Piketon v. Boone Coleman Constr., Inc. (Slip Opinion) , 145 Ohio St. 3d 450 ( 2016 )

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Piketon v. Boone Coleman Constr., Inc., Slip Opinion No. 2016-Ohio-628.]
NOTICE
This slip opinion is subject to formal revision before it is published in an
advance sheet of the Ohio Official Reports. Readers are requested to
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
South Front Street, Columbus, Ohio 43215, of any typographical or other
formal errors in the opinion, in order that corrections may be made before
the opinion is published.
SLIP OPINION NO. 2016-OHIO-628
BOONE COLEMAN CONSTRUCTION, INC., APPELLEE, v. THE VILLAGE OF
PIKETON, APPELLANT.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Piketon v. Boone Coleman Constr., Inc., Slip Opinion No.
2016-Ohio-628.]
Contracts―Public works―Enforceable liquidated-damages clause distinguished
from unenforceable penalty―Samson Sales tripartite test
applied―Provision for liquidated damages of $700 per day for delay of
completion upheld―Reasonableness of provision determined by per diem
amount rather than aggregate amount of damages assessed―If provision
was reasonable at the time of formation and bears reasonable relation to
actual damages, provision will be enforced.
(No. 2014-0978—Submitted June 9, 2015—Decided February 24, 2016.)
APPEAL from the Court of Appeals for Pike County,
No. 13CA836, 2014-Ohio-2377.
_____________________
SUPREME COURT OF OHIO
O’CONNOR, C.J.
{¶ 1} In this appeal arising from a public-road-construction contract, we
consider our precedent on contractual liquidated-damages provisions. We
expressly extend that precedent to public-works contracts, vacate the judgment of
the court of appeals, and remand this cause to that court for reconsideration in light
of our opinion.
RELEVANT BACKGROUND
{¶ 2} In 2007, appellant, the village of Piketon, solicited bids for the “Pike
Hill Roadway and Related Improvements” project. The project included the
installation of a traffic light at the intersection of U.S. Route 23 and Market Street
in Piketon and improvements to the roadway.
{¶ 3} Appellee, Boone Coleman Construction, Inc., submitted the lowest
bid and was hired for the project. The parties entered into a contract in which
Piketon agreed to pay Boone Coleman $683,300 to complete the work. The contract
expressly provided that the time for completing the project was “of the essence”1
1
The relevant provisions of the contract stated:
ARTICLE 4—CONTRACT TIMES
4.01. Time of the Essence
A. All time limits for Milestones, if any, Substantial Completion, and
completion and readiness for final payment as stated in the Contract Documents
are of the essence of the Contract.
4.02 Days to Achieve Substantial Completion and Final Payment
A. The Work will be substantially completed within 120 days after the
date when the Contract Times commence to run as provided in paragraph 2.03 of
the General Conditions, and completed and ready for final payment in accordance
with paragraph 14.07 of the General Conditions within 120 days after the date
when the Contract Times commence to run.
4.03 Liquidated Damages
A. CONTRACTOR and OWNER recognize that time is of the essence
of this Agreement and that OWNER will suffer financial loss if the Work is not
completed within the time(s) specified in paragraph 4.02 above, plus any
extensions thereof allowed in accordance with Article 12 of the General
Conditions. The parties also recognize the delays, expense, and difficulties
involved in proving in a legal or arbitration [proceeding] the actual loss suffered
2
January Term, 2016
and that the project had to be substantially completed within 120 days of the date
of commencement of the project. A liquidated-damages provision made clear that
Boone Coleman would pay $700 to Piketon for each day after the specified
completion date that the contract was not substantially completed.
{¶ 4} The date of commencement of the project was set for July 30, 2007.
Thus, the contract required that the project be substantially completed 120 days
later on November 27, 2007. Piketon granted Boone Coleman’s first request for an
extension, which moved the completion date to May 30, 2008. But when Boone
Coleman sought another extension, Piketon refused to grant it and notified Boone
Coleman that it would assess the contractually specified liquidated damages of
$700 per day if the project was not completed by May 30, 2008. Boone Coleman
did not do so, and on July 7, 2008, Piketon informed Boone Coleman that it was
assessing damages of $700 per day, as of May 31, 2008, until the completion of the
project.
{¶ 5} Boone Coleman did not complete the project until July 2, 2009―well
over a year (397 days) after the parties’ extended completion date of May 30, 2008.
