Per Day Damages Charges in Public Construction Projects Are Enforceable
When assessing the fairness of fining a public works contractor for failing to finish the project on time, Ohio courts should consider the per-day fine amount agreed upon at the start of the project, rather than the total amount assessed when the project is completed, the Ohio Supreme Court ruled today.
The Supreme Court reviewed a $277,900 damages judgment against a construction firm hired by the village of Piketon. Boone Coleman Construction Co. was paid $683,000 for a street construction job but finished 397 days late. The parties had agreed to a $700 “per diem liquidated damages” charge for each day the project was not finished on time. In the Court’s lead opinion, Chief Justice Maureen O’Connor wrote the decision in Piketon v. Boone Coleman Constr. Inc. is the first where the high court expressly rules that liquidated damages provisions apply to public works contracts.
Chief Justice O’Connor noted that the General Assembly requires every state-funded public improvement construction contract include a liquidated damages provision, and local governments such as Piketon pattern their public works contracts using guidelines from the Ohio Department of Transportation. She explained the Court has a test for determining if a liquidated damages clause is fair and has been following it since 1984. Prior cases before the high court have only considered liquidated damages in contract disputes between private parties.
Street Construction Hits Snag
In 2007 Piketon solicited bids to install a traffic light at U.S. Route 23 and Market Street and to make improvements to the roadway. The contract with winning bidder Boone Coleman expressed “time was of the essence” to get the project substantially completed within 120 days, and the contract contained a liquidated damages provision that Boone Coleman agreed to pay Piketon $700 per day for each day after the deadline that the project was not finished.
The project was to be completed in November, but Boone Coleman requested and received an extension from Piketon to have it finished by May 30, 2008. Boone Coleman sought a second extension, which Piketon refused and notified the company that it would be assessing the $700 per day cost for each day after May 31. Boone Coleman did not complete the work until July 2009, 397 days after the extended deadline of May 30, 2008.
Boone Coleman Disputes Damages Assessment
Boone Coleman filed a lawsuit in Pike County Common Pleas Court claiming that Piketon owed an additional $147,477 in construction costs arguing it should be entitled to more money and not be assessed the damages because the village provided inaccurate site information. Piketon asked the judge to invoke the damages clause and assess Boone Coleman $277,900. The trial court sided with Piketon finding that Boone Coleman failed to follow the contract’s procedure for seeking additional payment. The company appealed to the Fourth District Court of Appeals, which agreed that Boone Coleman was not entitled to additional payment and that the $227,900 in damages was unfair. It reversed the trial court damage payment to Piketon and the village appealed to the Supreme Court.
Three Part Test Developed to Consider Liquidated Damages
Chief Justice O’Connor’s decision vacates the Fourth District’s decision. In her opinion, she explained that Ohio courts have considered liquidated damages provisions as valid and enforceable citing cases as far back as 1853 upholding such contractual agreements. She noted the difficulty with the provisions is determining in each case whether the amount should be considered an unfair penalty that a court should not enforce or whether they are a reasonable way to compensate for damages that are hard to calculate.
“In a public-roadway-construction contract, each delay in completing the project adds to inconvenience, increased costs, and loss of use of the roadway,” she wrote. “We recognize the liquidated damages provisions in public-construction projects play an important civic purpose in that they help foster timely completion of the project, thereby avoiding the loss of billions of taxpayers’ dollars caused by contractors’ delays.”
The Court developed a three-part test in its 1984 Samson Sales, Inc. v. Honeywell Inc. decision for weighing the fairness of a liquated damages clause and Chief Justice O’Connor said the Piketon case is the first for the Court to apply it to a public works project. The test to find a liquidated damages clause is enforceable if: (1) the actual damages are hard to prove, (2) the contract as a whole must not be so “unconscionable, unreasonable and disproportionate” as to conclude it does not reflect the true agreement of the parties; and (3) the contact should reflect the parties intended that damages should be paid if one of them breached the contract.
Court Find Appeals Court Misapplied the Test
Chief Justice O’Connor wrote the Fourth District misapplied the test. She said it correctly interpreted the first part finding that it is always difficult to prove the actual damages the public suffers from a road construction delay, and the appellate court correctly applied the third part because the village and the construction company were represented by attorneys who made it clear both sides agreed to the $700 per day fine.
She explained the Fourth District misapplied the second part of the test when it viewed the contract as a whole “in its application,” which the Court found to be a “distorted analysis of our precedent.” She wrote the appellate court focused solely on the total amount of the fine, $227,900, and its relation to the total value of the contract, $683,300. The Fourth District concluded it was unrealistic and inequitable to make Boone Coleman pay it.
By relying on “in its application” the Fourth District was weighing its reasonableness based on the total amount and not the per day amount that was in the contract. Chief Justice O’Connor wrote a court must look at whether the per-day amount is fair rather than looking at the total. She explained the “front end” analysis is appropriate, and questioned if the Fourth District would have found the $700 per day damages were enforceable if Boone Coleman had only been two days, two weeks or two months behind.
“We remind our appellate courts that engaging in prospective analysis, the appellate court’s role is not to determine what the parties should have contracted for based on the court’s understanding of the damages after the breach,” she wrote. Chief Justice O’Connor also reminded parties in contracts with liquidated damages provisions to heed Benjamin Franklin’s advice and remember that “time is money.”
The Court remanded the case to the appellate court for further proceedings consistent with its ruling.
Justice William M. O’Neill concurred with the Chief Justice’s opinion.
Justices Terrence O’Donnell and Sharon L. Kennedy concurred separately.
Justices Judith Ann Lanzinger and Judith L. French and concurred in the judgment only.
Dissenting Opinion Questions Village’s Role in Delay
In a dissenting opinion, Justice Paul E. Pfeifer wrote the Fourth District reached a proper conclusion that did not award Boone Coleman additional funds, but also did not unfairly punish them.
“Boone Coleman already suffered a loss for performing additional work for which it was not paid. On top of that, this court now determines that Boone Coleman must pay a penalty because it didn’t complete the contract on time, never mind that Boone Coleman claims that part of the problem was that Piketon provided inaccurate site information. This is akin to frontier justice: we do it because we can, not because it makes sense,” he wrote.
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