Liquidated Damages Provisions in Public Works Contracts Are Enforceable
People in the construction industry are wont to say “time is money.” Apparently, Benjamin Franklin was the first to coin that phrase in the year 1748 when he published Advice to a Young Tradesman. Now, the Supreme Court of Ohio has quoted Old Ben in its decision upholding a per diem liquidated damages provision in a public roadway contract. Having not previously addressed the question in the context of public works construction contracts, the Court held that liquidated damages are enforceable if the provision was reasonable at the time the contract was entered into and bears a reasonable relation to the actual damages.
The Village of Piketon solicited bids for the installation of a traffic signal and for certain roadway improvements. The successful bidder entered into a contract with Piketon for $683,000 to complete the work. The contract required that the project be completed within 120 days of the date of commencement.
The contractor requested and was granted a six month extension of time, which moved the completion date to May 30, 2008. The contractor’s second request for an extension of the completion date was denied, and Piketon notified the contractor that it was assessing liquidated damages at the contractually agreed to rate of $700 per day until the project was completed.
The contractor did not complete the project until 397 days after the extended completion date. The contractor sued Piketon for additional compensation for unexpected subsurface road problems and for work on revisions to a retaining wall and the traffic signal. Piketon counterclaimed for the liquidated damages amount of $277,900 (397 days x $700 per day).
The trial court ruled in favor of Piketon and awarded the village $277,900 in liquidated damages. The contractor appealed, and the Court of Appeals reversed, finding that the liquidated damage amount of $277,900 in relation to the contract amount of $683,000 was manifestly inequitable and an unenforceable penalty.
The Supreme Court of Ohio took up the case and applied its precedent on contractual liquidated damages provisions to this public works contract. The Supreme Court said that liquidated damages provisions will be enforced when they are fair and reasonable attempts to fix just compensation for anticipated loss caused by a breach of the contract. Courts have recognized that liquidated damages provisions promote the prompt performance of contracts, and adjust in advance the difficulty and uncertainty in ascertaining breach of contract damages.
The Supreme Court recognized that each delay in a public roadway construction project results in inconvenience to the public, increased costs, and the loss of the public’s use of the roadway. These damages can be difficult to calculate.
The key in the analysis is that the liquidated damages provision must not serve as a penalty or punishment for a default. If it is a penalty, the provision is not enforceable. The Court recognized that a per diem measure of damages is more likely to be an enforceable liquidated damages provision. The Court noted that the per diem liquidated damages imposed under the Piketon contract were consistent with the per diem liquidated damages schedule in the Ohio Department of Transportation’s 2013 Construction and Materials Specifications. The focus of the analysis must be on the reasonableness of the per diem amount agreed to at the time the contract was entered into, rather than the total amount of the liquidated damages assessed at the end of the project.
According to the Supreme Court, where the Court of Appeals erred was looking only at the fact that the liquidated damages total amount was one-third of the total contract price. The appellate court should have focused on whether the per diem amount was reasonable at the time of contract.
When an enforceable liquidated damages provision is included with the typical contract language, “time is of the essence,” Ben Franklin’s adage “time is money” certainly becomes reality.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.