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25 August 2020
Where parties have entered into separate but related contracts, a breach of one contract does not necessarily preclude the recovery of damages under another. In Attorney General of the Virgin Islands v Global Water Associates Ltd,(1) the Privy Council summarised the law in respect of remoteness of damage for breach of contract.
The BVI government entered into two contracts with Global Water Associates Ltd (GWA) relating to a proposed water reclamation treatment plant:
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 unable to earn the profits which it would have made during MOMA's 12-year term. 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 relating to the MOMA was 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.
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.
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 whose rights have been breached is entitled to recover only such losses as were reasonably contemplated as liable to result from the breach when the contract was made. 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 that time (or which the party which later commits the breach then possessed).
The test to be applied is an objective one – namely, what the defendant must be taken to have had in their contemplation, rather than what they actually contemplated. In other words, one assumes that the defendant thought about the consequences of their breach when the contract was made.
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 because:
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 when the contracts were entered into, assuming that, at that time, the defendant had thought about the breach.
For further information on this topic please contact Eliot Henderson or Chris Ross at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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