Ohio Supreme Court Upholds Liquidated Damages Provisions in Construction Contracts

posted by Michael R. Fortney  |  Feb 25, 2016 11:22 AM in Construction Law

The Ohio Supreme Court overturned the Fourth District Court of Appeals' holding that a $700 per day liquidated damages provision that totaled $277,900 in liquidated damages was unenforceable because it amounted to a penalty.  The appeals court decision, Boone Coleman, was first reported on by us in 2014.

In Boone Coleman, the liquidated damages stemmed from a contract between Boone Coleman and the Village of Piketon for public roadway improvements. The contract included a liquidated damages provision of $700 for each day after the completion date that Boone Coleman did not complete the work. The amount sought by Piketon in the Boone Coleman case ended up being over one-third of the $683,000 contract price, since the project completion was delayed by 397 days. The trial court awarded Piketon the entire $277,900 in 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.

The Court of Appeals held that the $277,900 damage amount violated the second part of the three-part test on liquidated damages. Since the damages turned out to be so high, the court held that the damages constituted a penalty.

Supreme Court Review

In its review, the Supreme Court held that “the court of appeals properly applied the first and third parts of the test.” The first part being that the damages of delay to a construction project are uncertain and difficult to prove, and the third part of the test being that the parties agreed to the liquidated damages and intended them to follow a breach. However, the Supreme Court disagreed with the appellate court’s interpretation of the second part of the test.

The Supreme Court found that the appellate court’s focus on the total amount of the liquidated damages penalty versus the per diem amount of the penalty was not the proper analysis of the second part of the liquidated damages test. The Court found that this misplaced focus was due to the appellate court’s reliance on a distinguishable decision, Harmon v. Haehn. First, since Harmon dealt with a commercial lease agreement instead of a public construction contract, the damages were easier to quantify. Second, the liquidated damages provision found unenforceable in Harmon was a lump-sum provision, instead of a per diem provision as in this case.

Since courts in other Ohio jurisdictions (and other states' jurisdictions) have found that per diem liquidated damages provisions in amounts larger than $700, the Court held that this number and presumably the entire $277,900, was a proper damage assessment. The Court further held that $277,900 in damages was not against public policy because the General Assembly passed a law requiring liquidated damages provisions in every state-funded public construction project. See R.C. 153.19. The Ohio Department of Transportation’s Construction and Material Specifications dictate appropriate amounts of liquidated damages provisions, and the $700 per day amount in this contract falls within those guidelines. The Supreme Court remanded the case to the appellate court for further proceedings.

In the meantime, owners and contractors who regularly use liquidated damages provisions in public or private construction agreements should make certain they are aware of any liquidated damages provisions when entering into agreements. In the future Ohio courts will only look at the prospective, or “front end,” analysis of liquidated damages cases to determine the reasonableness of the liquidated damages provision. A delay of over a year will not be an excuse that a contractor can rely on to escape a liquidated damages penalty, even one in the amount of $277,900, more than one-third of the contract price.

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