A Lesson on the Enforceability of Notice and Liquidated Damages Provisions

Construction and Procurement Law News, Q1 2015

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The Ohio Court of Appeals recently held in Boone Coleman Construction v. Village of Piketon that a general contractor could not claim additional time or recover delay damages if it failed to comply with the contract’s notice provisions. At the same time, the court invalidated the parties’ liquidated damages clause on the grounds that it produced such an unreasonably high award so as to constitute an unenforceable penalty.

This case involved the construction of a roadway and related improvements for the village of Piketon. As general contractor, Boone Coleman Construction entered into a contract with the village to complete the project for $683,300. The work was to be substantially complete within 120 days, and the parties agreed that liquidated damages would be assessed at $700 per day. Subcontractor and coordination issues arose during construction, and Boone Coleman delivered the project 397 days after the agreed project completion date. After the village refused to pay Boone Coleman its entire contract balance, Boone Coleman filed suit for the outstanding amount owed plus amounts claimed for additional work. The village then filed a counterclaim seeking liquidated damages. The trial court entered summary judgment in favor of the village reasoning that Boone Coleman failed to abide by the notice requirements of the contract in submitting its claims and that the liquidated damages provision was enforceable.

On appeal, the appellate court agreed that the general contractor was not entitled to delay damages because it did not provide proper notice. Although Boone Coleman had provided notice to the project’s engineer, it was also contractually required to provide notice to the village. It failed to do so, and even though the village had been informed by the project engineer of Boone Coleman’s claims for additional costs and time, the court denied those claims because notice was not strictly given in accordance with the contract. At the same time, the appellate court reversed the decision that the liquidated damages provision was enforceable. Specifically, the appellate court determined that the amount of liquidated damages was disproportionate to the value of the contract such that it constituted a penalty.

This case reinforces two important points. First, as has been said repeatedly in this newsletter previously, it is critical for contractors to faithfully comply with the notice provisions in their contracts. Failure to do so may bar recovery of claims for which the contractor is otherwise entitled. Moreover, as this case illustrates, constructive notice may not be a defense in some jurisdictions. The fact that the owner may be generally aware of a contractor’s claim for additional costs or time (through its architect or engineer, for example) does not mean that the contractor is relieved from giving notice to the owner. As always, the safest option is, where practicable, to give notice in the exact manner as required by the contract.

Second, this case illustrates how courts may treat liquidated damages that are assessed over a long period of time. The daily liquidated damages amount in this contract was modest by some standards. However, the amount of time that liquidated damages were assessed – almost 400 days – turned this modest amount into an award approximately 1/3 the value of the contract. Liquidated damages clauses are typically enforceable, but under these circumstances, the disproportionate result gave the court cause to invalidate this portion of the parties’ agreement.