A remotely interesting case

September 2020

Rating system:
Reading time (mins): only 2 or 3
Sophistication level (1 (idiot) – 10 (expert)): 7
Entertainment value (1 (turgid) – 10 (side-splitting)): 5

Background

This is a recent case heard by the Privy Council (basically the UK Supreme Court in disguise). Any case by the Supreme Court is generally worth reporting on as it is the final court of appeal and so its decisions represent the final say on what the actual law is (until new legislation is passed or a subsequent Supreme Court changes its mind). This case was about the basis on which you work out how far you can go when working out for what kinds of losses you can claim damages when there is a breach of contract, before they have to be treated as irrecoverable because they are too remote.

Case

The case was about a dispute between the Government of the British Virgin Islands (‘BVI’) and a company called Global Water Associates (‘GWA’). GWA had entered into two different contracts with BVI. The first was for GWA to design and build a massive water reclamation treatment plant in Paraquita Bay, Tortola. The second was for GWA to manage, operate and maintain the plant for 12 years once it was built.

BVI breached the design and build contract in a major way, entitling GWA to terminate it and claim damages.

GWA also claimed damages for the loss of all the profit it would have expected to make for managing, operating and maintaining the plant for 12 years under the other contract. BVI said that GWA wasn’t entitled to claim for this because those losses were unforeseeable and therefore too remote from the breach of the design and build contract. It said that a plant could have ended up being built to the same spec by someone else and that GWA could still have managed, operated and maintained it under the second contract.

After a long time the case reached the Court of Appeal of the Eastern Caribbean Supreme Court. The court agreed with BVI. GWA appealed to the final possible court, the Privy Council.

What did the Privy Council say?

The Privy Council overturned the Court of Appeal and found in favour of GWA. It found that the 2^nd contract could only start if the first contract was performed, and so GWA was entitled to recover its losses under both contracts.

To back up its decision the Privy Council did a detailed analysis of all the laws relating to what kinds of losses you can claim before they must be treated as being too remote to be claimable. These laws go all the way back to the cornerstone case on this subject way back in 1854, that of Hadley v Baxendale.  The Privy Council then summarised it all in a reminder of the basic building blocks of a contractual damages claim, as follows:

1. 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 (i.e. the injured party looks to what would have happened if the contract had been performed, not back at the position it was in before contracting).
2. Recovery is limited to losses which were, 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.
3. What was reasonably contemplated depends upon the knowledge which the parties possessed at that time (or at least the knowledge possessed by the breaching party).
4. The test to be applied is an objective one. The relevant question is what the defendant must be taken to have had in his or her contemplation rather than only what he or she actually contemplated. The consequence of this objective test is to impose an assumption that the defendant had thought about the consequences of its breach at the time the contract was made.
5. 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.

In  applying these basic principles to the facts of this case, the Privy Council said it was clear that the losses resulting from an inability to earn profits under the 2^nd contract were within the reasonable contemplation of the parties to the first contract, and that losses arising under both contracts were therefore recoverable by GWA.

Comments and tips:

1. Negotiating contracts

When negotiating contracts the more open you are about what you expect to get out of the contract, and what kinds of losses you might expect to hold the other party to be responsible for if things go horribly wrong (eg they are in breach), the easier it might be to make a subsequent damages claim in respect of those losses if they do end up being in breach. You might want to create an appropriate paper trail of correspondence which might help you if it comes to it. See the example I set out in this previous legal briefing.

2. Exclusion and limitation clauses

Conversely, parties to contracts will often want to insert clauses purporting to exclude or limit their liability if they ever do happen to be in breach of contract. It helps to be as clear and specific as possible when drafting these clauses, and to be careful with the legal wording you use, as even many lawyers get confused about what some of the standard legal wording actually means. For example, do you successfully exclude liability for loss of profits by excluding ‘indirect’ losses? (answer: not necessarily). Are ‘consequential losses’ the same as ‘indirect losses’? (answer: not necessarily, depends…).

For more in depth insights and tips on this area feel free to have a look at my previous legal briefing mentioned above, and also this one.

3. Covid

In normal times, the possibility of a global pandemic and the additional types of losses that might follow from a breach of contract would probably not be in the contemplation of parties when they enter into a contract. But the position might be different for contracts being entered into right now…

4. Share purchases and warranties

For a smashing previous legal briefing which looks at how you might work out what kinds of damages you could claim for under the warranty clauses in a share sale agreement have a look here.

 

Case:  Attorney General of the Virgin Islands v Global Water Associates Ltd [2020] UKPC 18