Multiple contracts and the recovery of profit
Attorney General Virgin Islands v Global Water (Privy Council) [2020]
This case considered the ability of a contractor to recover damages in respect of lost profits in circumstances where its appointment was split into distinct contracts covering different stages of the relationship
Facts:
The British Virgin Islands' government (the employer) engaged Global Water Associates (the contractor) to build and then operate a water treatment plant. The parties agreed two separate contracts, a design and build agreement (DBA) and a management, operation and maintenance agreement (MOMA). However, the DBA was terminated by the contractor due to breach by the employer and the plant was never built. The employer failed to provide a prepared project site to enable the installation of the plant as it was required to do under the DBA.
The contractor claimed damages for breach of the DBA, including its loss of profits from being unable to operate the plant under the MOMA. The claim was rejected in arbitration, on the basis that the loss of profit was too remote. Successive appeals led to the Privy Council.
Decision:
The Privy Council held that the contractor's claim for damages for breach of the DBA contract could include the profit it would have made if it had completed the facility and operated it under the related MOMA. The Privy Council held that the resulting loss of profit was within the reasonable contemplation of the parties to the DBA when they entered that contract.
The Privy Council identified the following facts in support of its conclusion:
- The DBA and MOMA were between the same parties, related to the same plant and were executed on the same day (and both contracts incorporated many of the same underlying documents).
- The employer knew that the DBA would lead to commencement of the MOMA.
- The DBA did not exclude liability for loss of profit under the MOMA.
The Privy Council also stated that the mere existence of separate contracts for the construction and operation phases did not by itself support the view that the DBA contained an implicit limitation of liability for breach of contract.
After a review of the main authorities, the Privy Council said that the position on the recovery of damages (remoteness) may be summarised as follows. The contracting party is entitled to recover losses which, at the time the contract was made, were 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’.
What was reasonably contemplated depends upon the knowledge which the parties possessed at the time of entering the contract. The test to be applied is an objective one. One asks what the defendant must be taken to have had in its contemplation. In other words, one assumes that the defendant at the time the contract was made had thought about the likely consequences of its breach.
It was thought to be 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.
Points to Note:
- The simple fact of splitting arrangements into two distinct contracts did not have the effect of avoiding or limiting liability (at least based on these facts).
- The outcome may have been quite different had either contract excluded liability for ‘loss of profit’ although query whether such an exclusion would have been upheld by the court?
- There doesn’t seem to have been any discussion about any financial caps on liability – which, again, could have had a major impact on the damages which could be recovered by the contractor.