Recently in Boone Coleman Constr., Inc. v. Vill. of Piketon, 2016-Ohio-628 (Ohio Feb. 24, 2016)* the Ohio Supreme Court enforced a liquidated damages provision in a public works contract and held that when analyzing the enforceability of liquidated damages, Ohio courts must look at the per-day amount agreed upon at the start of the project, not the cumulative amount of liquidated damages when the project is complete.
In 2007, the Village of Piketon, Ohio received competitive bids for a traffic light and road improvement project. The winning bidder, Boone Coleman signed a contract with the Village for the project. This contract included a substantial completion date and liquidated damages of $700 per day for each day beyond that date if the project was not finished on time.
During construction, Boone Coleman requested an extension for additional time to complete the project and the Village agreed to that extension. Then, Boone Coleman requested a second extension but the Village refused this second extension and notified the contractor that the Village would be assessing the $700 per day liquidated damages under the contract. In the end, Boone Coleman did not complete the project until 397 days after the extended deadline.
Boone Coleman brought a lawsuit against the Village and claimed that the liquidated damages should not apply. The Village argued that it was owed $277,900 under the liquidated damages provision of the contract ($700 per day for 397 days.) Under Ohio law, the amount of liquidated damages cannot be a “penalty.” To decide whether the liquidated damages provision is an unfair penalty, Ohio courts apply a test that was developed by the Supreme Court of Ohio in 1984 and that was based on a prospective analysis of whether such damages constituted a penalty. Applying this test, the trial court held that the liquidated damages in this case were enforceable. On appeal, the Fourth District Court of Appeals focused on the retrospective total amount of the $277,900 liquidated damages, compared to the total value of Boone Coleman’s contract which was $683,300. The Appeals Court held that the $277,900 liquidated damages were unfair and could not be enforced.
The Village appealed the case to the Supreme Court of Ohio. The Supreme Court held in favor of the Village, deciding that parties may agree to a per-day liquidated damages amount when entering into a contract and the enforceability test should not be applied to the total amount of the liquidated damages after a breach, but rather the per-day amount that was in the contract. The Court confirmed that Ohio courts must examine a liquidated damages provision based on what the parties knew at the time the contract was formed, not what the court may know in hindsight. Under this ruling, when determining the enforceability of liquidated damages, Ohio courts must look at the per day liquidated damages amount, not the total amount of assessed damages in order to determine whether it constitutes an unenforceable penalty.