{¶ 6} Boone Coleman brought suit against Piketon in the Pike County
Common Pleas Court. Among other things, it alleged that Piketon had improperly
by OWNER if the Work is not completed on time. Accordingly, instead of
requiring any such proof, OWNER and CONTRACTOR agree that as liquidated
damages for delay (but not as a penalty), CONTRACTOR shall pay OWNER
$700.00 for each day that expires after the time specified in paragraph 4.02 for
Substantial Completion until the Work is substantially complete.
(Boldface, underlining, and capitalization sic.)
3
SUPREME COURT OF OHIO
failed to pay $147,477 of the contract price for the construction.2 Piketon
counterclaimed for liquidated damages.
{¶ 7} Piketon moved for summary judgment. The trial court granted
Piketon’s motion and entered judgment in its favor, awarding Piketon $277,900 in
liquidated damages.
{¶ 8} Boone Coleman appealed, asserting that the trial court erred in
awarding Piketon liquidated damages. The appellate court agreed. Citing our
decision in Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St. 3d 27, 465 N.E.2d
392 (1984), it held, “[W]hen we view the contract as a whole in its application, we
conclude the amount of damages is so manifestly unreasonable and
disproportionate that it is plainly unrealistic and inequitable.” (Emphasis added.)
2014-Ohio-2377, 13 N.E.3d 1190, at ¶ 40. It concluded that because the “resulting
amount [of liquidated damages] is manifestly inequitable and unrealistic, courts are
justified in determining the provision to be an unenforceable penalty.” Id. at ¶ 43,
citing Samson Sales at 28. It reversed that portion of the trial court’s judgment and
remanded for further proceedings.
{¶ 9} We granted Piketon’s request for discretionary review and agreed to
address two related propositions of law:
2
In its complaint, Boone Coleman asserted that the liquidated-damages provision was a penalty and
also argued that it should have been awarded additional compensation based on work it performed
to correct subsurface road problems and to perform revisions on the retaining wall and traffic signal.
The trial court denied that relief and the appellate court affirmed, holding that “Boone Coleman did
not follow the parties’ unambiguous notice provisions to claim additional compensation. And the
contract explicitly precluded recovery for additional costs related to subsurface conditions
encountered by Boone Coleman.” 2014-Ohio-2377, ¶ 4. Nevertheless, the dissenting opinion
asserts, “Boone Coleman already suffered a loss from performing additional work for which it was
not paid” and seemingly gives credence to Boone Coleman’s claim that Piketon provided inaccurate
site information. It seems, then, that the dissent’s insistence on adhering to its own conclusion,
without regard to the facts of this case or the law controlling it, is where “frontier justice” comes
into play. In any event, Boone Coleman did not seek this court’s review of the holdings that it had
been paid properly, and it is therefore not discussed further in this opinion.
4
January Term, 2016
When evaluating the enforceability of a liquidated damages
provision in a construction contract, the court must conduct its
analysis prospectively, based on the per diem amount of the
liquidated damages at the time the contract is executed, and not
retrospectively, based on the total liquidated damages that
ultimately accrue.
Liquidated damages are not deemed a penalty simply
because a project consists of new construction of an improvement
that did not exist previously and no proof of actual damages is
required to enforce liquidated damages pursuant to such a contract.
140 Ohio St. 3d 1451, 2014-Ohio-4414, 17 N.E.3d 598.
ANALYSIS
Standard of Review for Contractual Liquidated-Damages Provisions
{¶ 10} We review the interpretation of a contract, a question of law, de
novo. Arnott v. Arnott, 132 Ohio St. 3d 401, 2012-Ohio-3208, 972 N.E.2d 586,
¶ 14. Similarly, the question of whether a contract clause provides for liquidated
damages or an unenforceable penalty is a question of law that we also review de
novo. Lake Ridge Academy v. Carney, 66 Ohio St. 3d 376, 380, 613 N.E.2d 183
(1993).
Substantive Law on Liquidated Damages
{¶ 11} 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. Sheffield-King Milling Co. v. Domestic Science
Baking Co., 95 Ohio St. 180, 183, 115 N.E. 1014 (1917).
{¶ 12} “ ‘The effect of a clause for stipulated damages in a contract is to
substitute the amount agreed upon as liquidated damages for the actual damages
resulting from breach of the contract, and thereby prevents [sic] a controversy
5
SUPREME COURT OF OHIO
between the parties as to the amount of damages.’ ” Dave Gustafson & Co., Inc. v.
