Ohio Supreme Court holds that the enforceability of a liquidated damages provision must be analyzed at the time of contracting, not at the end of a project.
The Supreme Court of Ohio issued a decision today in Boone Coleman Constr. Inc. v. The Village of Piketon, Slip Opinion, 2016-Ohio-628 (the “Decision”) holding that when deciding whether a liquidated damages clause in a public construction contract is enforceable courts must focus “on the reasonableness of the clause at the time the contract was executed rather than looking at the provision retrospectively … after a breach.” Decision, at 36 (emphasis added).
In the underlying case, the Village of Piketon and Boone Coleman Construction entered into a $683,000 contract to install a traffic signal and make related roadway improvements. The Contract contained a $700 liquidated damages per diem, which was based on the Ohio Department of Transportation rate schedule for liquidated damages of that size, to compensate the Village for each day of unexcused delay on the Project.
The Project was plagued by problems of the contractor’s making, and was not completed until 397 days after the extended contract deadline. The Pike County Court of Common Pleas granted the Village’s motion for summary judgment, found the liquidated damages per diem enforceable, and entered judgment for the Village for $277,900 for liquidated damages (397 days x $700 per day) less the undisputed contract balance.
The Fourth District Court of Appeals affirmed the trial court’s finding that the contractor was entirely responsible for the delay but reversed on the counterclaim for liquidated damages. In reversing on the liquidated damages, the court of appeals looked at the situation retroactively and found the total amount of liquidated damages assessed ($277,900) disproportionate and an unenforceable penalty.
The Supreme Court, however, reversed, noting among other things that “the appellate court’s myopic focus on the reasonableness of the total amount of liquidated damages in application, rather than on the reasonableness of the per diem amount in the contract terms, was not proper. The correct analysis looks at whether it was conscionable to assess $700 per day in liquidated damages for each day that the contract was not completed rather than looking at the aggregate amount of the damages awarded.” Decision, at ¶31. The Supreme Court added that “the appellate court’s use of this invented perspective”, to wit, looking retroactively at the total amount of liquidated damages assessed rather than the per diem amount known at the time of contracting “resulted in an distorted analysis of our precedent.” Decision, at paragraph 34 (emphasis added).
The Supreme Court added that “when the appellate court determined that the award [by the trial court] was an unenforceable penalty because the amount was ‘so unreasonably high and disproportionate to the consideration paid’ the court failed to fully consider that the amount was large only because Boone Coleman failed to complete the Project for more than a year after the agreed-upon completion date .… It is a perverse rule of law to hold that a court can relieve a breaching party of the consequences it agreed to by refusing to enforce a per-diem liquidated damages provision solely because the breach was an egregious one.” Decision, at paragraphs 38-39 (emphasis added).
The Supreme Court quoted Ben Franklin that “time is money” and vacated the judgment of the 4th District Court of Appeals, remanding the case for that court “to reconsider its decision on the enforceability of the liquidated damages provision in light of this opinion.” Decision, at paragraph 42. The whole point of liquidated damages clauses is to allow parties, in advance, to agree on a provision that will enable the owner to avoid having to prove damages that are difficult if not impossible to prove. The Supreme Court decision helps clarify the analysis that Ohio courts must undertake and should help avoid costly and counterproductive squabbles in the future, particularly on public works projects. In this regard, the Court was clear that it viewed its decision not as making new law but simply to “expressly extend” prior precedent on liquidated damages to apply to public works contracts, which have unique difficulties in proving actual loss given that such projects are not intended for profit but for public use. We represented the prevailing party in this case, from the trial court through the Ohio Supreme Court.