Ohio Appellate Court Finds $277,900 Liquidated Damages Award Unenforceable

posted by Michael R. Fortney  |  Dec 1, 2014 2:04 PM in Construction Law

The Fourth District Court of Appeals of Ohio, in the case of Boone Coleman v. Village of Piketon, held that a liquidated damages provision of $700 per day that totaled $277,900 was unenforceable because the provision amounted to a penalty, and because the defendant could not prove how the parties came up with the amount of $700 per day.  The Court of Appeals reversed the decision of the trial court, after the trial court enforced the full amount of the liquidated damages. 

Liquidated damages provisions are used in contracts where the actual damages caused by a breach are unknown or would be difficult to quantify. In Ohio, liquidated damages are enforceable if they satisfy a three-part test. First, the actual damages must be uncertain as to amount and difficult to prove. Second, the contract must not be manifestly unconscionable, unreasonable, or disproportionate in amount to the reasonably anticipated damages such that the court views the provision as a penalty. Finally, the contract must demonstrate that the parties agreed to the liquidated damages following a breach.

In the Boone Coleman case, the liquidated damages stemmed from a contract for public roadway improvements.  Delays in a construction project can cause ripple effects that lead to massive actual damages by the time the project is completed. This makes liquidated damages provisions in construction contracts preferable, because both parties know the consequences of a breach.

Unenforceable penalty

The amount sought by Piketon in the Boone Coleman case ended up being over one-third of the $683,000 contract price since the contractor delayed the construction project for 397 days. The Court of Appeals held that this amount violated the second part of the three-part test. Since the damages turned out to be so high, they constituted a penalty.

No evidence to support liquidated damages amount

The Court of Appeals also held that the liquidated damages provision was unenforceable because Piketon did not present any evidence as to how the parties arrived at the $700 per day figure and whether the liquidated damages was disproportionate to the amount of reasonably anticipated damages.

Supreme Court of Ohio has granted review

The Supreme Court of Ohio has granted certiorari. This case will be an interesting one to watch and could have far-reaching consequences for contractors and other parties who use liquidated damages clauses regularly.

In the meantime owners and contractors who regularly use liquidated damages clauses in contracts should make certain that they have evidence showing how the parties arrived at the liquidated damages figure.

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