When are Liquidated Damages Too High to be Enforceable?
Kegler Brown Construction Newsletter July 10, 2014
Ohio law has traditionally upheld liquidated damages for late completion if: (1) they were uncertain as to amount and difficult of proof; (2) the contract as a whole is not manifestly unreasonable; and (3) the intention of the parties in the event of a breach. It was typically thought that if the liquidated damages "per diem" was consistent with state (ODAS, ODOT, etc.) standards, they would be considered reasonable and enforceable.
However, a recent 4th District Court of Appeals case has ruled that a $700-a-day liquidated damages provision (0.01% of the Contract Price) on a road project was unreasonable because the total liquidated damages assessed ($700 a day x 397 days delay) of $277,900 was too high as "the clause in this matter produced an award nearly equal to 1/3 the value of the contract," which was $683,600. Boone Coleman Construction v. Village of Piketon, 2014-Ohio-2377, Fourth District Court of Appeals (May 22, 2014). While the total liquidated damages award was admittedly high due to the lengthy delay, the amount per day set forth in the contract was fairly typical and consistent with ODOT guidelines.
This decision raises the concern that at some point the contractor's delay becomes so lengthy that the liquidated damages amount becomes so high as to become unenforceable, thereby removing the desired incentive to complete a project timely. In other words, the greater the delay by the contractor, the less chance the liquidated damages provision can be enforced by the owner.
As a result the Village (and numerous amicus groups such as the County Commissioners of Ohio, Ohio Municipal League, Ohio Schools Boards Association and the Ohio Township Association) has argued that this case is of great public interest and petitioned the Ohio Supreme Court to hear the case and reconsider this precedent.