What’s On Their Minds: 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.

“Is this a big problem in the construction area? I don’t see a whole host of amici here coming to your side of the table. I’d say the construction industry, especially those that do business with the state—I’d expect them to be here and I don’t see that. No hue and cry that yeah we are all caught in this vice of liquidated damages—I just don’t see that.” Chief Justice O’Connor to counsel for Boone Coleman.

“Aren’t you asking us to re-write what you agreed to?” Justice Lanzinger to counsel for Boone Coleman.

On June 9, 2015, the Supreme Court of Ohio heard oral argument in the case of Boone Coleman Construction Co., Inc. v. 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, and whether that determination should be made prospectively or after the fact, looking at the totality of the circumstances.

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, and Market Street. The contract contained a $700 per diem liquidated damages clause 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.

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 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. One extension was agreed to by the parties. In April of 2008, Boone Coleman requested a second extension, but did not follow the proper procedure under the contract to get one. The project was completed on July 2, 2009, 397 days late.

Boone Coleman filed a complaint to recover the $147,477 due under the contract, plus $106,900 in additional compensation for extra work performed. 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, in its application, (meaning it looked at the situation retroactively) finding that the liquidated damages equaled nearly a third of the contract price. 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.

Read the oral argument preview of the case here.

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)

At Oral Argument

Arguing Counsel

Eric B. Travers, Kegler Brown Hill & Ritter LPA, Columbus, for Appellant Village of Piketon

Jack R. Rosati, Jr., Bricker and Eckler LLP, Columbus, for Amici, The County Commissioners Ass’n of Ohio, The Ohio Municipal League, The Ohio School Boards Ass’n and the Ohio Township Ass’n., in support of Appellant.

John A. Gamble, Portsmouth, for Appellee Boone Coleman Construction Co.

Piketon’s Argument

There are no facts in dispute in this case, and the only legal argument of any moment is whether the per diem liquidated damages provision in this public contract is valid and enforceable.  It is. The analysis of the enforceability of the liquidated damages provision must be done at the time of contracting, not retroactively, after the fact. Parties should be entitled to the benefit of their bargains without any second guessing by the courts.

The trial court was correct in finding that the liquidated damages provision in the contract was valid and enforceable under the three part test of Samson Sales; the court of appeals was wrong in viewing the contract in its application-after the fact, so to speak. In this case the parties bargained for a traffic light to be installed by a certain time, and it wasn’t. The lower courts found Boone Coleman responsible for this delay, and it did not file a cross appeal on that issue.

Liquidated damages provisions exist in public contracts precisely because damages in this type of situation are difficult to prove or to quantify. This is a good example—how can inconvenience to the public be quantified? The $700 per diem figure was consistent with what was used by the Ohio Department of Transportation at that time.  When this contract was put out for bid, there is no evidence that Boone Coleman tried to negotiate the per diem or put a cap on the liquidated damages. A liquidated damages clause will only apply against a party that is breaching—the clause does not apply to excusable delay or proper time extensions. The amount of liquidated  damages awarded in this case was proper and should be upheld.

Argument of Amici in Support of Piketon

It is very difficult to quantify the harm to the public when a public project is not finished on time, which is why liquidated damages provisions exist.  The contractor had choices here. If the contractor sees it is not going to finish for an extended period of time past the contract deadline, it could look at the damages for voluntarily terminating its performance and compare those damages with what would be owed under the liquidated damages provision. The contractor can do the math and decide what is in its own best interest.

Boone Coleman’s Argument

The fundamental principle of contract damages is reasonable compensation for actual loss.  There was no actual loss to Piketon in this matter in the entire 397 day delay. The contract in this case was for more than just the installation of a traffic light. About 82% of this contract was for the excavation of the hillside and building of a retaining wall.  The traffic signal portion was only about 18% of the total contract price.  By the time of the deadline, everything was done but the light, and the travelling public was using the roadways as it always had.

In this case the court of appeals correctly looked at principles of equity, determined that the non-breaching party should only be compensated for actual loss, and found that the liquidated damages here were unconscionable.

If the court requires a purely prospective analysis of the liquidated damages provision, and does not allow for the dust to settle and see what sort of damages actually flow from the breach, a court’s discretion to invalidate a liquidated damages provision that would otherwise be a penalty against a breaching party is eliminated. A court must be allowed to consider actual loss. Here, Boone Coleman was assessed damages of more than double the cost of the part of the contract that was delayed. That is inequitable and wrong. Piketon has gotten a windfall here.

The Samson Sales test can be modified to allow for a permissible retroactive analysis of contract damages. Part two of that test says to look at the contract as a whole. Courts must have the discretion to look at the totality of the circumstances including fault for the breach. The current system requires that the court do a prospective analysis. Boone Coleman is advocating that the court not be handcuffed from exercising its discretion. Construction contractors are at the behest of the owners when it comes to liquidated damages.

The court can and should impose a rule that would allow for a permissible look at a retroactive analysis of the contract damages that actually flowed from the breach.

