Ohio Court of Appeals Holds Liquidated Damages Unenforceable Where Amount of Liquidated Damages Is Disproportionate to Contract Price

Boone Coleman Construction, Inc. v. Village of Piketon, 2014-Ohio-2377, 2014 Ohio App. LEXIS 2317 (Ohio Ct. App. May 22, 2014)

The Court of Appeals of Ohio held that a liquidated damages provision in a public construction contract constituted an unenforceable penalty because the amount of liquidated damages sought – nearly one-third of the total contract price – was “so manifestly unreasonable and disproportionate” to the contract price that it was unenforceable.

The defendant in that case was the Village of Piketon, Ohio, which solicited bids for a public construction project for roadway improvements. Plaintiff, Boone Coleman Construction, Inc., was the low bidder on the project. The parties entered into a contract under which Boone Coleman agreed to construct the project for $683,300. The contract further provided that if Boone Coleman had not substantially completed its work within 120 days, it would pay the Village $700 per day in liquidated damages until the project was substantially completed. Ultimately, Boone Coleman did not complete its work until 397 days after the agreed project completion date. Upon completion, the Village paid Boone Coleman $535,823 for its work.

Boone Coleman filed suit seeking the balance of the $683,300 contract price and additional compensation for extra work. The Village denied liability to Boone Coleman, counterclaimed for $277,900 in liquidated damages, and moved for summary judgment in its favor. The trial court granted the motion for summary judgment, determining that the Village was not liable to Boone Coleman, and that Boone Coleman was liable to the Village for liquidated damages.

On appeal, the Court of Appeals of Ohio reversed the portion of the trial court’s judgment that enforced the contractual liquidated damages provision. The Court of Appeals held that in relation to a contract for $683,300 in work, liquidated damages in the amount of $277,900 “is so unreasonably high and so disproportionate to the consideration paid that the clause amounts to a penalty.”

Under Ohio law, liquidated damages are enforceable where: (1) the amount of actual damages would be uncertain or difficult to prove; (2) in the context of the contract as a whole, the amount of liquidated damages is not “manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties”; and (3) the parties intended for the amount set as liquidated damages to apply in the case of breach. The Court relied upon the second factor to invalidate the liquidated damages before it. In particular, the court held that the liquidated damages provision could not be enforced because it would produce an award equal to nearly one-third of the total contract price.

In reaching its holding, the Court of Appeals noted that it based its decision, at least in part, on the failure of the Village to present any evidence supporting the conclusion that $277,900 in liquidated damages bore a reasonable relationship to the actual damages suffered. Absent such evidence, the amount of damages could only be deemed a penalty.

To view the full text of this decision, courtesy of Lexis ®, click here.

Kristopher Berr

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