South Dakota, 83 S.D. 160, 164, 156 N.W.2d 185 (1968), quoting 22 American
Jurisprudence 2d, Damages, Section 235, at 321 (1965). “ ‘If a provision is
construed to be one for liquidated damages, the sum stipulated forms, in general,
the measure of damages in case of a breach, and the recovery must be for that
amount. No larger or smaller sum can be awarded even though the actual loss may
be greater or less.’ ” Id., quoting Section 235 at 321. Put another way, “a liquidated
damages clause in a contract is an advance settlement of the anticipated actual
damages arising from a future breach.” Carrothers Constr. Co., L.L.C. v. S.
Hutchinson, 288 Kan. 743, 754, 207 P.3d 231 (2009).
{¶ 13} The common law viewed liquidated-damages provisions “with a
gimlet eye,” Dist. Cablevision Ltd. Partnership v. Bassin, 828 A.2d 714, 723
(D.C.App.2003), but that historical antipathy dissipated as parties to contracts,
attorneys, and the courts recognized that such provisions serve valuable purposes.
{¶ 14} “Today the law does not look with disfavor upon ‘liquidated
damages’ provisions in contracts. When they are fair and reasonable attempts to
fix just compensation for anticipated loss caused by breach of contract, they are
enforced.” Priebe & Sons, Inc. v. United States, 332 U.S. 407, 411, 68 S. Ct. 123,
92 L. Ed. 32 (1947). The modern rule is “to look with candor, if not with favor”
upon liquidated-damages provisions in contracts when those provisions were
“deliberately entered into between parties who have equality of opportunity for
understanding and insisting upon their rights.” Wise v. United States, 249 U.S. 361,
365, 39 S. Ct. 303, 63 L. Ed. 647 (1919). See also Bassin at 724, quoting Wilmington
Trust Co. v. Aerovias de Mexico, S.A. de C.V., 893 F. Supp. 215, 218
(S.D.N.Y.1995) (“ ‘Relevant to this inquiry is the sophistication of the parties and
whether both sides were represented by able counsel who negotiated the contract at
arms length without the ability to overreach the other side’ ”).
6
January Term, 2016
{¶ 15} Part of the appeal of liquidated-damages provisions is that they allow
the contracting parties to “protect themselves against the difficulty, uncertainty, and
expenses that necessarily follow judicial proceedings when trying to ascertain
damages.” Carrothers Constr. Co., 288 Kan. at 754, 207 P.3d 231. This benefit is
particularly valuable when “actual damages are likely to be difficult to quantify in
the event that the contract is breached.” Bassin, 828 A.2d at 723. Liquidated-
damages provisions thereby “promot[e] prompt performance of contracts” and
“adjust[] in advance, and amicably, matters the settlement of which through courts
would often involve difficulty, uncertainty, delay and expense.” Wise at 366.
{¶ 16} Ohio has long recognized liquidated-damages provisions as valid
and enforceable, see Samson Sales, 12 Ohio St. 3d at 28, 465 N.E.2d 392, citing
Jones v. Stevens, 112 Ohio St. 43, 146 N.E. 894 (1925); Lange v. Werke, 2 Ohio St.
519 (1853), as long as the provisions are not ones for penalties, Samson Sales, id.
And therein lies the rub. “The difficult problem, in each case, is to determine
whether or not the stipulated sum is an unenforceable penalty or an enforceable
provision for liquidated damages.” Dave Gustafson & Co., 83 S.D. at 165, 156
N.W.2d 185.
{¶ 17} In addressing whether a contract includes a permissible liquidated-
damages provision or an unenforceable penalty, one of our appellate courts has
explained that a “penalty” is
“a sum inserted in a contract, not as the measure of compensation
for its breach, but rather as a punishment for default, or by way of
security for actual damages which may be sustained by reason of
nonperformance, and it involves the idea of punishment. A penalty
is an agreement to pay a stipulated sum on breach of contract,
irrespective of the damage sustained. Its essence is a payment of
money stipulated as in terrorem of the offending party, while the
7
SUPREME COURT OF OHIO
essence of liquidated damages is a genuine covenanted pre-estimate
of damages. The amount is fixed and is not subject to change;
however, if the stipulated sum is deemed to be a penalty, it is not
enforceable and the nondefaulting party is left to the recovery of
such actual damages as he can prove.”
