In a recent decision by the Ohio Supreme Court analyzing the reasonableness of a public construction contract’s per diem liquidated damages clause, the Court held that the enforceability of the clause must be analyzed at the time of contracting rather than at the project’s completion.¹
The underlying case involved a contractual dispute between the Village of Piketon (the “Village”) and Boone Coleman Construction (“Boone Coleman”). The Village and Boone Coleman entered into a $683,000 contract to install a traffic light and perform roadwork in the Village. The contract contained a per diem liquidated damages clause whereby Boone Coleman agreed to pay the Village $700 per day in the event Boone Coleman did not meet the substantial completion deadline outlined in the contract. Boone Coleman completed the project albeit 397 days late, which equated to a $277,900 obligation per the contract’s liquidated damages clause ($700 x 397 days).
In applying the three-part test used to analyze the enforceability of a liquidated damages clause, the Fourth District Court of Appeals held that the delay damages constituted a penalty, and therefore, the clause was unenforceable as it was unreasonable and disproportionate when looking at the contract as a whole. The appellate court cited to the fact that the resulting liquidated damages ($277,900) equated to over 40% of the parties’ total contract price.
The Ohio Supreme Court reversed the Court of Appeals decision, holding that the appellate court applied the incorrect analysis. The Court opined that the Court of Appeals erred by focusing on “the reasonableness of the total amount of liquidated damages in application, rather than on the reasonableness of the per diem amount in the contract terms.” That is, the reasonableness of the clause must be examined at the time the parties entered into the contract rather than retrospectively after the breach occurred. The Court further noted, “We remind our appellate courts that in engaging in prospective analysis, the appellate court’s role is not to determine what the parties should have contracted for based on the court’s understanding of the damages after the breach.” Thus, the Court remanded the case to the appellate court to analyze, consistent with the Ohio Supreme Court’s opinion, whether the $700 per day was reasonable without consideration to the aggregate amount of liquidated damages.
There are two valuable points contractors should take away from the Boone Coleman decision.
- The Ohio Supreme Court will not only continue to enforce legitimate per diem liquidated damage clauses in private construction contracts, but also in public construction contracts; and
- Precedent has been set on how Ohio courts are to examine the reasonableness of per diem liquidated damage clauses when determining if the clause is unconscionable, unreasonable, and disproportionate. That is, courts must conduct a prospective analysis of the clause at the time the contract is executed and not delay the analysis until the breach and extent of damages are fully recognized.
It is also worth noting that Ohio’s Revised Code mandates that every state-funded public-improvement construction contract include a liquidated damages provision. Thus, contractors performing work on these types of projects must be extra cautious of the liquidated damage provisions in their contracts.
Josh Morrow leads the litigation practice at Ranallo & Aveni, LLC and focuses his representation on commercial, construction, and real estate litigation. Josh can be reached at 440-684-1600 and email@example.com
Ranallo & Aveni is a Cleveland-based boutique law firm dedicated to servicing closely-held businesses and individuals throughout the State of Ohio in the areas of commercial transactions, real estate and construction, commercial litigation, environmental law, and strategic and business succession planning.