Key Notes:

  •  Liquidated damages apply in public construction
  • Damages provisions encourage timely completion and avoid taxpayer losses
  • Ohio uses prospective test for reasonableness of damages amount

In Boone Coleman Constr., Inc. v. Vill. of Piketon, 2016-Ohio-628, the Supreme Court of Ohio for the first time extended its precedent on liquidated damages clauses to a case involving a public construction contract. In addition to the traditional factors applied under Ohio law, the Court held that the protection of the public interest is a proper consideration when determining the validity of a liquidated damages provision in a public construction contract.

Boone Coleman involved a public works infrastructure project for the installation of a traffic light and related road improvements in Piketon, Ohio. The Village of Piketon (“Piketon”) selected Boone Coleman Construction, Inc. (“Boone Coleman”) as the contractor for the project. The contract included a liquidated damages clause requiring Boone Coleman to pay $700 per day if the project was late. Completion was delayed by over a year, and the trial court awarded $277,900 in liquidated damages to Piketon – approximately one-third of the overall contract value.

The Fourth District Court of Appeals reversed the trial court’s judgment, holding that the liquidated damages clause was an unenforceable penalty because the damages were “manifestly unreasonable and disproportionate” to the contract as a whole. The Ohio Supreme Court, however, vacated the appellate decision, holding that the appellate court improperly analyzed the reasonableness of the liquidated damages. The Court explained that under Ohio law, the reasonableness of liquidated damages is assessed prospectively (i.e., when the parties enter into the contract) rather than retrospectively (i.e., after the liquidated damages have been calculated). The appellate court in Boone Coleman improperly utilized a retrospective analysis and focused on the actual liquidated damages in proportion to the contract, rather than the reasonableness of the per diem amount in the contract in comparison to similar cases.

The Court also extended the traditional precedent for evaluating the enforceability of liquidated damages clauses to public construction contracts. In general, Ohio follows a three-part test when determining the validity of a liquidated damages clause: (1) the damages must be difficult to ascertain and prove, (2) the damages must not be so manifestly unconscionable, unreasonable and disproportionate in amount to suggest that they do not express the intention of the parties, and (3) the contract must reflect the intention of the parties that the stated damages should follow the breach. ¶18, citing Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27 (1984), at syllabus.

For the first time in Boone Coleman, the Court considered how this test should be applied in the case of a public construction contract. The Court acknowledged that liquidated damages provisions play an important “civic purpose” in public construction by fostering the timely completion of projects and avoiding the loss of taxpayer dollars caused by contractor delays. The Court therefore determined that “the protection of the public interest is a proper consideration in determining the validity of a liquidated damages provision.” In the case of the Piketon/Boone Coleman contract, the Court noted that $700 per diem was “consistent with Ohio public policy” because it was comparable with the $1,000 per diem liquidated damages amount established by the Ohio Department of Transportation for contracts between $500,000 and $2,000,000.

Parties entering into public works contracts in Ohio should be mindful of the public policy considerations raised in Boone Coleman when evaluating liquidated damages provisions in public works contracts. According to the Court’s holdings, liquidated damages are enforceable in public construction contracts in order to protect the public interest, and the reasonableness of a particular liquidated damages provision will be evaluated prospectively from the perspective of the parties at the time of contracting.