Last summer an important “back to basics” judgment that received less attention than it deserved because it was decided by the Judicial Committee of the Privy Council, not the Supreme Court. The case is Att. Gen of the Virgin Islands v Global Water Associated Ltd. [2020] UKSC 18 and gives a useful summary of 5 principles about remoteness of contractual loss.

The parties made two contracts on the same day in 2006, a DBA [Design Build Agreement] and an MOMA [Management, Operation and Maintenance Agreement]. Under the DBA Global agreed to design and build a water reclamation treatment plant and the government of the BVI agreed to provide a prepared site suitable for the installation. Under the MOMA, BVI engaged Global to manage, maintain and operate the plant for 12 years from the start of water processing.

BVI failed to provide a site and Global terminated the DBA. Global claimed as damages for breach of the DBA, or alternatively, for breach of an implied term of the MOMA, the profits it would have made under the MOMA.

The arbitrators found that BVI had breached the DBA but rejected the claim for damages on grounds of remoteness. They also rejected the claim that there was an implied term in the MOMA. The High Court allowed Global’s appeal and ordered the claim be remitted for assessment of damages.  The Court of Appeal allowed BVI’s appeal and reversed that order.

The Judicial Committee, in a unanimous judgment delivered by Lord Hodge, started from basic principles by referring to Hadley v Baxendale [1854] 9 Exch 341 where Alderson B said:

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as 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.”

He said of the second limb:

“Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.”

As to the first limb, by contrast:

“But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred; and these special circumstance were here never communicated by the plaintiffs to the defendants.”

Next Lord Hodge considered Victoria Laundry v Newman Industries Ltd [1949] 2 KB 528 CA. Launderers and dyers wishing to extend their business by taking on profitable dyeing contracts bought a second-hand boiler from Newman, who were engineers, with an agreed delivery date. When contracting, Newman knew that Victoria were launderers and dyers and that they wanted the boiler for business use. Victoria had explained that they intended to put the boiler into use “in the shortest possible space of time”. When third parties, under a contract with Newman, were dismantling the boiler for transportation, it fell on its side and was damaged. Victoria refused to take delivery of the damaged boiler and took delivery of it only after Newman had arranged for its repair, which involved delay of 5 months. They claimed damages for breach of contract, including for loss of profits during the period of delay. The claim included the loss of profits on particularly profitable dyeing contracts which Victoria wished to take on, the existence and details of which had not been communicated to Newman.

The Court of Appeal upheld Victoria’s claim to the extent that they were not precluded from recovering “some general (and perhaps conjectural) sum for loss of business in respect of dyeing contracts to be reasonably expected, any more than in respect of laundering contracts to be reasonably expected.”

Next, Lord Hodge looked at Koufos v Czarnikow Ltd. [The Heron II] [1969] 1 AC 350. Czarnikow chartered the Heron II to carry sugar to Basrah, or at their option to Jeddah. In breach of contract the ship made deviations causing a delay of 9 days. Koufos, the ship owner, knew there was a sugar market at Basrah but did not know that Czarnikow planned to sell the sugar promptly on its arrival. Czarnikow in the Court of Appeal won their claim for damages as the difference between the price of the sugar at its destination when it should have been delivered and the lower price when it was delivered. The House of Lords dismissed Koufos’s appeal, holding the charterers were entitled to damages on that basis.

Finally Lord Hodge referred to the opinion of Professor, now Lord Burrows, that

“The general rule is that loss is too remote if that type of loss could not reasonably have been contemplated by the defendant as a serious possibility at the time the contract was made assuming that, at that time, the defendant had thought about the breach.”

The position may be summarised as follows: –

1st, 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 2nd, the party in a 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.

3rd, 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.

4th, the test is an objective one. One asks 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.

5th, 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.

Applying those principles, it was clear 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 they made that contract.

The arbitrators, while recognising the vital interconnection between the DBA and the MOMA, relied on Burgundy Global Exploration Corpn. v Transocean Offshore International Ventures Ltd. SGCA 24, a decision of the Singapore courts – to hold that damages for loss of profit on the MOMA flowed only from the MOMA.

 Burgundy is clearly distinguishable. Burgundy had entered into a drilling contract with Transocean under which Transocean would provide a drilling rig and drilling services to Burgundy.  They also entered into an escrow agreement which obliged Burgundy to place funds in an escrow account to provide security for payment of the sums which would be due to Transocean under the drilling contract. It was a condition precedent of the drilling contract that the parties would enter into the escrow agreement and the escrow agreement provided that a breach of its terms would entitle Transocean to terminate the drilling contract. Burgundy failed to make the initial deposit of funds and Transocean terminated the drilling contract. The Singapore CA held that the damage caused by Burgundy’s breach of the escrow agreement was the loss of the security.

Transition’s loss of profit from the drilling contract was the result of its decision not to proceed with that contract in the absence of the security which the escrow contract would have provided. Because Transocean could have performed the drilling contract without the security it had to show that there was a breach of the drilling contract itself.

By contrast, BVI’s failure to perform the DBA prevented Global from obtaining profit from its performance of the MOMA. There was also no tenable basis for the arbitrators distinguishing the Victoria Laundry case on the basis that Global would not have owned the Plant when operating it under the MOMA.

The Court of Appeal had upheld the arbitrators’ award but for different reasons:-

“It must be taken as given that the parties would have contemplated at the time the Design and Build Agreement was concluded that if a treatment plant was never built, the respondent [GWA] would be deprived of the opportunity to reap the profits expected to be derived from the fulfilment of its obligations under the Management Agreement.”

Nonetheless, it held that the claim for loss of profits from the MOMA was too remote because BVI could have employed another contractor to build the Plant.

Lord Hodge said that reasoning was “unacceptable”. It is clear as a matter of law that BVI had contracted in the MOMA for Global to manage, operate and maintain the Plant which it had designed and constructed. It is also clear that the parties envisaged the completion of the DBA to lead seamlessly into the operation of the MOMA. It was not necessary to consider the alternative case that there was an implied term in the MOMA which would have entitled GWA to succeed.

Paul Ashwell has a broad civil practice and is recommended as a Band 1 practitioner in 2021 by both Chambers & Partners and Legal 500, who describe him as ‘‘commercially astute, thorough in preparation, easily approachable and exceptional legally knowledgeable’ in their 2021 guide.