(Emphasis sic.) Piper v. Stewart & Inlow, 5th Dist. Licking No. CA-2530, 1978
WL 217430, *1 (June 14, 1978), quoting 22 American Jurisprudence 2d, Damages,
Section 213, at 298 (1965).
{¶ 18} In Samson Sales, we set forth Ohio’s tripartite test to determine
whether a contractual provision should be considered a liquidated-damages
provision or an unenforceable penalty. We held:
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 amount and difficult of proof,
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.
Samson Sales, 12 Ohio St. 3d 27, 465 N.E.2d 392, at syllabus.
{¶ 19} Valid and enforceable liquidated-damages provisions are those
intended by the parties to give reasonable compensation for damages, but
8
January Term, 2016
provisions that impose amounts that are “manifestly inequitable and unrealistic”
are deemed unenforceable penalties. Id. at 28. Since Samson Sales, we have
reiterated its holding once, in Lake Ridge Academy v. Carney, 66 Ohio St. 3d 376,
380, 613 N.E.2d 183 (1993), and have not departed from its teachings. This case
requires that we consider our precedent in a context we have not previously
addressed: public-works-construction contracts.
Liquidated Damages in Public-Works-Construction Contracts
{¶ 20} The benefits of liquidated-damages provisions in building and
construction contracts are well documented. R. Harper Heckman & Benjamin R.
Edwards, Time is Money: Recovery of Liquidated Damages by the Owner, 24
Constr.Lawyer 28, 29 (Fall 2004). The provisions create firm expectations and
allow the parties to allocate damages caused by delays in completing construction.
Id. The ability to agree about damages is particularly important in public-works-
construction contracts because “[i]t is uniquely difficult to calculate damages to the
general public interest caused by a contractor’s breach of its agreement to provide
public improvements.” Carrothers Constr. Co., 288 Kan. at 756, 207 P.3d 231.
{¶ 21} In a public-roadway-construction contract, each delay in completing
the project adds to inconvenience, increased costs, and loss of use of the roadway.
Dave Gustafson & Co., 83 S.D. at 167, 156 N.W.2d 185. But “ ‘each day’s delay,
while unquestionably injurious, is injurious frequently in ways that are difficult to
estimate.’ ” Id., quoting 5 Williston on Contracts, Section 785, 733 (3d Ed.1961).
{¶ 22} We recognize that 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. See, e.g., Scott M. Tyler, No (Easy) Way Out:
“Liquidating” Stipulated Damages for Contractor Delay in Public Construction
Contracts, 44 Duke L.J. 357, 358-359 (1994); Christian, Public Entities in Nevada
Beware, 12-OCT Nevada Lawyer 16. We are not alone in that recognition. The
9
SUPREME COURT OF OHIO
Supreme Court and many state and federal appellate courts also recognize that
liquidated-damages provisions in public contracts are particularly valuable given
the unique difficulty in calculating the damages associated with a public
contractor’s breach of its promise to timely complete a public-improvement project.
See, e.g., Priebe & Sons, 332 U.S. at 411, 68 S. Ct. 123, 92 L. Ed. 32 (recognizing
that liquidated-damages provisions “serve a particularly useful function when
damages are uncertain in nature or amount or are unmeasurable, as is the case in
many government contracts”); Hovas Constr., Inc. v. W. Line Consol. School Dist.
Bd. of Trustees, 111 So. 3d 663, 666-667 (Miss.App.2013); Carrothers Constr. Co.,
288 Kan. at 756, 207 P.3d 231 (the unique difficulty of calculating damages when
a contractor breaches a public-works contract “should be an important
consideration in such cases and weigh favorably in finding a liquidated damages
provision to be reasonable”); Fortune Bridge Co. v. Dept. of Transp., 242 Ga. 531,
533-534, 250 S.E.2d 401 (1978) (noting that “damages flowing from the
contractor’s failure to complete [public] roadway and bridges in a timely fashion
are, as a practical matter, incapable of proof”); Brooks v. Wichita, 114 F. 297, 299
(8th Cir.1902) (recognizing that liquidated-damages provisions are the only way
for a city to obtain adequate compensation for breach of a public contract; the
damages sustained by the public in such cases are not capable of “judicial
ascertainment” because they are “too remote, conjectural, and speculative” to
prove); Dade Cty. Pub. Health Trust v. Romart Constr., Inc., 577 So. 2d 636, 638,
669 (Fla.App.1991) (fact that public entity may have suffered no monetary loss
from breach does not render liquidated-damages provision unconscionable,
because public project was intended for public use, not for profit).
