While English Law prevents recovery of damages deemed to be too remote, a recent Privy Council decision provides clarification on what is, or is not, too remote.
The Privy Council has ruled that damages claimed by a contractor for a breach of a construction contract to build a water reclamation treatment plant can include the profit that the contractor would have made from operating the plant under a separate, but related, operation and maintenance agreement.
Facts:
The case in question, Attorney General of the Virgin Islands v Global Water Associates Ltd features a dispute between the BVI government (“the Government”) and Global Water Associates (“GWA”) arising from two contracts. The first contract was a design and build agreement (“the D&B Agreement”) which required the Government to provide a prepared development site on which GWA would build a water reclamation treatment plant for the Government. The second contract was a management, operation and maintenance agreement (“the MOMA”) that provided for GWA to run the plant following its completion for a period of 12 years.
The Government breached the D&B Agreement by not providing a development site to enable the plant to be built. GWA terminated the D&B Agreement and claimed damages for breach of contract. As part of its claim, GWA sought to recoup the profit it would have earned under the separate MOMA. The issue was whether this lost profit was too remote to be recoverable.
Summary of the Law on Remoteness of Damages
The test for remoteness was summarised as follows:
- In principle, the purpose of damages for breach of contract is to put the party whose rights have been breached in the same position, so far as money can do so, as if their rights had been observed.
- The party in a breach of contract is entitled to recover only such part of the loss actually resulting as was, at the time the contract was made, reasonably contemplated as liable to result from the breach. To be recoverable, the type of loss must have been reasonably contemplated as a ‘serious possibility’.
- What was reasonably contemplated depends on the knowledge which the parties possessed at the time or, in any event, which the party, who later commits the breach, then possessed.
- The test to be applied is an objective one. One asks what the defendant must be taken to have had in their contemplation rather than only what they actually contemplated. In other words, one assumes that the defendant at the time the contract was made had thought about the consequences of its breach.
- The criterion for deciding what the defendant must be taken to have had in their contemplation as the result of a breach of their contract is a factual one.
Application of the Law to the Facts
The Privy Council found in favour of GWA and held that damages for loss of profit under the MOMA were not too remote. In the opinion of the Privy Council, it was clear that, at the time the contract was made, the Government and GWA would have reasonably contemplated that loss of profit under the MOMA could have occurred if there was a breach of the D&B Agreement. The Privy Council relied on the facts that:
- both the D&B Agreement and MOMA were signed by the same parties on the same day and related to the same plant on the same site;
- the Government knew that the performance of each party’s obligations under the D&B Agreement would lead seamlessly to the commencement of the MOMA;
- both agreements contained the same ‘Design Build Documents’; and
- there was no express term in the D&B Agreement which limited the Government’s liability in damages to GWA’s loss of earnings under the D&B Agreement.
Conclusion
This decision summarises the law of remoteness of damages succinctly and it makes it clear that, where there are two separate but related contracts, a breach of one can enable a claimant to recover damages under the other.
The existence of two related contracts, on its own, does not mean that there is an implicit limitation of the liability for breach of one contract to the loss of earnings from that contract only. Instead, and barring any limitation to the contrary, the question is whether the type of loss would have been in the reasonable contemplation of the parties if they considered the consequences of a breach of contract at the time the contract was entered into.
