Bankers and other business persons should carefully consider a significant change this year to the state’s law regarding contractual default clauses. The change was made by a little-noticed Ohio Supreme Court decision that requires the fairness of such clauses to be assessed from the perspective of the relationship of the parties at the beginning of the contract.  In the case at issue this led to enforcement of an extreme damages claim.

These clauses are commonly called “liquidated damages clauses” because they impose a definite economic cost on the defaulting party when a contract is breached. Such clauses are ubiquitous.  They are most frequently found in construction contracts and in public construction contracts they are often required by the law applicable to governmental bodies.  The clauses are also found in other types of business contracts frequently encountered by bankers such as IT vendor contracts, consulting contracts, contracts for the supply and delivery of equipment, and other contracts for the sale of goods and services where time is of the essence.…