Merit Decision: Court Upholds Liquidated Damages Provision in Public Works Construction Contract. Boone Coleman Constr., Inc. v. Piketon.

On February 24, 2016, the Supreme Court of Ohio handed down a merit decision in Boone Coleman Constr., Inc. v. Piketon, 2016-Ohio-628. In a fractured 6-1 opinion authored by Chief Justice O’Connor, the court upheld a contractual liquidated-damages provision in a public road construction contract. Only Justice O’Neill fully concurred in the court’s opinion. Justices O’Donnell, Lanzinger, Kennedy, and French concurred in judgment only.  Justice Pfeifer dissented. The case was argued June 9, 2015.

Case Background

In 2007, appellant the Village of Piketon solicited bids for the installation of a traffic signal and related roadway improvements at the intersection of U.S. Route 23, and Market Street. The project was awarded to the lowest bidder, Appellee Boone Coleman Construction Company. Piketon agreed to pay Boone Coleman $683,000 to complete the job. The job was set to begin July 30, 2007. The contract contained a “time is of the essence” provision, requiring substantial completion by November 27, 2007. The contract also contained a $700 per diem liquidated-damages provision. 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.

Piketon granted Boone Coleman one extension, which moved the completion date to May 30, 2008, but refused to grant a second extension. Piketon notified Boone Coleman it was going to assess the $700 per day liquidated damages provision if the work wasn’t completed by May 30, 2008.The project wasn’t completed until July 2, 2009.

Boone Coleman went to court and sued Piketon for the $147,477 due under the contract. Piketon counterclaimed for liquidated damges. The trial court granted Piketon’s motion for summary judgment, awarding the Village $277, 900 in liquidated damages.  The Fourth District 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. Read the oral argument preview here and the analysis of the argument here.

Key Statute and Precedent

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)

Sheffield-King Milling Co. v. Domestic Science Baking Co., 95 Ohio St. 180, 183, 115 N.E. 1014 (1917) (“Simply stated, liquidated damages are damages that the parties to a contract agree upon, or stipulate to, as the actual damages that will result from a future breach of the contract.”)

Wise v. United States, 249 U.S. 361 (1919) (The modern rule is “to look with candor, if not with favor” upon liquidated-damages provisions when those provisions were “deliberately entered into between parties who have equality of opportunity for understanding and insisting upon their rights…There is no sound reason why persons competent and free to contract may not agree upon this subject [of liquidated damages] as fully as upon any other, or why their agreement, when fairly and understandingly entered into with a view to just compensation for the anticipated loss, should not be enforced.”)

Jones v. Stevens, 112 Ohio St. 43, 146 N.E. 894, 3 Ohio L. Abs. 164 (1925) (Ohio law requires a court to examine a liquidated damages provision “in light of what the parties knew at the time the contract was formed.”)

Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27 (1984) (Syllabus)(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.) (Followed in Lake Ridge Academy v. Carney, , 66 Ohio St.3d 376, 380, 613 N.E.2d 183 (1993)).

Merit Decision

Executive Summary

At issue in the case is the liquidated damages provision—was it enforceable, or was it a penalty? The court found it an enforceable provision. The court also found the fairness of such provisions must be analyzed prospectively, not after-the-fact.

Definition of Liquidated Damages

Liquidated damages are “damages that the parties to a contract agree upon, or stipulate to, as the actual damages that will result from a future breach of contract.”

Historical View of Liquidated Damages

At common law, liquidated damages provisions were originally viewed with antipathy, but that is no longer true, so long as such provisions are fairly bargained for, and are not penalties.

Enforceable Liquidated Damages Provision or Penalty?

As the court acknowledges, therein lies the rub. How to tell which is which?  The court set forth a tripartite test to make this distinction in Samson Sales (see precedent section), and has not departed from its holding, although it had never applied this test to public works construction contracts.  It does so in this case.

