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Garden Ridge, L.P. v. Advance Int'l, Inc. - 403 S.W.3d 432 (Tex. App. 2013)

Rule:

In order to enforce a liquidated damages 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. One way a party can show that a liquidated damages provision is unreasonable is by showing that the actual damages incurred were much less than the amount contracted for," which requires the party to prove what those actual damages were. Thus, in such a case, factual issues must be resolved before the legal question can be decided.

Facts:

Garden Ridge, a Houston-based chain of housewares and home décor stores, sent Advance International (Advance) – one of its vendors – two purchase orders, one for approximately 950 nine-foot waving snowmen (PO '721), and the other for approximately 3,500 eight-foot waving snowmen (PO '743). Thereafter, Garden Ridge realized that the eight-foot snowmen that Advance sent were not waving snowmen, but instead were banner snowmen; it then refused to pay even if the products sold well, and assessed non-compliance chargebacks to Advance. Garden Ridge based its refusal to pay on chargeback provisions outlined in the parties' contracts. Advance argued that the chargeback provisions were unenforceable penalties. When Advance demanded payment, Garden Ridge sued for breach of contract and a declaratory judgment that Garden Ridge had complied with its contracts with Advance.  Advance counterclaimed for breach of contract. The trial court ruled in favor of Advance. Garden Ridge appealed.

Issue:

Were the chargeback provisions in the parties’ agreement enforceable?

Answer:

No.

Conclusion:

The Court held that the chargebacks assessed by Garden Ridge were unreasonably large when compared to its actual damages of zero. Therefore, the Court concluded the chargeback provisions were unenforceable as penalties. The provisions did not reasonably reflect Garden Ridge’s anticipated harm for an unauthorized substitution.

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