{¶ 23} We agree with those courts that find that “the protection of the public
interest is a proper consideration in determining [the] validity of a liquidated
damages provision.” Carrothers Constr. Co., 288 Kan. at 756, 207 P.3d 231. The
Ohio General Assembly requires that every state-funded public-improvement-
10
January Term, 2016
construction contract include a liquidated-damages provision. R.C. 153.19. Many
states have similar requirements. Dave Gustafson & Co., 83 S.D. at 166, 156
N.W.2d 185; Fortune Bridge Co., 242 Ga. at 534, 250 S.E.2d 401; see also Bale
Contracting, Inc. v. Westerville, 7 Ohio App. 3d 271, 272, 455 N.E.2d 517 (10th
Dist.1982) (recognizing the materiality of a completion date in a public-works-
construction project and that a bid for such a project is incomplete when it fails to
specify the time for performance, citing R.C. 153.19).
{¶ 24} With these principles in mind, we turn to the appellate court’s
opinion in this case.
The Appellate Court’s Analysis of the Liquidated-Damages Provision
{¶ 25} In considering whether the liquidated-damages provision in this case
constituted an unenforceable penalty, the court of appeals properly applied the first
and third parts of the test in Samson Sales, 12 Ohio St. 3d 27, 465 N.E.2d 392. The
appellate court recognized that “the damages incurred as a result of a delay [by
Boone Coleman in completing the project] were uncertain as to amount and
difficult to prove” and that “the plain and unambiguous language of the liquidated
damages clause is consistent with the conclusion that the parties intended that
damages in the amount of $700 per day would follow the contractor’s breach of the
project completion deadline.” 2014-Ohio-2377, 13 N.E.3d 1190, ¶ 38 and 39,
citing Samson Sales. But the appellate court concluded that the provision did not
pass the second prong of the Samson Sales test. The second prong requires a court
reviewing a liquidated-damages provision 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.” Samson Sales, at syllabus.
{¶ 26} Even though the appellate court had already determined that the
provision reflected the parties’ intentions, the appellate court focused solely on the
aggregate amount of the penalty, $277,900, in relation to the total value of the
11
SUPREME COURT OF OHIO
contract, $683,300. See 2014-Ohio-2377, ¶ 42. Only after finding that the
liquidated-damages aggregate award constituted a third of the total contract price
did the court determine that the application of the provision rendered it an
unenforceable penalty. 2014-Ohio-2377, ¶ 40. For several reasons, it was error to
do so.
{¶ 27} First, the appellate court relied heavily on a decision of one of its
sister courts, Harmon v. Haehn, 7th Dist. Mahoning No. 10 MA 177, 2011-Ohio-
6449. But Harmon is wholly distinguishable here.
{¶ 28} Given “the wide range and variety of contracts, and of their subject-
matter, it is sometimes difficult to determine whether the terms thus agreed upon in
advance actually provide for damages or for a penalty.” Sheffield-King Milling Co.,
95 Ohio St. at 183, 115 N.E. 1014. See also Lange, 2 Ohio St. at 533 (noting that
in evaluating a liquidated-damages provision, “Arbitrary rules can not help us, and
judicial decisions are of less value than upon most other questions, as each case
depends so peculiarly on its own circumstances”). Thus, when courts review
liquidated-damages provisions, they often look to similar provisions in contracts
that govern similar subject matter. See, e.g., Kurtz v. W. Property, L.L.C., 10th
Dist. Franklin No. 10AP-1099, 2011-Ohio-6726, ¶ 33 (in case involving delay in
sale of real estate, cases involving breaches in other contexts are “readily
distinguishable”).
{¶ 29} Here, Harmon is of limited value because it arose from a private
commercial real estate lease rather than a public-works-construction contract.
2011-Ohio-6449, ¶ 1. That distinction is particularly relevant because the actual
damages at issue in Harmon were far easier to quantify than those at issue here.