Value of Liquidated Damages Provisions in Public Works Construction Contracts

It is uniquely difficult to calculate damages to the general public caused by delays in public works contracts. So liquidated damages provisions “create firm expectations and allow the parties to allocate damages caused by delays in completing construction.” And as a matter of public policy, R.C. 153.19 requires every state-funded public-improvement construction project to include a liquidated-damages provision.

Where the Appeals Court Went Wrong in Finding the Liquidated Damages Provision to be a Penalty

The high court found that the appeals court had properly applied the first and third parts of the Samson Sales test, but misapplied the second, which requires a court to consider whether “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.” The appeals court had focused on the total amount of the penalty–$277,900-in relation to the total value of the contract–$683,300—nearly one third of the contract price. Only then did the appeals court find the application of the provision rendered it an unenforceable penalty.  This was error for a number of reasons. And here the court really took the Fourth District to the woodshed.

  • The appeals court incorrectly relied on appellate precedent involving a lump sum liquidated damages provision in a private commercial real estate lease.  A lump sum is more suggestive of a penalty, while a per diem measure of damages is more of an indicia of liquidated damages. Plus public and private projects are different.
  • The appeals court incorrectly focused on the reasonableness of the total amount of the liquidated damages rather than on the reasonableness of the per diem amount. The per diem amount is completely in line with ODOT requirements.
  • The appeals court evaluated the per diem provision retrospectively instead of prospectively. To determine if such a provision is a penalty or not, it must be evaluated at the time the contract was executed, not after the fact.
  • In determining that the award was an unenforceable penalty because the amount was so high, the appeals court failed to consider that the reason it was so high was because Boone Coleman failed to complete the job for more than a year past the agreed-upon completion date.

Re-Enforcing A Fundamental Principle

The court isn’t going to re-write a valid contract provision. “This court has made it clear for over 150 years that judges have no more power to disregard a valid liquidated damages provision than they do to disregard any other contractual provision,” O’Connor wrote. The court will enforce what the parties bargained for, not what they should have bargained for, or wished they had.

Justice Kennedy’s Two Cents

In concurring in judgment only, Justice Kennedy wrote this:

“I agree with the majority opinion. However, I would exclude the first paragraph of the majority’s conclusion.” And Justice O’Donnell agreed with this. So here is the first paragraph of the majority conclusion, verbatim:

CONCLUSION

{¶ 40} Benjamin Franklin advised us to remember that “time is money.” United States v. One 1971 Corvette Stingray, E.D.Pa. No. 89-5398, 1990 WL 4374, *1 (Jan. 18, 1990), citing Benjamin Franklin, Advice to a Young Tradesman (1748). Boone Coleman would have done well to follow that advice.

For the life of me, I don’t see what is objectionable to Justices French and O’Donnell about this, but I guess I am missing something. The other justices who concurred in judgment only in the case—Justices Lanziger and French—did not join in Justice Kennedy’s two cents.

Justice Pfeifer’s Solo Dissent

Justice Pfeifer would have dismissed this case as improvidently accepted. In the alternative, he’d uphold the appeals court decision, because he agrees the liquidated damages clause is both unreasonable and disproportionate, and because part of the delay was caused by inaccurate site information provided by Piketon to Boone Construction.

Case Syllabus

None

Concluding Observations

There was little doubt after argument the court was going to find for Piketon, and I and both student contributors called it that way. The Chief in particular was very hostile to Boone Construction during argument, considering the entire problem one of its own making. She also commented on the lack of amici from the industry supporting Boone Construction.  And Justice Lanzinger, as she so often does, hit the nail on the head when she asked counsel for Boone Construction, “Aren’t you asking us to re-write what you agreed to?”

I noted after argument that this is a stable and well-settled area of the law that the court did not seem inclined to upend. Furthermore, the $700 per diem amount was not invented out of whole cloth—it was actually below what was suggested in ODOT regulations for a contract of that size. What I don’t know is if there is any room for bargaining on such per diem amounts.

What was curious about the decision is that only Justice O’Neill fully concurred in it. I couldn’t really tell why.

 

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