Remoteness

Attorney General of the Virgin Islands v Global Water Associates Ltd (British Virgin Islands) [2020] UKPC 18

Facts

The British Virgin Islands government engaged Global Water to manage, operate and maintain a water reclamation plant. However, the government failed to prepare the site, in breach of the Design and Build Agreement contract. Global Water terminated the agreement due to this breach, the plant was not built, and Global Water was unable to earn the profits it would have made under a related agreement, the Management, Operation and Maintenance contract.

Were the losses from the maintenance contract too remote to recover from breach of the Design and Build contract? The resulting dispute reached the Privy Council.

Held

Traditional Hadley v Baxendale principles were applied by the Privy Council. In other words:

• Limb one (losses arising naturally i.e. according to the usual course of things, from the breach of contract); and
• Limb two (loss not so arising but “which may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it”).

Damages were found to extend to the profit that the contractor, Global Water, would have made operating the completed water reclamation treatment facility in the British Virgin Islands. This loss was in the reasonable contemplation of the parties when entering the related Design and Build contract. Both agreements were entered into on the same day, by the same parties, in relation to the same plant. The losses under the operating contract were limb two, not too remote to recover for breach of the Design and Build contract.

Comment

Where a relationship is documented in two or more agreements it is important to understand how they interrelate. In this case nothing in the Design and Build Agreement limited the government’s liability for damages claimed under the related operational agreement.

The decision is also of interest as some years ago in The Achilleas the House of Lords held that the traditional two limb test was not necessarily conclusive; that where a loss was reasonably contemplated but a party had not “assumed responsibility” for that loss then that party might escape liability. In a subsequent case, the same reasoning was applied in reverse - a party was held liable for loss not reasonably contemplated on the basis that it had, nevertheless, “assumed responsibility” for the loss.

Where does that leave us?

The Privy Council acknowledged that it was not following The Achilleas reasoning (although it is not clear entirely on what basis). There remains some uncertainty as to the status of the “assumed responsibility” test, although we can say that this test seems to be applied by exception. That said, in this judgment, the Privy Council set out its summary of the law of remoteness. There is a good argument that this represents the law as it now stands:

• “First, 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 his or her rights had been observed.
• But secondly, the party in 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.
• Thirdly, what was reasonably contemplated depends upon the knowledge which the parties possessed at that time or, in any event, which the party who later commits the breach, then possessed.
• Fourthly, the test to be applied is an objective one. The relevant issue is: what the defendant must be taken to have had in his or her contemplation rather than only what he or she 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.
• Fifthly, the criterion for deciding what the defendant must be taken to have had in his or her contemplation as the result of a breach of their contract is a factual one.”