The Ohio Fourth Appellate District recently addressed the issue of liquidated damages provisions in the context of public works contracts.
In Boone Coleman Constr., Inc. v. Village of Piketon, 2016-Ohio-1557 (4th Dist.) Plaintiff, a construction project contractor, brought suit against an Ohio Village seeking additional payment for its work. The Village counterclaimed for contractual liquidated damages, claiming that Plaintiff had taken too long to complete the project, in violation of the parties’ contract. The contract provided that time was of the essence and that all work on the project would be substantially completed within one hundred twenty (120) days following the date construction began. The contractual liquidated Damages for Delay provision indicated Plaintiff would pay the Village Seven Hundred Dollars ($700) per day, for each day following the completion date until the project was substantially completed. The trial court ruled in favor of the Village and Plaintiff appealed.
The 4th District, in its original decision, (2014-Ohio-2377), reversed the trial court’s award of liquidated damages to the Village, ruling that the liquidated damages provision was unenforceable because it constituted a penalty. In so ruling, the District Court had relied upon the Ohio Supreme Court’s earlier decision in Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27, 465 N.E.2d 392 (1984), through which was developed a three-part test relative to the enforceability of such liquidated damages provisions. In Samson, the Court held that liquidated damages provisions are valid and enforceable, and not an unenforceable penalty, provided:
- At the time of contracting, actual damages are uncertain as to amount and difficult to prove;
- The amount of liquidated damages is not manifestly unconscionable, unfair, or inequitable; and
- The contract demonstrates that it was the intention of the parties that liquidated damages in the amount stated would follow a breach.
The 4th District ruled that the liquidated damages provision at issue did not meet part two (2) of this test. That is, the court determined that the amount of liquidated damages called for in the parties’ contract was manifestly unreasonable and inequitable, as the amount of liquidated damages was over one third the total contract price.
The Ohio Supreme Court reversed (2016-Ohio-628), expressly extending its previous precedent relative to such liquidated damages provisions relative to public works construction projects, further holding that the protection of the public interest is a proper consideration in determining the validity of a liquidated damages provision in such situations.
Specifically, the Court held it is improper to analyze whether a liquidated damages provision is conscionable or equitable based merely upon the total value of the contract, as opposed to the total amount of liquidated damages determined after the fact. Rather, a proper analysis considers the fairness and conscionability of the per diem amount of damages in and of itself, agreed upon by the parties at the time the contract is entered. That is, an appellate court must analyze whether a liquidated damages provision is conscionable and equitable at the time the contract was executed rather than looking at the result of the damages with the benefit of hindsight, following a breach.
Ultimately, the Ohio Supreme Court’s ruling appears positive for public entities. As political subdivisions enter into public-works contracts, it is uniquely difficult to calculate damage to the public’s interest caused by breach of the agreement to provide public improvements in a timely manner. Each delay adds to inconvenience, increased costs, and loss of use to the taxpaying public. As such, and as the Ohio Supreme Court wisely recognized, liquidated damages provisions in public-works project contracts are necessary to foster timely completion of projects, thereby avoiding the loss of taxpayer dollars.