August 3, 2016
Summary submitted by Jean Ann S. Sieler, RCO Law, firstname.lastname@example.org
The Ohio Supreme Court reversed the Fourth Appellate District Court, in Boone Coleman Construction, Inc. v. The Village of Piketon, Slip Opinion 2016-Ohio-628, which had overturned an award of $277,900 in liquidated damages on a contract totaling $683,300 (40%), based upon a 397 day delay in performing road work for the Village of Piketon, Ohio on February 24, 2016. Boone had failed to either complete the construction contract within the time specified or obtain an extension of the performance time under the contract. The work was to be completed within 120 days, with liquidated damages of $700 per day for unexcused delay. While Boone received one extension, a subsequent letter request was denied. The court found that Boone did not comply with the contract, which had set forth a specific procedure to resolve claims and disputes for changes sought in contract price or completion time.
When Boone sued for the $147,477 balance due on his contract, the Village counterclaimed seeking liquidated damages as a set off. Enforcing the contract, the trial court awarded the Village a net $130,423 ($277,900 delay damages, minus $147,477 the balance due on the contract). Boone appealed noting the Village’s role in the delay in completion and for extra work required, but the Court of Appeals determined that Boone’s failure to follow the detailed notice provisions of the contract to seek an extension of the project completion date and for additional compensation barred it from raising these issues. Moreover, insofar as the subsurface conditions and claimed inaccurate site plans provided a defense to Boone under the Spearin doctrine, it waived those claims by failure to argue them in the trial court. In any event, the contract expressly made Boone responsible to ascertain the subsurface conditions prior to bidding, thus making Spearin inapplicable. Finally, Boone argued the liquidated damages of $277,900 constituted an unenforceable penalty, rather than a measure of damages for failure to perform.
Citing Samson Sales, Inc v. Honeywell, Inc, 12 Ohio St. 3d 27 (1984), a three part test was applied for evaluating the enforceability of a liquidated damages provision. Where the terms are agreed in a contract in unambiguous terms, such damages are not a penalty if (1) the damages are uncertain as to amount and difficult of proof, (2) the contract as a whole is not manifestly unconscionable, unreasonable and disproportionate in amount as to justify that it does not express the true intensions of the parties, and (3) the contract is consistent with the parties’ intention that such damages follow the breach thereof. When applying Samson, the Fourth Appellate District Court determined that viewing the contract as a whole, the damages were so manifestly unreasonable and disproportionate to the contract amount paid, that the clause constituted a penalty, sending the case back to the trial court to address appropriate damages.
The Ohio Supreme Court disagreed, reinstating the verdict in favor of the Village and finding that the liquidated damages met the Samson criteria. It held that $700 per day in liquidated damages for delay in completion was appropriate. The reasonableness of the provision should be addressed by the per diem charged, not the aggregate damages to result. Finally, if the provision was reasonable at the time of contract formation, looking at the parties’ view of the contract terms up front, and bears a reasonable relation to actual damages, the provision would be enforced.
Lessons Learned: Liquidated Damages provisions are common in Public-Works and general construction contracts and will be enforced. Be familiar with all contract provisions and general conditions of the contract, particularly those related to obtaining an extension of time for performance or increase in contract payment. First, there are typically very short time-lines within which to request and submit justification and documentation for the changes. Second, document and communicate within the strict requirements of the contract, as the Ohio Supreme Court has made clear its intention to enforce these provisions which, at times, can be virtually impossible with which to comply. Repeat your notices and requests so that it is clear that the ongoing problems and issues justifying changes are not resolved. Do not contract to suffer liquidated damages if you are not experienced at performing the work included in the contract, with knowledge of the underlying conditions, within the requirements of the contract.