{¶ 30} Moreover, the Harmon decision involved a liquidated-damages
provision that contemplated a lump sum. Piketon and Boone Coleman did not
contract for a lump sum. Rather, the parties contracted for a per diem measure of
damages which, as Chief Justice Marshall recognized, is more likely to be an
12
January Term, 2016
enforceable liquidated-damages provision than an unenforceable penalty: “[T]he
agreement to pay a specified sum weekly during the failure of the party to perform
the work, partakes much more of the character of liquidated damages than the
reservation of a sum in gross.” Tayloe v. T. & S. Sandiford, 20 U.S. 13, 18, 5 L. Ed.
384 (1822). In failing to recognize this distinction, the appellate court committed
its second error.
{¶ 31} More importantly, the appellate court’s myopic focus on the
reasonableness of the total amount of liquidated damages in application, rather than
on the reasonableness of the per diem amount in the contract terms, was not proper.
The correct analysis looks at whether it was conscionable to assess $700 per day in
liquidated damages for each day that the contract was not completed rather than
looking at the aggregate amount of the damages awarded. Accord Carrothers
Constr. Co., 288 Kan. at 759, 207 P.3d 231.
{¶ 32} Although per diem amounts vary greatly in the case law, courts have
upheld liquidated-damages provisions in public-construction contracts with per
diem amounts similar to those at issue here. See, e.g., Sec. Fence Group, Inc. v.
Cincinnati, 1st Dist. Hamilton No. C-020827, 2003-Ohio-5263 (enforcing a per
diem liquidated-damages provision in a public-bridge-replacement project that
imposed $600 per day); see also Carter Steel & Fabricating Co. v. Ohio Dept. of
Transp., 102 Ohio Misc.2d 1, 721 N.E.2d 1115 (Ct. of Cl.1999) (impliedly
recognizing the validity of a liquidated-damages per diem provision in bridge-
construction project that imposed $600 in liquidated damages per day, but refusing
to enforce it against subcontractor who had no control over delay); Hovas Constr.,
111 So. 3d at 667 (upholding as reasonable a $500 per diem assessment of liquidated
damages in public-construction contract); Carrothers Constr. Co., 288 Kan. at 759,
207 P.3d 231 ($850 per diem assessment of liquidated damages held reasonable in
public-construction contract). In fact, courts have upheld far greater amounts of
per diem damages in construction contracts. See, e.g., Dade Cty. Pub. Health Trust,
13
SUPREME COURT OF OHIO
577 So. 2d at 638 (upholding as “perfectly reasonable” a liquidated-damages
provision imposing $2,500 in damages per day in public-construction project for
medical facility); Bethlehem Steel Corp. v. Chicago, 350 F.2d 649 (7th Cir.1965)
(upholding a liquidated-damages provision imposing $1,000 in damages per day in
public-construction project for elevated highway, even though contractor’s delay
did not prevent highway from opening to public on date scheduled). See also Unruh
& Worden, 34 Santa Clara L.Rev. 1, at fn. 1 (in commercial construction contracts,
“a typical per diem liquidated damages provision might provide that the general
contractor pay the owner/developer $10,000 for each calendar day” of delay).
{¶ 33} Moreover, the per diem liquidated damages imposed by the contract
between Piketon and Boone Coleman reflect the Ohio Department of
Transportation’s 2013 Construction and Material Specifications. Those
specifications not only require liquidated damages be deducted from any sum owed
the contractor for each day by which the contractor exceeds the completion date,
but set out the specific amount of the per diem damages.3 The per diem damages
are thus consistent with Ohio public policy.
3
The Ohio Department of Transportation’s 2013 document entitled “Construction and Material
Specifications” is available at http://www.dot.state.oh.us/Divisions/ConstructionMgt
/Specification%20Files/2013%20CMS%2011142012%20FINAL.PDF. Section 108.07 provides:
Failure to Complete on Time. If the Contractor fails to complete the Work
by the Completion Date, then the Director, if satisfied that the Contractor is making
reasonable progress, and deems it in the best interest of the public, may allow the
Contractor to continue in control of the Work. The Department will pay the Contractor
for Work performed on the Project less any liquidated damages incurred.
(Boldface sic.)
The 2013 schedule of liquidated damages, found in Table 108.07-1, provides that the
amount of liquidated damages to be deducted for each calendar day of an “overrun in time” varies
depending on the original amount of the contract. For contracts between 0 and $500,000, the
amount of per diem liquidated damages is $500; for contracts between $500,000 and $2,000,0000,
the amount of per diem liquidated damages is $1,000; for contracts between $2,000,0000 and
$10,000,000, the amount of per diem liquidated damages is $1,500; for contracts between
14
January Term, 2016
{¶ 34} Finally and most importantly, we note that the appellate court stated
that its conclusion resulted from viewing “the contract as a whole in its
application.” (Emphasis added.) 2014-Ohio-2377, ¶ 3. The use of the phrase “in
its application” is not part of our test from Samson Sales. The appellate court’s use
of this invented perspective resulted in a distorted analysis of our precedent.
