Legal Update: Remoteness Of Damages For Breach Of Contract
The Privy Council, the Island's final appeal court, recently reaffirmed the test for remoteness of liability in breach of contract claims in Attorney General of the Virgin Islands v Global Water Associates Ltd (British Virgin Islands)  UKPC 18 ("GWA").
In such a lawsuit, the party would only be entitled to recover damages that:-
Arise spontaneously as a result of a contract breach; or
Are in the parties' fair contemplation at the time of contracting.
A remoteness test is triggered by the second leg, which means that damages can only be sought if they are sufficiently foreseeable.
The British Virgin Islands ("BVI") government had signed two contracts with Global Water Associates ("GWA") ("Global"). The first is for Global to develop and build a water reclamation treatment plant (the "D&B Agreement"), and the second is for Global to finance, run, and repair the plant for a period of 12 years after it is completed (the "Management Agreement"). By failing to have a prepared venue, the BVI government violated the D&B Agreement. As a result, Global cancelled the deals and sought penalties in both the D&B Arrangement and the Management Agreement, claiming that it had sacrificed not only the right to develop the factory, but also the revenues from running it for 12 years.
Global's argument for damages resulting from the Management Agreement was eventually rejected by the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands) after litigation and an appeal, on the grounds that the injuries were not sufficiently probable and hence too distant. Despite violating the D&B Agreement, the Court of Appeal found that the BVI Government should have hired a third party to develop the plant so that Global could continue to run it under the Management Agreement. Global appealed to the Privy Council.
Decision in GWA
The Privy Council granted the appeal, allowing Global to recover costs for expenses incurred not only in the construction of the factory, but also in the 12 years of missed earnings as a result of its failure to operate it. Since the Management Arrangement will only begin until the D&B Agreement was fulfilled, the Court ruled that penalties resulting from a violation were unavoidable to the parties at the time they signed the agreements.
Lord Hodge reached this conclusion after reviewing the historical case law in this field and summarizing the applicable legal concepts on remoteness as follows: –
Damages for breach of contract are intended to put the person whose rights have been violated in the same place as if the contract had been done, to the extent that money will do so.
Losses are limited to those that the parties would have adequately anticipated as a serious possibility in the event of a violation at the time the contract was entered into.
The information that the parties had at the time of contracting determines what was reasonably contemplated.
The measure to be used is objective, which means that instead of asking what the violating party has in mind, one should consider what he should have had in mind. As a result, one would presume that the violating party considered the repercussions of a violation at the time the contract was created.
Finally, a factual checklist is used to determine what the violating party may have been thinking about.
The test for determining and quantifying penalties for breach of contract, as well as the test for remoteness, is the same in the United Kingdom, the British Virgin Islands, and the Isle of Man. Although the ruling in GWA is not modern legislation, it serves as a useful reminder of the common law rules of remoteness of damages and is convincing in the Isle of Man. The GWA decision further reaffirms the principle that only damages that the parties reasonably anticipated at the time of contracting are recoverable. As a result, when a party seeks to reclaim lost profits, the success of the appeal is completely dependent on the empirical matrix and expertise of the parties at the moment the contract is signed.