Boone Coleman Constr., Inc. v. Vill. of Piketon, 2016-Ohio-628, 2016 Ohio LEXIS 441 (Ohio Feb. 24, 2016)
A general contractor entered into a construction contract with a public agency for a road construction project with a $700 per day liquidated damages provision. The contractor completed the project over one year late, and was assessed $277,900 in liquidated damages. The original contract price was $683,300. The trial court granted summary judgment for the public agency, awarding the full amount of the liquidated damages. An intermediate appellate court overturned the ruling based upon an after-the-fact comparison of the total liquidated damages imposed in relation to the contract price, stating, “the amount of damages [as a whole] is so manifestly unreasonable and disproportionate that it is plainly unrealistic and inequitable.” The Ohio Supreme Court vacated the decision of the appellate court and remanded for further consideration.
The Supreme Court noted that Ohio law recognizes liquidated damage provisions as valid and enforceable, as long as the value of those damages are fair and reasonable attempts to fix just compensation for anticipated loss caused by breach of the contract and not mere penalties to the breaching party. A “penalty” is a value that forms a punishment for a default rather than a measure for compensation of the breach. It also observed that liquidated damage provisions are particularly appropriate in public contracts, where actual damages may be difficult to calculate.
The Supreme Court restated the basic test of the validity of a liquidated damage clause under Ohio law as set forth in Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St. 3d 27 (Ohio 1984):
Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (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, and if (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 Supreme Court held that the appellate court’s after-the-fact approach to evaluating the reasonableness of the liquidated damages provision was improper. A proper approach required examination of the provision based upon the parties’ knowledge as of the time of contracting. If a per diem amount is reasonable, based on what the parties know at the time of contracting, it should be enforceable. Here, factors apart from the per diem amount, i.e., that the contractor took four times the original duration to complete, caused the aggregate liquidated damages to be high in comparison to the original contract value.
The Supreme Court held that the proper analysis was whether the per diem amount was reasonable based on what the parties knew when they contracted, not after-the-fact. On remand, the appellate court was to reconsider the enforceability of the liquidated damages clause from that perspective.