Prospective Reasonableness: Assessing Liquidated Damages in Construction Contracts
Today, the Supreme Court of Ohio ruled that the reasonableness of a liquidated damages provision is determined by prospectively analyzing the per diem amount rather than the aggregate amount of damages assessed.
Piketon v. Boone Coleman Constr., Inc., Slip Opinion No. 2016-Ohio-628, involves the late delivery of roadway and traffic signal improvements at the intersection of U.S. 23 and Market Street in Piketon, Ohio. Boone Coleman Construction, Inc. (Boone) and the Village of Piketon (Village) entered into a contract in which the Village agreed to pay Boone a total of $683,300 to complete the project. The project was completed 397 days late. Applying the contract’s $700 per day liquidated damage provision to this delay equated to Boone being assessed $277,900 in liquidated damages.
In overturning the decision of the Court of Appeals for Pike County, the Supreme Court of Ohio stated that the appellate court was incorrect in its conclusion that “because the ‘resulting amount [of liquidated damages] is manifestly inequitable and unrealistic, courts are justified in determining the provision to be an unenforceable penalty.’”1 Instead, the Supreme Court of Ohio held that courts must conduct a prospective analysis of the per diem amount of the liquidated damages provision at the time the contract is executed. If the provision was reasonable at the time the contract was signed and bears a reasonable relation to the actual damages incurred, the provision will be enforced. Therefore, the question the appellate court should have answered was whether assessing $700 per day was reasonable as opposed to the total amount of liquidated damages assessed.
The Court reiterated that an enforceable liquidated damage per diem amount must be a “genuine covenanted pre-estimate of damages”2 —meaning the parties evaluated and forecasted the probable loss resulting from a delay in completing the construction. In Piketon, it appears the per diem amount of $700 may have been roughly based off of a schedule of liquidated damages included in Section 108.07 of the Ohio Department of Transportation’s “Construction and Material Specifications”3 and not based off of a pre-estimate of probable damages. At first glance, applying a liquidated damages rate based off of a graduated schedule of contract amounts may appear to have no correlation to the probable loss resulting from a delay. However, the Court noted that there is a “unique difficulty [in] calculating damages when a contractor breaches a public-works contract”4 and, further, that the protection of the public interest is a proper consideration in the calculation of damages. These two factors introduce a great amount of latitude in a public owner’s ability to set a per diem liquidated damage.
The case has been remanded to the appellate court for the reasonableness determination of the Piketon per diem amount.
1Piketon v. Boone, No. 2016-Ohio-628, slip op. at 4.
2Id. at 8 (quoting Piper v. Steward & Inlow, 5th Dist. Licking No. CA-2530, 1978 WL 217430, *1 (June 14, 1978)).
3 The Ohio Department of Transportation, Construction and Material Specifications (2013), available here.
4Piketon v. Boone, No. 2016-Ohio-628, slip op. at 10 (emphasis added).