What Was On Their Minds

Liquidated Damages

Are liquidated damages appeal proof, asked Justice Lanzinger? Isn’t part of the idea of liquidated damages to make sure that the contracts are not extended and that they are done on time? If the court changes the law in this area, wouldn’t the court be weakening the idea of this carrot that is there for construction to be done on time when the public is involved?

Aren’t liquidated damages by definition set before the contract starts, asked Justice O’Neill? Is the court to say, yes there are liquidated damages in Ohio as long a party has demonstrated actual damages?

Isn’t the whole point of liquidated damages to agree on a number because the parties can’t or don’t want to have to figure out the actual damages, asked Chief Justice O’Connor?

The $700 Per Diem

Was this amount negotiated or forced on the parties, asked Chief Justice O’Connor?  Was there an ability to negotiate that with a cap at any time? Wasn’t that a reasonable amount? Later, she asked Boone Coleman’s lawyer if it was his position that the clock should never have started to run on the per diem damages because there was no actual damage to Piketon.  When he answered yes, she asked where it said that in the contract.

Is this an industry standard, asked Justice O’Donnell? Are liquidated damages clauses statutorily mandated in these contracts? (answer: yes). How does that $700 per diem number come about? Was it negotiated or part of the bid?

Liquidated damages are supposed to be a substitute for the fact that there were actual damages for that day, noted Justice Lanzinger. What does that ODOT number of $700 per day specifically represent?

Didn’t the court of appeals take issue with the fact that there was really no demonstrated loss that was commensurate with the $277,000 penalty, asked Justice O’Neill? What would have happened if, before it was awarded the contract, Boone Coleman had said a $700 per diem is too much? Would the state sit down and talk or just move on to the next bidder? Later, he commented to Boone Coleman’s lawyer that it had gotten a free pass from the appeals court, hadn’t it?

Proportionality and Unconsionability

Hypothetically, if the delay had gone on another two years, Boone Coleman could owe money to Piketon to finish the job, commented Justice O’Donnell.  Would there reach a point where this would become unconscionable?

Should the $700 per diem be unconscionable as embedded in the contract to begin with, asked Chief Justice O’Connor? As the court of appeals said, that may look ok on its face, but multiplied times the 397 days past due and, that’s a lot  of money—the appeals court did a comparison of the total amount of the contract to the amount of liquidated damages, and found it disproportional—was that the wrong standard for analysis? Must there be a nexus between the per diem and an actual dollar amount that could be demonstrated? Later, she commented that there is nothing in the concept of liquidated damages that includes a proportionality requirement.

Is there any case law from any jurisdiction that says a court should be able to true up the actual damages to the liquidated damages that were contemplated, asked Justice Lanzinger?

Prospective Look or Retrospective Look?

Should the court not ever look at the application of the liquidated damages to the situation, after the dust has settled, asked Justice Lanzinger?

Was the court of appeals wrong in its retroactive look at the contract and the amount of the liquidated damages as compared with the contract requirement, asked Justice O’Donnell? Is that contrary to what is contemplated in Samson Sales?

Other Options

Couldn’t the contractor simply have said it couldn’t perform the traffic light portion of the contract, and walked away, asked Chief Justice O’Connor?  Wouldn’t that have stopped the liquidated damages from accruing?

Equity

Justice Pfeifer commented that it seemed to him that the only wiggle room Boone Coleman had here was to say that under certain circumstances a court must put on its equity hat and say, this is too much–the way things have actually unfolded here is both inequitable and punitive.

Chief Justice O’Connor told counsel for Boone Coleman that she heard him saying, “let’s go beyond the contract and let’s just put on our equity hats, and without any other information before us let’s just see if we can pull out a number. “(he denied that this what he was saying.) Later, she said to him, “ you are saying afterward, we agreed to this and we don’t like the consequences so now we are asking the court to help us get out of this.”

Public Policy

Was there an inconvenience to the public here, asked Justice Lanzinger?

What was the actual damage to the public, asked Justice O’Neill?

Samson Sales Case

Was Boone Coleman saying the case law needs to be changed to put in another element, requiring a showing of actual damages in order to trigger the per diem and that there has to be some sort of rational relationship between the accumulated per diem to those damages, asked Chief Justice O’Connor, who then commented that that “kind of defies the reason for having liquidated damages.”  (answer: a court must be capable of considering actual loss.  A court can’t be handcuffed from saying no actual loss was suffered by the nonbreaching party.)

Does the court need to modify Samson Sales to include a look back at the total amount of the liquidated damages compared with the contract price, asked Justice O’Donnell? What percentage would be too much? How is that judgment to be made?

How it Looks from the Bleachers

To Professor Bettman

Both my student contributors and I agree this looks like a win for the Village of Piketon. The Chief was pretty hard on Boone Coleman’s lawyer, peppering him with skeptical comments more than questions. This comment from the Chief, near the end of Boone Coleman’s argument, pretty much sums things up:

“I see a much bigger application here which pretty much upends a pretty stable area of contracts with public funded projects which is the stick, the penalty, if the construction company does not get the work done for the benefit of the public. Using public dollars, you are going to be penalized, and I don’t know that it would be a wise foray for this court to upend that.” Indeed.  The whole point of liquidated damages is to avoid having to prove damages in a difficult context, such as inconvenience to the public.

