Contractor brought suit seeking additional compensation for costs resulting from differing site conditions and alleged inaccurate site plans. The Owner counterclaimed for liquidated damages based on delayed completion, being a 397 day delay at $700/day. The court held due to failure of the contractor to comply with the claim notice provisions of the contract (i.e., the contractor gave notice to the project engineer but not directly to the town itself) it was not entitled to either additional compensation or time extension. A contractual waiver of the right to make any claims based on differing site conditions was enforced against the contractor. The good news for the contractor, however, was that the court found the liquidated damages clause was an unenforceable penalty, stating that “the amount of damages is so manifestly unreasonable and disproportionate that it plainly constitutes an unenforceable penalty.” The court stated that it rejected the contractor’s claim for additional compensation because the contractor “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.” Boone Coleman Construction, Inc. v. Village of Piketon, 13 N.E. 3d (Ohio, 2014).
Notice Requirements for Submitting a Claim
The contract included a clause stating that “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.” The contract further provided that all work was to be substantially completed within 120 days after the work commenced.
The time of the essence requirement was reiterated in the liquidated damages clause of the contract which provided the following:
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 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.
The court found that during the project, the contractor did not request time or additional compensation in accordance with the parties’ contract, which set forth a specific procedure to resolve these claims as follows:
10.05 Claims and Disputes
A. Notice: Written notice stating the general nature of each Claim, dispute, or other matter shall be delivered by the claimant to the ENGINEER and the other party to the Contract promptly (but in no event later than 30 days) after the start of the event giving rise thereto. Notice of the amount or extent of the Claim, dispute, or other matter with supporting data shall be delivered to the ENGINEER and the other party to the Contract within 60 days after the start of such event (unless ENGINEER allows additional time for claimant to submit additional or more accurate data in support of such Claim, dispute, or other matter). A Claim for adjustment in Contract Price shall be prepared in accordance*1194 with the provisions of paragraph 12.01.B. A Claim for an adjustment in Contract Time shall be prepared in accordance with the provisions of paragraph 12.02.B. Each Claim shall be accompanied by claimant’s written statement that the adjustment claimed is the entire adjustment to which the claimant believes it is entitled as a result of said event. * * *
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D. No Claim for an adjustment in Contract Price or Contract Times (or Milestones) will be valid ifnot submitted in accordance with this paragraph 10.05.
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12.01 Change a/Contract Price
A. The Contract Price may only be changed by a Change Order or by a Written Amendment. Any Claim for an adjustment in the Contract Price shall be based on written notice submitted by the party making the claim to the ENGINEER and the other party to the Contract in accordance with the provisions of paragraph 10.05.
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12.02 Change a/Contract Times
A. The Contract Times(or Milestones) may only be changed by a Change Order or by a Written Amendment. Any Claim for an adjustment in the Contract Times (or Milestones) shall be based on written notice submitted by the party making the claim to the ENGINEER and the other party to the contract in accordance with the provisions of paragraph 10.05.
The contract required several notice of requests for time extensions and extra compensation be sent BOTH to the village’s consulting engineer as well as to the village itself. The court held that the letters failed to satisfy the notice requirements of the contract because ”they were not sent to the village.” In strictly enforcing the notice requirements of the contract, the court rejected the contractor’s argument that its failure to comply with the provision was not fatal because the village had actual notice of the requests through its engineer. The court cited Ohio Supreme Court precedent for strict enforcement, quoting as follows:
“[W]e reject [the contractor’s] argument that it was excused from complying with the specific change-order procedure for requesting extensions because the state had actual notice of the need for changes to the deadline, and therefore any failure to comply with procedure was harmless error. The record lacks evidence of either an affirmative or implied waiver by the department or OSU of the change-order procedures contained in the contract. [The contractor] has not convinced us that its failure to request extensions was harmless to *1197 OSU. To the contrary, [the contractor] agreed that the contract language stated that failure to provide written notice “shall constitute a waiver by the Contractor of any claim for extension of or mitigation of Liquidated Damages.” The court of appeals correctly concluded that [the Contractor] “has not demonstrated that it was entitled to disregard its obligations under that part of the contract * * *.”
Waiver of Claims for Subsurface Conditions
Even if adequate notice pursuant to the contract requirements had been given, the court held that the contractor would lose on its differing site condition claim because “the construction contract expressly stated that it was the ‘sole responsibility of the Contractor to take any and all measures he feels necessary to ascertain the subsurface conditions prior to bidding/ and that ‘no claims for additional costs will be considered for material, labor, equipment, or subcontractors/subconsultants to address subsurface conditions encountered during construction.” The court states: “The Spearin doctrine does not invalidate express contractual provisions like these.”
Liquidated Damages Provision is Unenforceable
After acknowledging that parties have the right to contract freely with the expectation that contract terms will be enforced, the court said “penalty provisions in contracts are invalid on public policy grounds because a penalty attempts to coerce compliance with the contract instead of representing damages that may actually result from a failure to perform.” A three-part test for evaluating the enforceability of a liquidated damages provision was previously established by the Ohio Supreme Court as follows:
“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 amounts 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.”
The court found that test 1 and test 3 were both met for enforcing the LD clause but that the evidence did not satisfy the second test. “That is, when 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. Given the circumstances of this case we conclude the amount of damages is so unreasonably high and so disproportionate to the consideration paid that the clause amounts to a penalty.” The court cited other case precedent for the principle that “Reasonable compensation for actual damages is the legitimate objective of the liquidated damages provision and, where the amount specified is plainly unrealistic and inequitable, courts will ordinarily regard the amount as a penalty.” An LD provision would also be unenforceable, concluded the court, where the amount specified is manifestly disproportionate to the consideration paid or the damages that could foreseeably result for a breach.”
Here the court found that the LD amount was nearly a third of the contract price and that the village did not testify as to how that amount bore a reasonable relationship to the amount of damages in the event of a breach. “Where the resulting amount is manifestly inequitable and unrealistic, courts are justified in determining the provision to be an unenforceable penalty.” For these reasons, the court found the LDs in this case to constitute an unenforceable penalty and reversed and remanded to the trial court for further proceedings on damages.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 17, No. 1 (January 2015).
Copyright 2015, ConstructionRisk, LLC
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