July 01, 2016

Analyze This! Ohio Supreme Court Clarifies Analysis of Liquidated Damages Provisions

Matthew A. Moeller

In Boone Coleman Construction, Inc. v. The Village of Piketon, the defendant contracted for a roadway and improvements project and agreed to pay Boone $683,300 to complete the work. 50 N.E.3d 502 (Ohio 2016). The contract required substantial completion within 120 days and contained a liquidated damages provision that provided for the payment of $700 for each day beyond the substantial completion date. Boone did not complete the project until well over a year after a previously extended substantial completion date. Boone brought suit against Piketon alleging that it failed to pay money due under the contract, and Piketon counterclaimed for liquidated damages.

The trial court granted summary judgment in favor of Piketon, awarding $277,900 in liquidated damages. Boone appealed, however, asserting that the trial court erred in awarding Piketon liquidated damages. Upon review, the appellate court agreed, reversing the trial court’s liquidated damages award and remanding the case for further proceedings. Relying on Samson Sales, Inc. v. Honeywell, Inc., 465 N.E.2d 392 (Ohio 1984), the appellate court held that upon reviewing the contract as a whole in its application, it was clear that “the amount of damages [was] so manifestly unreasonable and disproportionate that it [was] plainly unrealistic and inequitable.” Boone Coleman Constr., 50 N.E.3d at 507. The court concluded that the liquidated damages provision constituted “an unenforceable penalty.” Id., citing Samson Sales, 465 N.E.2d at 392.   

The Ohio Supreme Court granted Piketon’s request for discretionary review for purposes of addressing two issues of law: (1) that the court must conduct a liquidated damages provision analysis prospectively based on the per diem amount of damages at the time the contract is executed; and (2) liquidated damages are not deemed a penalty simply because a project consists of new construction of an improvement which did not exist previously. The court first noted that the law does not look with disfavor upon liquidated damages provisions in contracts, for “when they are fair and reasonable attempts to fix just compensation for anticipated loss caused by breach of contract, they are enforced.” Boone Coleman Constr., 50 N.E.3d at 508, citing Priebe & Sons, Inc. v. United States, 332 U.S. 407, 411 (1947). Moreover, the court explained, part of the reason for liquidated damages provisions is that they allow the parties to protect themselves against the uncertainty and difficulty, as well as the expense, resulting from judicial proceedings when trying to ascertain damages. This benefit is particularly valuable when actual damages are difficult to quantify, such as in Boone Coleman Construction, which presented the court with the issue considered in Samson Sales but in a context not previously addressed: public works construction contracts.

Under Ohio law, an analysis of liquidated damages provisions centers squarely on whether or not the stipulated sum is an unenforceable penalty or an enforceable liquidated damages provision. As explained by the court, Samson Sales established Ohio’s three-part test to determine whether a contractual provision constitutes a liquidated damages provision or an unenforceable penalty:

“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.”

Boone Coleman Constr., 50 N.E.3d at 509, citing Samson Sales, 465 N.E.2d at 392. Turning to the appellate court’s analysis of the rule established in Samson Sales, the Ohio Supreme Court found that the appellate court misapplied the second prong of the test. The appellate court concluded that the provision reflected the intention of the parties, but it erroneously focused on the aggregate amount of the penalty in relation to the value of the contract. Only after finding that the liquidated damages aggregate constituted a third of the contract price did the appellate court then determine that the application of the provision rendered it an unenforceable penalty.

The Ohio Supreme Court articulated a few reasons why such analysis was improper. First, the court found that the appellate court’s reliance on what it deemed to be an analogous case, Harmon v. Haehn, No. 10 MA 177, 2011 WL 6296731 (Ohio Ct. App. Dec. 9, 2011), was misplaced because that case involved a private commercial real estate lease, the damages were easier to quantify, and the provision contemplated the lump sum—not a per diem—which has been consistently upheld by other courts in public construction contracts. Furthermore, the court focused on the appellate court’s conclusion, which relied on viewing the contract as a whole “in its application.” The court was quick to point out, however, that the phrase “in its application” is not part of the test put forth in Samson Sales. As such, the court found that the appellate court’s viewpoint deviated from prior precedent, resulting in a distorted analysis. Accordingly, the court reaffirmed the standard under Ohio law, which requires courts to consider liquidated damages provisions in light of what the parties knew at the time of contract and not to look with hindsight to the aggregate application of a per diem in order to determine unconscionability. The court reminded state appellate courts that their role is not to determine what the parties should have contracted for based on a court’s understanding of the damages after the breach. Consequently, the judgment of the appellate court was vacated, and the case was remanded to reconsider the enforceability of the provision pursuant to the court’s ruling.

This ruling is significant because it strongly suggests that Ohio law favors liquidated damages provisions that include per diem rather than lump sum damages for failure to timely complete a project. Moreover, significance also lies in the absence of any consideration of the reasonableness of the chosen per diem at the time of the contract. The court did not show any concern, using a prospective analysis, for any method or basis used by Piketon to arrive at a $700 per diem.


Matthew A. Moeller

Matthew A. Moeller is the principal of the Moeller Firm LLC in New Orleans, Louisiana. His practice focuses on commercial, construction and maritime litigation.