Crain’s Cleveland Business – Don’t be late: The costly consequence of omitting liquidated damages clauses
May 16, 2016 • 3 min read
As a real estate and construction attorney and author of a soon-to-be-unveiled construction news outlet called YouDig?, I often deal with — and get asked about — liquidated damages provisions. Liquidated damages provisions in construction contracts are designed to establish agreed-upon damages in advance, when actual damages are likely to be very difficult to quantify.
For example, just recently a client asked me about the cost of missing a completion date on a public construction project. “How much is that really worth?” he asked. “What is the real cost of the delay?”
Recently, in Boone Coleman Construction Inc. v. The Village of Piketon, the Ohio Supreme Court confirmed the long-established elements of a valid liquidated damages provision in Ohio as applied to a public works project. In a well-written opinion, Ohio’s highest court provided a modern education on the concept of liquidated damages and went further to clarify the elements. Consider it suggested reading. It is now even more clear, liquidated damages provisions are the “go to” power play clause for any construction contract. Do not take it lightly.
To be clear, a liquidated damages provision in Ohio must not be a penalty. This is tricky because, well, ask anyone who has been late on a job with a liquidated damages clause in play — they will tell you it sure feels like a penalty.
The Ohio Supreme Court has long established that such a clause be treated as liquidated damages, and not as a penalty, when:
♦ The actual damages are uncertain as to the amount and difficult to prove;
♦ The contract as a whole is not so manifestly unconscionable, unreasonable and disproportionate in amount that it does not express the true intention of the parties, and;
♦ 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.
In the Boone Coleman case, the court focused on the second element. Is the liquidated damages provision so unreasonable and disproportionate as to constitute a penalty? The contract sum was $683,300. The contract was to be completed ultimately, within 120 days. The liquidated damages provision was for $700/per day. Now, take a deep breath. Boone Coleman was 397 days late. The Village of Piketon assessed liquidated damages to the final pay application in the amount of, gulp, $277,900, or about 41% of the entire contract value! Boone Coleman cried foul, claiming that the operation of the clause was unreasonable and disproportionate, and therefore a penalty.
This is not surprising. Boone Coleman sought to manipulate the elements in the manner that many before them had successfully used to avoid a large hit for liquidated damages. Clearly, the elements provide some wiggle room for the pleasure of the master wordsmiths where the numbers seem, well, just not fair! No more.
To the delight of the Village of Piketon, the Supreme Court determined that the liquidated damages provision was not a penalty and should be assessed. The Supreme Court’s decision did not focus on whether the liquidated damages were reasonable after the performance of the contract, but rather, was the per diem liquidated damage amount reasonable on commencement date of the contract. The high court determined that the court of appeals’ “myopic focus” on the reasonableness of the total amount of damages assessed was an error. The appellate court should have focused on the reasonableness of the $700 per diem. Essentially, if the liquidated damages amount is reasonable on day one, it is reasonable always.
The court noted that reasonable liquidated damages provisions come in various amounts and terms all of which can be reasonable depending on the circumstances. The court saw it as reasonable for Boone Coleman and the Village of Piketon to establish $700/per day as the liquidated damage amount consistent with the Ohio statutory per diem amount for public work projects in that price range.
The Boone Coleman case is centered on public works projects. However, the decision is very broad indeed. The Supreme Court’s analysis is one of contract interpretation, not construction law, per se. The emphasis is on the benefit of the bargain. Consequently, what often merely operated as a club (which was often waived) is now more easily implemented and enforced, thus increasing the power of the clause.
The Boone Coleman decision provides a road map for establishing and enforcing liquidated damages clauses for public or private construction as well as commercial contracts of any kind.
If you bargain for a liquidated damages clause, don’t be late.
