Oral Argument Preview: Liquidated Damages or Penalty in Public Construction Contract? Boone Coleman Construction Co., Inc. v. Village of Piketon, Ohio.

Update: On February 24, 2016, the Supreme Court of Ohio handed down a merit decision in this case.  Read the analysis here.

Read the analysis of the oral argument here.

On June 9, 2015, the Supreme Court of Ohio will hear oral argument in the case of Boone Coleman Construction Co., Inc. v. The Village of Piketon, Ohio, 2014-0978. The issue is whether a liquidated damages provision in a public construction contract is valid, or an unenforceable penalty.

Case Background

In 2007, Appellant Village of Piketon put out a competitive bid for the installation of a traffic signal and related roadway improvements at the intersection of U.S. Route 23, Market Street at the edge of the village. The impetus behind the project was to make a busy intersection safer. The project was awarded to the lowest bidder, Appellee Boone Coleman Construction Company, which bid at $683,300.

In the bid and the subsequent contract, Boone Coleman agreed to complete the project in 120 days. The contract contained a liquidated damages clause with a $700 per diem to compensate Piketon for damages caused by unexcused delays in the project. The per diem was set based on a schedule established by the Ohio Department of Transportation (ODOT), and was $60 less than the recommended per diem for road construction contracts falling between $500,000 and $2 million.

Under the contract, work was to begin on July 30, 2007, making the required completion date November 27, 2007. Subsequently, the parties agreed to extend the completion date to May 30, 2008. The project was beset with delays from the beginning, including problems for Boone Coleman with subcontractors and problems for Piketon in obtaining easements from adjoining property owners and issues contracting with Norfolk Southern Railway Company (N&S) to synchronize the new traffic signal with a railway crossing near the intersection. Boone Coleman requested a second extension to the project in April 2008, but did not follow the proper procedure under the contract to get one. The project was completed on July 2, 2009, 397 days after the adjusted May 30, 2008 completion date.

Boone Coleman filed a complaint to recover the $147,477 due under the contract, $20,120 for additional work performed to repair surface problems uncovered after the work began, and $86,780.26 for revisions to the retaining wall and traffic signal. In its answer, Piketon denied that any additional compensation was owed, and filed a counterclaim seeking $277,900 in liquidated damages for the delays in completing the project.  The trial court granted Piketon’s motion for summary judgment, and entered judgment in its favor in the net amount of $130,423 ($277,900 in liquidated damages less the $147,477 of the unpaid contract balance). The trial court found that the liquidated damages clause was valid and enforceable, that Boone Coleman was responsible for the delays in completion of the project, and that Boone Coleman did not provide the required written notice for extensions of time or additional compensation as required under the contract.

The Fourth District Court of Appeals affirmed the trial court’s granting of summary judgment in favor of Piketon on Boone Coleman’s claims for additional compensation, agreeing with the trial court that Boone Coleman failed to follow the notice provisions of the contract, and was responsible for the 397 day delay.

The court of appeals reversed on the counterclaim for liquidated damages, finding it to be an unenforceable  penalty under the second prong of the Samson Sales test. In doing so, the court of appeals looked at the contract as a whole, finding that the liquidated damages nearly equaled a third of the contract price. Relying on Harmon, the court found the total amount of liquidated damages to be “so manifestly unreasonable and disproportionate [to the consideration given to Boone Coleman] that [the contract] is plainly unrealistic and inequitable.”

Judge Ringland, of the Twelfth District Court of Appeals sitting by assignment on the case, dissented in part, finding genuine issues of material fact as to which party was responsible for the delay.

Key Precedent and Statute

R.C. 153.19 (requires a liquidated damages clause in contracts to construct public improvements funded with state money; the daily per diem for determining damages when contracted work is not completed by a mutually agreed upon deadline or extension is determined from a rate schedule established by the Ohio Department of Transportation).

Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27 (1984) (Syllabus Paragraph One) (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 the amount and difficult to prove, 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. (Jones v. Stevens, 112 Ohio St. 43, syllabus ¶ 2 (1925), followed.))

Lake Ridge Academy v. Carney, 66 Ohio St.3d 376 (1993) (When a stipulated damages provision is challenged, the court must examine it in light of what the parties knew at the time the contract was formed, and in light of an estimate of the actual damages caused by the breach. If the provision is reasonable at the time of formation and bears reasonable relation to actual damages, the provision will be enforced.)

