Remoteness Of Damages ' Privy Council Summarises Principles

• Published date: 07 September 2020
• Subject Matter: Government, Public Sector, Litigation, Mediation & Arbitration, Government Contracts, Procurement & PPP, Trials & Appeals & Compensation
• Law Firm: Gowling WLG
• Author: Ms Catherine Naylor and Sean Adams

The Judicial Committee of the Privy Council recently handed down a judgment - Attorney General of the Virgin Islands v Global Water Associates Ltd [2020] UKPC 18 - clarifying and summarising the test for remoteness of damages in breach of contract claims. In doing so, five Justices of the UK Supreme Court (sitting as the Privy Council Board) provided a reminder in uncertain times of what a claimant seeking to recover damages will need to demonstrate.

Background

In 2006, the Government of the British Virgin Islands ("BVI") entered into two contracts with Global Water Associates ("GWA"): (1) an agreement for GWA to design and build a 250,000 US gallons per day water reclamation treatment plant in Paraquita Bay, Tortola (the "DBA"); and (2) an agreement for GWA to manage, operate and maintain the plant for 12 years once built (the "MOMA").

The BVI Government breached the DBA, leading GWA to terminate and claim damages flowing from both the DBA and MOMA (on the basis that it had lost not only the ability to build the plant, but also to profit from 12 years of managing, operating and maintaining it).

After a long-running legal battle, in February 2018 the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands) rejected GWA's claim that it was entitled to the lost profits it would have obtained under the MOMA on the basis that those losses were unforeseeable and therefore too remote from the breach of the DBA. The Court of Appeal's decision was based on its view that even if GWA terminated the DBA, the BVI Government could have had a treatment plant built by a third party which it could then have offered to GWA to manage, operate and maintain.

The Privy Council overturned the Court of Appeal's finding. It found the MOMA could only commence if the DBA was performed, and so GWA was entitled to its losses under both agreements. In doing so, it clarified and summarised the test for remoteness of damages in breach of contract claims.

Test for remoteness of damages

The Privy Council started its analysis by looking back over 150 years to the two-limb test established in Hadley v Baxendale (1854) 9 Exch 341, which remains the bedrock in this area. In the event of a breach of contract, a party will only be entitled to damages falling within one of these two categories:

1. Damages arising naturally from the breach of contract ("Limb 1"); or
2. Damages in the reasonable contemplation of the parties at the time of contracting ("Limb 2").

Limb 2 of...