find: (1) that the harm caused by the breach is incapable or difficult of estimation, and (2) that the amount of liquidated damages called for is a reasonable forecast of just compensation." Cf. TEX.BUS. & COM.CODE § 2.718(a). ³

Whether a contractual provision is an enforceable liquidated damages provision or an unenforceable penalty is a question of law for the court to decide. Farrar v. Beeman, 63 Tex. 175, 181 (1885); see Lefevere v. Sears, 629 S.W.2d 768, 771 (Tex.Civ.App.--El Paso 1981, no writ); Muller v. Light, 538 S.W.2d 487, 488 (Tex.Civ.App.--Austin 1976, writ ref'd n.r.e.); Schepps v. American Dist. Telegraph Co., 286 S.W.2d 684, 690 (Tex.Civ.App.--Dallas 1955, no writ); Zucht v. Stewart Title Guar. Co., 207 S.W.2d 414, 418 (Tex.Civ.App.--San Antonio 1947, writ dism'd); Bourland v. Huffhines, 244 S.W. 847, 849 (Tex.Civ.App.--Amarillo 1922, writ dism'd). Sometimes, however, factual issues must be resolved before the legal question can be decided. For example, 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. See Johnson Eng'rs, Inc. v. Tri-Water Supply Corp., 582 S.W.2d 555, 557 (Tex.Civ.App.--Texarkana 1979, no writ); Oetting v. Flake Uniform & Linen Serv., Inc., 553 S.W.2d 793, 796-797 (Tex.Civ.App.--Fort Worth 1977, no writ); Smith v. Lane, 236 S.W.2d 214, 215 (Tex.Civ.App.--San Antonio 1950 no writ); Southern Plow Co. v. Dunlap Hardware Co., 236 S.W. 765, 766-767 (Tex.Civ.App.--Dallas 1922, no writ); Walsh v. Methodist Episcopal Church, 212 S.W. 950, 952 (Tex.Comm'n App.1919, judgm't adopted).

The enforceability of the contractual provision in this case involves no fact issues. A contractual provision like the one here by which one party agrees to pay the other some multiple of actual damages for breach of the agreement does not meet either part of the legal test for an enforceable liquidated damages provision. It cannot meet the first prong of the test because the harm caused by the breach of the contract is not incapable or difficult of estimation. The provision assumes actual damages can and will be determined, indeed must be determined, before the prescribed multiplier can be applied. The provision cannot meet the second prong of the test because, instead of attempting to forecast actual damages, it calls for them to be determined and then multiplied. Cf. Robert G. Beneke & Co. v. Cole, 550 S.W.2d 321 (Tex.Civ.App.--Dallas 1977, no writ) (contract provision which fixes liquidated damages without excluding additional liability for actual damages is not a reasonable forecast of just compensation and therefore a penalty). A contractual provision like the one in this case is thus, on its face, an unenforceable penalty.

Harry, however, did not plead penalty as an affirmative defense to an award of damages under the liquidated damages provision in the partnership agreement. Although penalty is not among the affirmative defenses enumerated in Rule 94, TEX.R.CIV.P., the listing in that rule is not exclusive. Penalty is, in the language of the rule, a "matter constituting an avoidance or affirmative defense." Johnson, 582 S.W.2d at 557; Oetting, 553 S.W.2d at 795-796; Robinson v. Granite Equip. Leasing Corp., 553 S.W.2d 633, 637 (Tex.Civ.App.--Houston [1st Dist.] 1977, writ ref'd n.r.e.); Walter E. Heller & Co. v. B.C. & M., Inc., 543 S.W.2d 696, 697 (Tex.Civ.App.--Houston [1st Dist.] 1976, writ ref'd n.r.e.); LoBue v. United Serv. Planning Ass'n, 467 S.W.2d 574, 576 (Tex.Civ.App.--Fort Worth 1971, writ dism'd); Young v. J.F. Zimmerman & Sons, Inc., 434 S.W.2d 926, 927 (Tex.Civ.App.--Waco 1968, writ dism'd); Smith v. Waite, 424...