Harmon v. Haehn, 2011-Ohio-6449 (7th Dist.) (If a stipulated damages provision is challenged, a court must view the provision in light of what parties knew at the time the contract was formed and in light of an estimate of the actual damages caused by the breach. A damages provision is unenforceable where the amount specified is manifestly disproportionate to the consideration paid or the damages that could foreseeably result from the breach.)

Security Fence Group, Inc. v. City of Cincinnati, 2003-Ohio-5363 (1st Dist.) (If a liquidated damages provision is otherwise valid, the party seeking such damages need not prove that actual damages resulted from a breach.)

Piketon’s Argument

Piketon’s primary argument challenges the court of appeals’ application of the second prong of Samson Sales. Piketon argues it was incorrect to analyze reasonableness by looking after the fact at the total amount of liquidated damages awarded, rather than analyzing reasonableness prospectively by looking at the parties’ intent at the time of contracting. In addition to Sampson Sales, Piketon cites Lake Ridge Academy for determining reasonableness at the time of contracting. The $700 per diem was based on a schedule promulgated by ODOT, and liquidated damages are required by R.C. 153.19. The $700 figure is based on the base consideration of the contract, and any unreasonableness in the total liquidated damages ($277,900) was caused by Boone Coleman’s delay in completing the project for more than year. Piketon argues the appeals court has impermissibly rewritten the Samson Sales test, and that when looking at the contract as whole at the time of contracting, the clause is valid and enforceable.

Piketon also argues that it was incorrect for the court of appeals to consider a lack of evidence of actual damages in reversing the trial court. Liquidated damages clauses serve the purpose of providing damages when they would otherwise be uncertain in amount and difficult to prove; Piketon argues the court of appeals decision would undermine every liquidated damage clause in construction contracts, because contractors could delay completion long enough to make total damages unreasonable and invalidate the clause. Piketon uses Security Fence to illustrate that lost use is the foreseeable harm protected by the liquidated damages clause. Even though the intersection was usable during construction, it was the lost use of a safer intersection that caused damages, and it was  Boone Coleman’s fault the delay was lengthy and the damages were ultimately so high.

Boone Coleman’s Argument

Boone Coleman argues the Fourth District’s finding of unreasonableness is correct, because upholding the damage award under the liquidated damages provision effectively gives Piketon a free traffic signal at Boone Coleman’s expense, plus additional compensation. The construction company argues that courts should be encouraged to look at all of the facts and circumstances surrounding drafting, negotiation of, and practical application of damages in the performance of the contract in determining reasonableness under the second prong of Samson Sales. If the court upholds the trial court’s decision, Piketon will receive a windfall. Boone Coleman rebuts Piketon’s argument that contractors will drag their feet to invalidate liquidation damage clauses, because contractors have other incentives to finish their projects on time. Finally, Boone Coleman attempts to argue that underlying factual disputes remain, despite the fact it did not file a cross appeal.

Piketon’s Proposed Proposition of Law No. 1

When evaluating the enforceability of a liquidated damages provision in a construction contract, the court must conduct its analysis prospectively, based on the per diem amount of the liquidated damages at the time the contract is executed, and not retrospectively, based on the total liquidated damages that ultimately accrue.

Piketon’s Proposed Proposition of Law No. 2

Liquidated damages are not a penalty simply because a project consists of new construction of an improvement that did not exist previously and no proof of actual damages is required to enforce liquidated damages pursuant to such a contract.

Boone-Coleman’s Proposed Counter Proposition of Law

When making a determination as to whether a stipulated damages provision in a contract is fair compensation for the aggrieved party or an unlawful penalty, a court must look at both the circumstances existing at the time the contract was entered into and look at the contract as a whole, including the application of the liquidated damages clause to the facts and circumstances of the contract’s performance.

Amicus Brief in Support of Piketon

An amicus brief in support of Piketon has been filed jointly by the County Commissioners’ Association of Ohio, the Ohio Municipal League, the Ohio School Boards Association, and the Ohio Township Association. The amici argue evaluation from the time the contract is formed is the proper method of analysis, and that liquidated damages clauses that are otherwise enforceable cannot become an unenforceable penalty after the fact. The court of appeals established dangerous precedent against enforcing liquidated damages, especially in the context of new public construction, and will incentivize contractors to delay construction to avoid such damages.

Amicus counsel will share time with Piketon at oral argument.

Student Contributor: Rebecca Campbell

 

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