Summary: The EJCDC case summary of February 2015 reviewed the Ohio Court of Appeals decision in this case, noting that the case had been appealed to the Ohio Supreme Court. The 2016 decision of the Ohio Supreme Court reverses the Court of Appeals decision.
The case arises from a modest public works project for construction of a traffic signal and related intersection improvements, at a stipulated price of $683,300. Based on excerpts in the appellate decisions, the construction contract appears to include EJCDC® C-520 or similar. The village inserted “$700/day” in the liquidated damages clause governing unexcused contractor delays in completion.
Partly as the result of subcontractor problems, and perhaps because of site difficulties, the contractor was 397 days late in completing the work. The contractor made weak attempts at seeking additional time and compensation, but never complied with the contract’s formal notice provisions. At the $700/day rate, the total damages for late completion were liquidated at $277,900.
The contractor filed a lawsuit against the village seeking to enforce the contractor’s claims for additional time and compensation. The village countered with a demand for enforcement of the liquidated damages clause. The trial court ruled in favor of the village on both issues, and the contractor appealed. The Court of Appeals held that the contractor’s claims should be rejected, primarily on procedural grounds.
The contractor had not followed the contract’s procedural requirements for claims, and did not properly appeal a differing site condition ruling.
Somewhat surprisingly, however, the Court of Appeals ruled in favor of the contractor with respect to liquidated damages. The court held that liquidated damages of more than a third of the total contract price was an unenforceable penalty. The court noted that there was no evidence presented regarding the legitimacy of the $700/day amount. There were no supporting calculations, and no relevant background facts such as a record of accidents at the intersection. The court mentioned that the intersection had never previously had a traffic light, so the lengthy delay merely sustained the status quo.
The liquidated damages issue was appealed to the Ohio Supreme Court.
Decision: The Supreme Court of Ohio reversed the Court of Appeals, and issued a strong decision in favor of the enforceability of liquidated damages provisions on public works projects. Among the court’s conclusions favoring liquidated damages (LDs):
- By agreeing to LDs, the parties avoid controversy over the amount of damages
- An LD clause is an advance settlement of damages from a future breach in meeting the completion deadlines
- The law should not look with disfavor on LD provisions (citing a 1948 S. Supreme Court decision)
- LD clauses promote prompt performance of contracts
- If the LD amount is a “genuine covenanted pre-estimate of damages” that is not a punishment for default, it is enforceable
- It is uniquely difficult in public works construction to calculate damages to the public interest, making it advisable to agree to damages in advance
- Delays in public projects result in inconvenience, increased costs, and loss of use to the public
- LD clauses that establish a rate (daily, weekly) are especially favored, compared with lump-sum LD clauses
- The Court of Appeals wrongly focused on the total amount of LDs—the focus should have been on the reasonableness of the per diem amount
- The LD rate must be reasonable, but does not need to bear an exact relation to actual damages
- The analysis of an LD clause must be prospective (looking forward from the point when the contract was formed, based on facts known at that time) rather than retrospective (focusing on aggregated damages after the fact)
Comment: The Ohio Supreme Court made some pointed comments in its decision. It labeled the Court of Appeals fixation on the aggregate damages as “myopic.” It concluded that looking at the aggregate amount would lead to a “perverse rule of law” that would result in short delays being assessed liquidated damages, but not more egregious lengthy delays. The intermediate court was also chided for not enforcing the plain terms of the contract, but rather undertaking “to be wiser than the parties.”
As noted in 2015, the Piketon dispute does raise a worthy point in asking what basis the owner had for the $700 rate. The Ohio Supreme Court decision supports the decision by pointing out many published public works cases in which the daily rate was similar. Nonetheless, EJCDC strongly encourages owners (and their engineering consultants) to establish a daily damages rate using reasonable criteria, and to carefully document the reasoning. Such documentation in the Piketon case might have carried the day at the Court of Appeals level, despite the large total.
It is important to note that there was no criticism in the case of the EJCDC liquidated damages clause’s wording or structure.
As a footnote, the case includes a citation to an 1822 U.S. Supreme Court case on liquidated damages for delay. The decision was written by the one of our country’s most preeminent jurists, Chief Justice John Marshall. It is interesting to learn that the contract drafters of the early 19th century were already using liquidated damages provisions.