Types of Damages Allowed
In a Business Case Under Texas Law

by Donald Ray Burger
Attorney at Law

The following are some kinds of damages allowed under Texas law in a business case. Not every element of damages is available in every case.

Basic Benefit of the Bargain Damages: When a plaintiff sues for damages from a breach of a contract, the general rule is that an amount may be awarded that will put the plaintiff "in as good a position as if the defendant had performed" on the contract. R. G. McClung Cotton Co. v. Cotton Concentration Co., 479 S.W.2d 733, 738 (Tex.Civ.App. Dallas 1972, writ ref'd n.r.e.).

Goods: For example, if a buyer fails to pay for the goods, the seller can sue for the agreed contract price, even if that is higher than the market price. If a seller of goods refuses to sell at the agreed price, the buyer may purchase substitute goods and recover the difference between the cost of the substitute and the contract price.

Services: When a seller of services fails to provide services, the measure of damages is the reasonable cost of replacing those services. When a buyer of services fails to pay for the services provided, the measure of damages is the agreed contract price for the services. Various defenses are available which may reduce the eventual recovery.

Lost Profits: Lost profits are generally available in business law cases. The plaintiff must prove losses of net profits, not gross profits. Net profits are gross receipts minus expenses. Proving lost profits with precision is difficult. However, mathematical exactitude is not required. They must be proved with "reasonable certainty." Southwest Battery Corporation v. Owen, 115 S.W.2d 1097, 1098 (Tex. 1938). What that is will vary from case to case. The general requirement is that "the plaintiff must adduce sufficient evidence from which the jury can reasonably infer that some profit would have been made, as well as evidence from which the jury can reasonably estimate the amount of the loss." Davis v. Small Business Inv. Co. of Houston, 535 S.W.2d 740, 743 (Tex.Civ.App. Texarkana 1976, writ ref'd n.r.e.)

Evidence that plaintiff has lost business income or business opportunities is not enough by itself. Lost income is not the same as lost profits. Remember that the courts are looking for loss of net profits. And while testimony from the plaintiff is admissible, it is usually not sufficient by itself. Frank B. Hall & Co. v. Beach, Inc., 733 S.W.2d 251, 258-259 (Tex.App. Corpus Christi 1987, writ ref'd n.r.e.). The testimony must be based on factual data that supports the claim to lost profits. International Harvester Company v. Kesey, 507 S.W.2d 195, 197 (Tex. 1934); see also, Pena v. Ludwig, 766 S.W.2d 298 (Tex.App. Waco 1989, no writ). The recovery of lost profits for a new business is even harder. There is a presumption in Texas that lost profits for new and unestablished businesses are too speculative to be recoverable. The presumption is rebuttable upon presentation of the proper evidence but such evidence is difficult to provide. The plaintiff in Fiberlock, Inc. v. LMS Enterprises, Inc., 976 F.2d 958, 963 (5th Cir. 1992) had been in business only one year, but that year had been profitable. The plaintiff proved lost profits because the contract the defendant breached was sufficiently specific in nature as to allow credible prediction of lost profits. The court held that the location, services, personnel, and management of two separate businesses could be so similar that the business and profits of one would serve as a reliable basis for calculating lost profits of the other. Pena v. Ludwig, 766 S.W.2d 298, 303 (Tex.App. Waco 1989, no writ). However, most court rulings deny lost profits to new and unestablished businesses.

Reliance Damages: A plaintiff may recover the costs and expenses incurred in reliance on a contract. If there is a breach after a party begins performing the contract, those expenses are recoverable, along with the net profits expected. For example, if a large capital expenditure is required to perform the contract, allowing the plaintiff to recover only net profits would fail to account for the capital expenditure.

However, it is the duty of the plaintiff to attempt to find a new use for the capital items to mitigate his damages. The burden of proving failure to mitigate is on the defendant. Houston Chronicle Pub. Co. v. McNair Trucklease, Inc., 519 S.W.2d 924, 929 (Tex.Civ.App. Houston [1st Dist.] 1975, writ ref'd n.r.e.).

Also reliance damages may be the only recovery possible if loss of profits is not provable because the business is new or has no profit record. Restatement, Second, Contracts  349, Comment a.

Interest: In Texas, two types of interest are generally available.

Post-Judgment Interest: Post-judgment interest is available once a judgment is obtained. If a contract provides for a specified interest rate, post-judgment interest is available at the lessor of the rate specified in the contract or 18 percent (art. 5069-1.05,  1). If the contract does not specify an interest rate, one must look to article 5069-1.05 of the Texas Revised Civil Statutes to determine the post-judgment interest rate. For the past several years the post-judgment interest rate has been 10 percent per annum, compounded annually. Judgments earn interest from the date rendered until the day they are satisfied. All lawsuits are eligible for post-judgment interest.

Prejudgment Interest: Prejudgment interest is usually, but not always, available in a business case.

Business contracts often have specific clauses providing for the recovery of interest if there is a breach. If a contract specifies a rate of interest, the courts will award that rate of interest, subject only to the usury limitation. Dodson v. Citizens State Bank of Dalhart, 701 S.W.2d 89, 91 (Tex.App. Amarillo 1986, writ ref'd n.r.e.). If the contract provides for the recovery of interest, but does not specify a rate, the courts will apply the rates in art. 5069-1.03 of the Texas Revised Civil Statutes. When the parties agree upon no specified rate, 6 percent per annum interest is allowed on all accounts and contracts ascertaining the sum payable, beginning on the thirtieth day after the sum is due. The interest rate is 6 percent. This rule applies to both written and oral contracts. Loom Treasures v. Terry Minke Advertising, 635 S.W.2d 940, 942 (Tex.App. Fort Worth 1982, no writ).