This is a stable and well settled area of the law, and Boone Coleman didn’t provide much of a convincing reason to change it. While the damages it was assessed were indeed large, most of the problem seemed to be of Boone Coleman’s own making. While I don’t know this, I suspect that it is difficult to negotiate certain terms in public contracts, like the amount of a per diem, or a cap, especially when other contractors abound. But Boone Coleman failed to follow the procedures set forth in the contract for an additional extension of time, and for additional compensation.  Nor did it file a cross appeal in this case. It sounds like some poor lawyering contributed to much of Boone Coleman’s troubles here.

The other thing I found quite fascinating was the Chief’s comments about the lack of amici on Boone Coleman’s side. Lawyers often have asked me if amici make any difference—when I was on the court of appeals, they very much did to me, often in providing additional explanation of points with which I was unfamiliar.  And while I didn’t think amicus counsel in support of Piketon added much to the oral argument, he had a lot of heft in the organizations he represented.

To Student Contributor Rebecca Campbell

Fundamentals of liquidated damages are the key to this case, and the Chief Justice may have best summed up Boone Coleman’s argument for allowing courts to have the discretion to invalidate a liquidated damages clause through a retrospective analysis looking at the post-breach totality of damages:

“[It] flies in the face of the concept of liquidated damages. Because liquidated damages are there with the mutual agreement that we don’t want to, or we can’t, or it’s very difficult to figure out what the per diems are going to be, so let’s just pick a number and that formula is related to the entirety of the project. That is what the concept of liquidated damages are all about.”

The Village of Piketon is going to win, and I think it is likely it will do so with a unanimous ruling by the court. Justice O’Neill feinted away from his position by championing questioning with strong use of the word “penalty” in relation to damages in this case, but Piketon and the Amici did a good job of returning the court’s focus to the fact the analysis has always been evaluated from the time of contract formation, not after the breach occurs. Piketon’s attorney fielded a slew of theoretical questions, from the nature any actual damages suffered and why liquidated damages should be enforced if Piketon was not inconvenienced as a result of the breach, to whether or not the contract was built upon industry standards. The court was reminded liquidated damages are included in contracts for public works because they are required by statute, and that the amount fixed in the liquidated damages clause at issue in the case was lower than the industry standard set by ODOT at the time.

Boone Coleman appeared once again to be trying to sneak the factual issue of who was at fault and for how much it was liable, an issue it failed to cross-appeal from the lower court, in through its reasonable compensation for actual loss argument. The Chief Justice, as well as Justices Pfeifer, O’Donnell, O’Neill, and Lanzinger looked as if they were cats toying with a mouse as they methodically deconstructed this argument. The court’s concern with adopting Boone Coleman’s position is the potential to upend a relatively stable area of contracts that regularly affects public concerns.

While the final amount of damages in question may be unfairly large in this case, ultimately making it look more like a penalty than damages, the court is going to rule for the Village of Piketon to maintain the current state of the law in this area.

To Student Contributor Connie Kremer

The pivotal issue of this case lies within the core purpose of liquidated damages. It was without dispute that this purpose is to quantify damages that are otherwise difficult to quantify—and to do so at the time of contract—so that parties and courts do not waste time splitting hairs subsequent to a breach.

Boone Coleman made for a less than sympathetic party; rather, as the Chief Justice noted, it agreed to the terms of a contract, and merely didn’t like the consequences when it breached that contract. It further appeared to be without dispute that the breach, and the length of the breach, was attributable solely to Boone Coleman. Though counsel for Boone Coleman claimed that the Village could have terminated its contract with Boone Coleman, this proposition was effectively countered by counsel for the Village, who asserted that such a termination would have come at a great cost to the Village and the project.

Not only did Boone Coleman start from behind with the undisputed facts of the case, but—more significantly—it also fought against the core purpose of liquidated damages. In response to Chief Justice O’Connor, counsel for Boone Coleman admitted that the “fundamental background of liquidated damages [is] that the damages are difficult quantify at the time of a contract.” As such, both parties preemptively agree to a clean estimate of damages flowing from a breach. Despite this admission, counsel asked the court to require a demonstration of actual damages in order for the Village to enforce the liquidated damages clause. There appeared to be consensus, led by Chief Justice O’Connor, that such a requirement would substantively alter precedent for an area of law that is otherwise “stable.”

Though counsel for Boone Coleman asserted that the freedom to contract is not without limitation, vaguely declaring this as a form contract in which Boone Coleman had little to no negotiation power, this argument did not appear to gain traction. Despite counsel’s claim that—taken as a whole—the liquidated damages were unconscionable, Boone Coleman failed to assert that the $700 per diem was inherently unconscionable (rather, it was below the standard for a contract of this size); nor did Boone Coleman assert that, as a construction company, it was unfamiliar with the standard procedure of public contracts which requires a clause for liquidated damages.

The Justices consistently returned to the issue of the purpose of liquidated damages. Given this purpose, it seems unlikely that (to borrow the language of the Chief Justice) the Justices will “upend” a settled area of the law, as doing so would effectively eliminate the purpose and enforceability of liquidated damages clauses.

 

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