{¶ 35} We reaffirm that Ohio law requires a court, when considering a
liquidated-damages provision, to “examine it in light of what the parties knew at
the time the contract was formed.” Jones, 112 Ohio St. 43, 146 N.E. 894, at
paragraph one of the syllabus; Miller v. Blockberger, 111 Ohio St. 798, 146 N.E.
206 (1924), paragraph one of the syllabus; Sec. Fence Group, 2003-Ohio-5263,
¶11. Accord Priebe & Sons, 332 U.S. at 412, 68 S. Ct. 123, 92 L. Ed. 32. “If the
provision was reasonable at the time of formation and it bears a reasonable (not
necessarily exact) relation to actual damages, the provision will be enforced.”
(Emphasis added.) Lake Ridge Academy at 382.
{¶ 36} This prospective or “front end” analysis of a liquidated-damages
provision focuses on the reasonableness of the clause at the time the contract was
executed rather than looking at the provision retrospectively, i.e., ascertaining the
reasonableness of the damages with the benefit of hindsight after a breach. See
generally Heckman & Edwards, 24 Constr.Law. at 30-31; Hovas Constr., 111
So. 3d at 668-669 (Maxwell, J., concurring); Carrothers Constr. Co., 288 Kan. 743,
207 P.3d 231, at paragraph nine of the syllabus. The prospective approach properly
focuses on whether (1) the parties evaluated, at the time of contract formation, the
probable loss resulting from delay in completing the construction, (2) the parties
clearly intended to use liquidated damages in case of a delay because actual
$10,00,000 and $50,000,000, the per diem amount is $2,600; and for contracts over $50,000,000,
the per diem amount is $3,200.
15
SUPREME COURT OF OHIO
damages would be difficult to ascertain, and (3) the parties reached an agreement
as to a per diem amount for delays. Carrothers Constr. Co. at 757. See also Hutton
Contracting Co., Inc. v. Coffeyville, 487 F.3d 772, 781 (10th Cir.2007), quoting
Kelly v. Marx, 428 Mass. 877, 881, 705 N.E.2d 1114 (1999) (recognizing that
prospective analysis “ ‘resolve[s] disputes efficiently by making it unnecessary to
wait until actual damages from a breach are proved’ ” and “ ‘eliminates uncertainty
and tends to prevent costly future litigation’ ”); William Schwartzkopf & John J.
McNamara, Calculating Construction Damages, Section 13.02, at 257-258 (2d
Ed.2015) (“The reasonableness of the forecast or estimate [in a liquidated-damages
provision] is usually determined in view of the facts known at the time of
contracting, and not at the time of the breach or delayed completion” [emphasis
sic]).
{¶ 37} Here, the appellate court improperly engaged in retrospective
analysis, i.e., it looked, with hindsight, to the aggregate application of the per diem
liquidated damages to conclude that the provision was unconscionable. But it did
not determine that the per diem amount was unconscionable at the time the parties
entered into the contract. The question whether the liquidated-damages provision
is conscionable “must be viewed by the court from the standpoint of the parties at
the time of the contract, and not ex post facto when the litigation is up for trial.
Contracts are always so construed and a stipulation for liquidated damages is no
exception.” Jacobs v. Shannon Furniture Co., 22 Ohio Cir. Dec. 51, 53, 1910 WL 1170
(1910), citing Sun Printing & Pub. Assn. v. Moore, 183 U.S. 642, 672, 22 S. Ct. 240,
46 L. Ed. 366 (1902), and Knox Rock-Blasting Co. v. Grafton Stone Co., 64 Ohio
St. 361, 266, 60 N.E. 563 (1901). Moreover, when the appellate court determined
that the award was an unenforceable penalty because the amount was “so
unreasonably high and so disproportionate to the consideration paid,” 2014-Ohio-
2377, ¶ 40, the court failed to fully consider that the amount was large only because
16
January Term, 2016
Boone Coleman failed to complete the project for more than a year after the agreed-
upon completion date, with full awareness of the consequences.
