Liquidated Damages in Your Contract? Not So Fast

by Wickens, Herzer, Panza, Cook & Batista Co.
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Parties often include terms in a contract providing for predetermined damages, or liquidated damages, in the event of a breach by one of the parties. In construction contracts, liquidated damages provisions typically apply to the contractor’s failure to timely complete its work. Regardless of the type of contract or the trigger for the liquidated damages, Ohio courts will only enforce those liquidated damages in certain circumstances.

A recent case, Boone Coleman Constr. v. Village of Piketon, involved a traffic signal and roadway improvement project in the Village of Piketon. The contract was valued at $683,300, but provided for liquidated damages of $700 per day for each day the contractor failed to complete the project on-time. The contractor completed its scope of work 397 days behind schedule, leading to a liquidated damages amount of $277,900, or more than a third of the contract price.

Generally, liquidated damages provisions are enforceable if (i) the actual damages would be uncertain and difficult to prove, and (ii) the damages assessed per the contract are not so unreasonable or disproportionate as to suggest that they do not express the parties’ true intention. In Boone Coleman, the delay to the project meant that there was no traffic light, and thus, an increased inconvenience and safety risk for drivers. The court agreed that this damage was not easily quantifiable.

However, the court held that $277,900 was so unreasonably high and disproportionate to the contract price that the clause amounted to an unenforceable penalty. The court stated that reasonable compensation for actual damages is the legitimate objective of a liquidated damages provision, and the damages assessed have to bear a reasonable relationship to the actual damage. In that regard, the court held that where there is no evidence of how the contracted damages were selected, the provision becomes a penalty. Not only was the $277,900 amount unreasonable and disproportionate, but the Village could produce no evidence of how the $700 per day figure was calculated.

The lesson here is that liquidated damages may be used not only where actual damages for breach would be difficult to prove, but also where a party can show how the liquidated damages figure was chosen. Otherwise, liquidated damages that the parties agreed on will likely be unenforceable later on.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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