In Boone Coleman Construction, Inc. v. TheVillage of Piketon (2016 Ohio 628), the Ohio Supreme Court reviewed its liquidated damages precedents within the context of a public works project for the first time. The matter stems from the award of a $638,000 public works contract for the installation of a new traffic light and associated roadway improvements with a substantial completion duration of 120 days. Contained within the contract was a liquidated damages provision in the amount of $700 per day for each day after the substantial completion date. The project’s date of commencement was set for July 30, 2007 putting substantial completion on November 27, 2007. Boone Coleman was granted an initial extension to May 30, 2008, but its second request for an extension was denied and Piketon put Boone Coleman on notice that liquidated damages would be sought for every day after May 30, 2008. The project eventually reached substantial completion on July 2, 2009, 397 days after the schedule extension date of May 30, 2008.
Boone Coleman brought suit against Piketon for not paying $144,477 of construction costs and Piketon countered in the amount of $277,900 for liquidated damages. The trial court granted Piketon’s motion for summary judgment and awarded liquidated damages. The appeals court reversed that decision and found the liquidated damages to be “unreasonable and disproportionate.” Piketon appealed to the Ohio Supreme Court.
The Court stated it would review the case for two propositions of law: 1) courts must review the validity of liquidated damages prospectively, not retrospectively, and 2) liquidated damages are not deemed to be a penalty simply because the construction is new and actual damages cannot be presented. It began by defining liquidated damages and pointed to Ohio’s three part test for determining whether a contract term is a liquidated damage or a penalty. A term is a liquidated damage if:
(1) [Damages are] uncertain as to amount and difficult of proof.
(2) The contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties.
(3) The contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.
The Court next discussed the inclusion of liquidated damage provisions in public works contracts. The Court stated that, “The Supreme Court and many state and federal appellate courts also recognize that liquidated-damages provision in public contracts are particularly valuable given the unique difficulty in calculating the damages associated with a public contractor’s breach of its promise to timely complete a public improvement project.” The Court then pointed to the statutory requirement passed by the Ohio legislature requiring public-improvement-construction contracts contain a liquidate damages provision.
The appeals court determined that the first and third parts of the above three part test were satisfied in the contract and the Court concurred, but it also found that the appeals court erred in determining the second part was not fulfilled. The Court identified the fact that the appeals court incorrectly focused its analysis on the total amount of liquidated damages and not the per diem amount when it concluded that the provision was an unenforceable penalty. The Court stated, “[h]ere the appellate court improperly engaged in retrospective analysis, i.e., it looked, with hindsight, to the aggregate application of the per diem liquidated damages to conclude that the provision was unconscionable. But it did not determine that the per diem amount was unconscionable at the time the parties entered into the contract.”
The Court further mused that with the appellate court’s reasoning, had the delay been only a few days and the liquidated damages did not accumulate to the level in the present matter, then the provision might have been enforceable. The court found this to be unacceptable so as to “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.”
The Court vacated the judgment of the appellate court and remanded.
The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law. He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based out of Boston, MA. He may be contacted at 617.748.8311 or firstname.lastname@example.org.