{¶ 38} By the appellate court’s reasoning, the same provision might have
been enforceable if Boone Coleman’s delay had been briefer, e.g., two days, two
weeks, or even two months, but not so long as to accrue the significant damages
that arose here. It is a perverse rule of law to hold that a court can relieve a
breaching party of the consequences it agreed to by refusing to enforce a per diem
liquidated-damages provision solely because the breach was an egregious one. We
decline to adopt that rationale and vacate the judgment of the appellate court in this
cause.
{¶ 39} We remind our appellate courts that in 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.
Lake Ridge Academy, 66 Ohio St. 3d at 382, 613 N.E.2d 183. This court has made
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. Lange, 2 Ohio St. at 533; see also Knox Rock-Blasting Co. at 367-368.
The proper course is to enforce contracts according to their plain meaning and “not
to undertake to be wiser than the parties.” Jones, 112 Ohio St. at 56, 146 N.E. 894.
“It is certainly not incumbent on the appellate courts * * * to change the contracts
of people, after the fact, in the name of public policy.” Court Rooms of Am., Inc.
v. Diefenbach, 425 N.E.2d 122, 124 (Ind.1981).
“The parties themselves best know what their expectations
are in regard to the advantages of their undertaking and the damages
attendant on its failure, and when they have mutually agreed on the
amount of such damages in good faith and without illegality, it is as
17
SUPREME COURT OF OHIO
much the duty of the court to enforce that agreement as it is the other
provisions of the contract.”
Sheffield-King Milling Co., 95 Ohio St. at 185, 115 N.E. 1014, quoting Knox Rock-
Blasting Co. at 368.
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.
{¶ 41} Boone Coleman entered a contract that required it to perform the
project within 120 days. It took four times that long to do so. It may not avoid the
result of the valid liquidated-damages provision it negotiated through able counsel.
“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.” Wise, 249 U.S. at
365, 39 S. Ct. 303, 63 L. Ed. 647.
{¶ 42} The appellate court erred in its use of a retrospective analysis to find
that the total amount of damages awarded to Piketon was so unreasonable as to
constitute a penalty, and in failing to focus on the per diem nature of the liquidated
damages. Accordingly, we vacate the judgment of the Fourth District Court of
Appeals and remand the cause to that court to reconsider the enforceability of the
liquidated-damages provision in light of this opinion.
Judgment vacated
and cause remanded.
O’NEILL, J., concurs.
18
January Term, 2016
O’DONNELL, LANZINGER, KENNEDY, and FRENCH, JJ., concur in judgment
only.
PFEIFER, J., dissents.
_________________
KENNEDY, J., concurring.
{¶ 43} I agree with the majority opinion. However, I would exclude the
first paragraph of the majority’s conclusion.
{¶ 44} Therefore, I respectfully concur.
O’DONNELL, J., concurs in the foregoing opinion.
_________________
PFEIFER, J., dissenting.
{¶ 45} We should dismiss this case as having been improvidently accepted
and allow the court of appeals decision to stand. That court reached a sound and
proper conclusion that is fair to both parties. Furthermore, no new legal issue is at
stake.
{¶ 46} Instead this court has taken a bad situation and made it worse. Boone
Coleman already suffered a loss from 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.
{¶ 47} Barring a dismissal, the sensible approach to this case, the approach
taken by the court of appeals, is to declare the liquidated-damages clause to be
unreasonable and disproportionate. Equities do matter―even in a contract case.
Given the circumstances of this case, which include Piketon allegedly providing
inaccurate site plans to Boone Coleman, the court of appeals got it right. It
disallowed Boone Coleman’s requests for additional payment because they were
19
SUPREME COURT OF OHIO
not properly submitted and refused to enforce the liquidated-damages clause
because it was so unreasonable and disproportionate as to amount to a penalty.
{¶ 48} Because the court is neither dismissing the case nor affirming the
court of appeals, I dissent.
_________________
Stephen C. Rodeheffer and John A. Gambill, for appellee.
Kegler Brown Hill & Ritter, L.P.A., Eric B. Travers, and Timothy A.
Kelley, for appellant.
Bricker & Eckler, L.L.P., Jack R. Rosati Jr., and Adam F. Florey, urging
reversal for amici curiae, County Commissioners Association of Ohio, Ohio
Municipal League, Ohio School Boards Association, and Ohio Township
Association.
_________________
20