Notice Provisions & Liquidated Damages. Their Enforceability & Importance in a Construction Contract.

    In the case of Boone Construction, Inc. v. The. Village of Piketon, 2014 – Ohio – 2377 (2014) the Appeals Court for the 4th District dealt with both of the above issues.

Have you ever heard the admonition: “Read the Contract?” Contractors do themselves a huge disservice by not 1) completely reading and understanding their  responsibilities to give notice as set forth in the contract, and 2) not actually giving notice of contract claims arising under the contract to the Owner in accord with the contract provisions.

In this case the contractor failed to comply with the detailed provisions of the contract that required it to give notice of the general nature of any request for extensions of time and/or adjustment to the contract price to the village and engineer. Accordingly the Court found the contractor was not entitled to additional compensation or extension of project completion date.

The Court so found even though the contractor did give notice to the engineer and even though the village had actual notice.  However, the failure to give notice under the contract to the village was fatal to the contractor.

The contractor in this case ran into subsurface soil conditions not disclosed in site plans included with the bid documents. By never having given notice of this issue to the village as required by the contract  the Court found that the contractor was precluded from claiming any damages relative thereto.

The Court held “…where contract expressly stated that it was the sole responsibility of the contractor to take any and all measures necessary to ascertain the subsurface conditions prior to bidding and that no claims for additional costs would be considered for material, labor, equipment, or subcontractors/subconsultants…”  the contractor was contractually precluded from claiming any damages or time extensions for its increased costs and additional time.

As for the most challenging of all construction claims – the claiming and collecting of  damages, we all know only too well that damages are very difficult, even impossible, to accurately forecast. Therefore the law allows the parties to estimate Liquidated Damages at the front end of a contract.  However, to be enforceable, the amount chosen for liquidated damages must be reasonable, and not simply a penalty.

In this case the Liquidated Damages were $700 per day. Because the contract was delayed for 397 days the village claimed Liquidated Damages of $277,900 which would have produced an award nearly equal to one third of the value of the contract. The Court found that although $700 a day in and of itself may be reasonable, when the Court reviews the contract as a whole Liquidated Damages of $277,900 is no longer “reasonable “, but a unenforceable penalty. The Appeals Court remanded the case to the Common Pleas Court for further proceedings on the question of the appropriate amount of Liquidated Damages.

The lesson for the contractor:  Protect yourself; read and strictly follow all of the terms of the contract especially with regard to Notice and ensure that those notices are timely given and to the right people.  Often, the assistance of counsel early in the process can avoid many of the issues demonstrated here.

The lesson for the City: Don’t be greedy when it comes to Liquidated Damages; ensure that the established amount bears some relation to the damage that will be incurred if performance is not timely.

If after reading this article you have any questions about the world of construction law generally or as it applies to any specific situation in which you are involved please call any of the construction law attorneys at Pickrel, Schaeffer and Ebeling, Alan B. Schaeffer, Michael W. Sandner, David H. Montgomery and/or Gerald L. McDonald at 937-223-1130.

AUTHOR: Mike Sandner
msandner@pselaw.com