What if the contract does not provide for interest? The general rule is that interest is not available for breach of contract unless allowed in the contract or by statute. Phillips Petroleum Co. v. Stahl Petroleum Co., 569 S.W.2d 480, 483 (Tex. 1978). However, there are many exceptions to this rule. Examples include failure to disclose material facts in real estate (Smith v. National Resort Communities, Inc., 585 S.W.2d 655, 660 (Tex. 1979)), recoveries in quantum meruit (Black Lake Pipe Line Co. v. Union Const. Co., 538 S.W.2d 80, 96 (Tex. 1976), and breach of contract cases where requirements of article 5069-1.03 cannot be met (Perry Roofing Co. v. Olcott, 744 S.W.2d 929, 930 (Tex. 1988).

Interestingly, cases that qualify for prejudgment interest under article 5069-1.03 are restricted to a 6 percent rate, while the common law and equity exceptions are governed by a 10 percent post-judgment interest rate.

If the debtor tenders the amount due in a liquidated damages case, this will prevent a recovery of prejudgment interest. Keystone Pipe & Supply Co. v. Zweifel, 94 S.W.2d 412, 415 (Tex. 1936).

Restitution: Restitution is an alternative to the usual measure of contract damages. The goal of restitution damages is to put the plaintiff in as good a position as if they had never entered into the contract. They are a substitute for, not an addition to, traditional contract damages. The buyer is saying, "Give me my money back and I'll give you your goods back."

Quantum Meruit: Quantum meruit is a type of recovery founded in equity. It is often used in contracts for goods or services where there is no express contract covering the goods or services. Quantum meruit is often available for partial performance, as opposed to complete performance, of a contract. Montclair Corp. v. Earl N. Lightfoot Paving Co., 417 S.W.2d 820, 830 (Tex.Civ.App. Houston 1967, writ ref'd n.r.e.). For example, if a plaintiff begins performance of a contract but is prevented from completing it, he may seek recovery of the services partially performed under the theory of quantum meruit.

Liquidated Damages: Many contracts contain a liquidated damages provision that fixes damages if there is a breach of a contract or a part of a contract. An earnest money provision in a real estate contract is an example of a liquidated damage provision. Whether such a provision is valid depends on whether the damages that would result from a breach are uncertain or unable to be determined at the time at which the contract is signed. Also, the liquidated damages must be a reasonable estimate of the harm that might result from the breach. Stewart v. Basey, 245 S.W.2d 484, 486 (Tex. 1952). If the provision is upheld, the liquidated damages amount is the exclusive remedy, and "actual damages" may not be recovered.

Liquidated damages provisions will not be upheld if the court determines they are really invalid penalties. Liquidated damages provisions will be upheld if, at the time the contract was entered, the damages that would result from a breach were uncertain in nature or amount and the amount of damages agreed to was a reasonable estimate of the harm that would result. Apparently, the uncertainty is tested as of the date the contract is entered and the reasonableness of the liquidated damages is tested as of the date of the damages. If actual damages can be accurately determined, the court will probably strike the clause. Whether a particular liquidated damages provision is valid is a question of law for the judge, not for the jury.

Loss of Goodwill: Goodwill is the advantage a business has because of its name, location, reputation and success. Goodwill is often an asset purchased when someone buys a business. In Texas, the loss of goodwill is a separate element of damages. Few cases discuss how one proves loss of goodwill, but in Taormina v. Culicchia, 355 S.W.2d 569, 574 (Tex.Civ.App. El Paso 1962, writ ref'd n.r.e.), the plaintiff used an expert witness (a CPA) who testified that when a business' net profits exceed 10% of the tangible net assets or invested capital, there is goodwill. The value of the goodwill is based on the amount by which net earnings of the business exceed normal earnings in the same or similar businesses. The Court approved a formula to measure goodwill as the amount by which the net earnings of the business exceed normal earnings in the same or similar businesses.

Loss of Use: Loss of use is the element of damages that compensates a plaintiff for the period of time during which he was unable to use an item of property. For example, in an action for conversion, a plaintiff can recover for the time the defendant had the property. If the action is for damaged property, the loss would be for the time it took to repair the property.

Loss of use damages are not available if the property is a total loss. For example, if damaged equipment is repairable, the plaintiff can recover for the time it takes to repair it. If the equipment is totally destroyed, there can be no recovery for loss of use. Instead, the measure of damages is the difference between the value before and after the damage.

Reasonable rental value of a similar item is one way to measure loss of use damages. However, it is not required that the plaintiff rent a substitute piece of property to recover for loss of use. The plaintiff can introduce evidence of the rental cost to replace the property and extrapolate that daily, weekly or monthly cost over the actual period during which plaintiff could not use the property.

Loss of Credit Reputation: Plaintiffs can recover for injury to credit reputation when they can show that loss of credit was the necessary and usual result of defendant's conduct. This element of damages is also available if the defendant's conduct forces plaintiff into bankruptcy.

Mental Anguish: The usual rule is that mental anguish damages are not available for breach of contract. Exceptions have been made for services related to funeral arrangements.

Punitive Damages: The usual rule is that punitive damages are not available for breach of contract even if the breach was intentional, or grossly negligent. Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986).

Attorneys Fees: Chapter 38 of the Texas Civil Practice & Remedies Code allows plaintiffs to recover attorneys fees in breach of contract cases. This remedy is available for both oral and written contracts. The plaintiff must be represented by an attorney and the defendant must have failed to tender the "just amount owed" within 30 days after the claim is presented.

Written by Donald Ray Burger, Attorney at Law
Last Revised: May 23, 1996

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