Determining whether liquidated damages are enforceable or not.

Liquidated damages arise from a contract provision that defines the amount of damages that will be paid if the contract is breached in the future.  During contract negotiations, the parties agree to estimated damages and specify that in the contract.  The purpose is to avoid a dispute later over how to calculate the actual damages.  Liquidated damages provisions are generally enforceable.

Penalties, however, are contract terms that seek to punish a party for breaching the contract.  Penalties are generally unenforceable.

Therefore, for Ohio construction projects, one aspect of evaluating whether liquidated damages are enforceable or not is determining whether they are really liquidated damages (making it enforceable) or are instead a penalty (making it unenforceable).  In application, it can be difficult to determine which category alleged damages fall into.  The Supreme Court of Ohio provided guidance for making the determination in Boone Coleman Construction, Inc. v. The Village of Piketon, 145 Ohio St.3d 450 (2016).

In Boone Coleman, the construction contract’s delay terms included that if the contractor missed the substantial completion deadline, it would pay the owner $700 per day for each day late.  After the contractor completed the project 397 days late, the owner sought $277,900 in delay damages.  The owner contended the $277,900 was enforceable as liquidated delay damages.  The contractor objected that it was an unenforceable penalty considering the project’s total contract amount was only $683,300.

The Supreme Court of Ohio instructed that comparing the total damages amount against the total contract amount was not a proper analysis.  Rather, the correct analysis was to evaluate whether the per diem amount ($700 per day) was conscionable based on what the parties would have known at the time they entered into the contract.  Essentially, to be enforceable the evaluation needed to determine whether $700 was a reasonable forward-looking estimate of daily delay damages, because if so, the total damages amount was merely a function of how many days late the contractor had completed the project.

The Supreme Court of Ohio found that for a public construction project, $700 per day was reasonable.  Based on that finding and the conclusion that the other elements of the liquidated damages test had been satisfied, the $277,900 was found to be enforceable liquidated damages and not an unenforceable penalty.

Schwandner Law Firm LLC is a construction law firm in Cincinnati, Ohio.  If you would like the help of a construction attorney for liquidated damages and contract penalty issues, the firm can be reached at 513-429-4099 or ns@schwanlawfirm.com.