Application of Liquidated Damages Provisions under Ohio Law

Construction and Procurement Law News, Q2 2016

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A recent decision from the Ohio Supreme Court, Boone Coleman Construction, Inc. v. Village of Piketon, clarified the state’s enforcement of liquidated damages provisions.

Boone Coleman entered into a public-works contract with Piketon to install a traffic light and complete other improvements to the roadway. The total value of the contract was $683,000. In the contract, the parties expressly agreed that (1) the project needed to be substantially complete within 120 days and (2) Boone Coleman would pay Piketon liquidated damages in the amount of $700 per day for each day past the specified completion date that the project was not substantially complete.

Boone Coleman was unable to complete the project within the required time period. In fact, it did not complete the project until over a year after the expected completion date. At the close of the project, the parties found themselves in court over the final amount owed. The trial court ruled in favor of Piketon and awarded the village $270,900 in liquidated damages. However, the Court of Appeals overturned the award when it determined that the provision was an unenforceable penalty. The Court of Appeals wrote: “[W]e conclude the amount of damages is so manifestly unreasonable and disproportionate that it is plainly unrealistic and inequitable.” Piketon appealed that decision to the Ohio Supreme Court.

On appeal, the Supreme Court examined the law on liquidated damages and determined the Court of Appeals had erred. As an initial matter, the Court reiterated the appropriate test in Ohio for determining whether a provision constitutes a liquidated damages provision or an unenforceable penalty:

The [damages] should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult to prove and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.

Second, the Supreme Court found that the appellate court improperly evaluated the aggregate liquidated damages award ($277,900) in relation to the total value of the contract ($683,000) when it should have looked at the reasonableness of the per diem amount. Third, the Supreme Court found that the Court of Appeals improperly engaged in a retrospective analysis to conclude that the provision was unconscionable. The correct analysis should focus on whether the provision was reasonable at the time the contract was formed. As the Supreme Court noted, if a retrospective analysis is used, the same provision may be enforceable or not depending on the length of the delay. Finally, the Supreme Court noted that the parties agreed to a per diem amount – which is favored in Ohio – and chose an amount which was within the standards for the industry. The significant aggregate amount was ultimately caused by the significant delay in completing the project.

As an aside, at trial Boone Coleman sought additional compensation for work it alleged was outside the scope of the original agreement. The claim was rejected based on Boone Coleman’s failure to follow the unambiguous notice provisions for claiming additional compensation outlined in the contract. This serves as an important reminder to contractors and subcontractors of the importance of following the notice provisions in agreements to avoid possibly losing out on what may be otherwise legitimate claims for relief.

This case more importantly serves as a reminder that, if a liquidated damages provision is to be included in a contract, the parties must pay particular attention to the provision during the formation of the contract. In Ohio, special attention should be paid to the form of the liquidated damage - per diem is favored - as well as the relationship between the amount chosen and the standards in the particular jurisdiction and industry.