Are Liquidated Damages Clauses Enforceable in Ohio?
We previously discussed how Colorado treats liquidated damages clauses. Put simply, liquidated damages clauses are used in some contracts to establish the damages upfront in the event of a breach of the contract–usually, damages that are difficult to prove. Ohio courts use a different test than Colorado when determining whether a liquidated damages clause is enforceable.
The test constructed by the Ohio Supreme Court in a 1925 opinion in Jones v. Stevens states 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 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.
If the liquidated damages clause does not satisfy the above test, then it is considered a penalty and unenforceable.
As the court makes clear, the inquiry is a factual one, dependent on the circumstances in each case. In Jones v. Stevens, the plaintiff, Jones, was a successful restaurant owner–in fact, both parties were experienced in the restaurant business. Jones contracted with Stevens for Stevens to operate the restaurant on Jones’s behalf. They negotiated a detailed contract which included a liquidated damages clause for the loss of “good will” in the business if Stevens breached the contract. Stevens ended up abandoning the restaurant and Jones, despite his efforts, could not bring the restaurant back to being profitable. Jones sued Stevens for various damages, including the $5,000.00 (this was 1925!) in liquidated damages for loss of good will. The court initially noted that good will is an actual business asset and that it is difficult to estimate. Additionally, the court noted that the sum they had fixed in liquidated damages for loss of good will “was [not] so unreasonable and disproportionate as to justify the conclusion that it did not express the true intention of the parties at the time it was made[.]” For this reason, the court find the liquidated damages clause enforceable.
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