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Privy Council gives a lesson on the remoteness of damage in contract law within a judgment on damages for breach of separate but related contracts

27 August 2020. Published by Chris Ross, Partner and Eliot Henderson, Associate

Where parties have entered into separate but related contracts, breach of one contract does not necessarily preclude the recovery of damages under another.

The Privy Council has also summarised the law in respect of remoteness of damage for breach of contract in Attorney General of the Virgin Islands v Global Water Associates Ltd.(1) 

Background

The BVI government entered into two contracts with Global Water Associates Ltd ("GWA") relating to a proposed water reclamation treatment plant:

  • a Design Build Agreement ("DBA") under which GWA agreed to design and build the plant; and
  • a Management, Operation and Maintenance Agreement ("MOMA") by which the government engaged GWA to manage, operate and maintain the plant once it had been built pursuant to the DBA.

The government breached the DBA by failing to provide a prepared project site to enable the installation of the plant. As a result, GWA was not able to earn the profits which it would have made during the 12-year term of the MOMA. GWA terminated the DBA and referred a claim for damages for loss of profits under the MOMA to arbitration.

The arbitrators found that GWA's claim for damages related to the MOMA were too remote to be recoverable; the parties had chosen to enter into two separate contracts and an award for damages for breach of the DBA was confined to sums payable for the performance of works under that agreement. Following a series of appeals through the BVI courts, the claim found its way to the Privy Council.

Privy Council decision

The Privy Council found for GWA. The judgment provides an overview of the case law on the remoteness of damage in contract law, including Hadley v Baxendale,(2) Victoria Laundry (Windsor) Ltd v Newman Industries Ltd, (3) and Koufos v C Czarnikow Ltd ("The Heron II"),(4) and summarises the law as follows:

  1. 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.
  2. The party in a breach of contract is entitled to recover only such losses as were reasonably contemplated as liable to result from the breach at the time the contract was made.  To be recoverable, the type of loss must have been reasonably contemplated as a serious possibility.
  3. What was reasonably contemplated depends upon the knowledge which the parties possessed at that time (or which the party who later commits the breach then possessed).
  4. The test to be applied is an objective one.  What must the defendant be taken to have had in their contemplation, rather than what did they actually contemplate?  In other words, one assumes that the defendant at the time the contract was made had thought about the consequences of their breach.
  5. The criterion for deciding what the defendant had in their contemplation as the result of a breach of contract is a factual one.

Applying those principles to the facts, the Privy Council found that the losses resulting from an inability to earn profits under the MOMA were within the reasonable contemplation of the parties to the DBA when the contract was made:

  • the contracts were entered into between the same parties on the same day, they both related to the plant and it was clear from both contracts that the parties "envisaged the completion of the DBA to lead seamlessly into the operation of the MOMA"; and 
  • there was no express term in the DBA which limited the government's liability in damages to GWA's loss of earnings under the DBA, and no finding that such a term was to be implied.

Comment

As well as providing a useful higher court summary of the law in respect of the recoverability of damages in contract, this decision makes it plain that, where parties have entered into separate contracts, a breach of one does not necessarily preclude the wronged party from recovering damages under another. The court will consider whether the type of loss was in the reasonable contemplation of the defendant as a serious possibility at the time the contracts were entered into assuming that, at that time, the defendant had thought about the breach.

(1) [2020] UKPC 18

(2) [1854] 9 Exch 341

(3) [1949] 2 KB 528

(4) [1969] 1 AC 350