Attorney General of the Virgin Islands v Global Water Associates Ltd (British Virgin Islands)

In contractual claims, recoverable damage is loss of the type which, when the contract was made, the parties reasonably contemplated as a serious possibility resulting from breach. The inquiry is objective and factual. It considers the parties’ knowledge at formation and assumes that the defendant had considered the consequences of breach. Separate contracts do not, without more, create an implied limitation confining damages to loss arising under the breached contract. Where connected contracts are made by the same parties for successive phases of one commercial arrangement, profits under the later phase may be within the reasonable contemplation of the earlier contract. An alternative means of performance does not necessarily make that loss too remote.

The Government of the British Virgin Islands entered into a Design Build Agreement and a Management, Operation and Maintenance Agreement with Global Water Associates Ltd for a water reclamation plant. The Government failed to provide the prepared site required by the first agreement, so the plant was not built and the later management agreement did not commence.

An arbitral tribunal accepted the breach of the Design Build Agreement but held that profits which would have been earned under the management agreement were too remote. It also rejected an implied term in the management agreement. Leon J upheld GWA’s contentions and remitted the award, but the Court of Appeal of the Eastern Caribbean Supreme Court allowed the Government’s appeal. The central issue was whether the lost management profits were recoverable for breach of the Design Build Agreement.

1. Appeal allowed. The Board advised that the appeal should be allowed. The arbitrators’ conclusion that profits under the Management, Operation and Maintenance Agreement were too remote disclosed an error of law on the face of the award.
2. The governing rule in Hadley v Baxendale (1854) 9 Exch 341 is that damages are recoverable only to the extent that the type of loss was, when the contract was made, reasonably contemplated as liable to result from breach. The relevant threshold is a serious possibility. The assessment is objective and factual. It depends on the parties’ knowledge at formation, including knowledge possessed by the party later in breach, and assumes that the defendant had considered the possible consequences.
3. The two agreements were made by the same parties on the same day and concerned the same plant and site. Their incorporated documents and provisions showed that performance of the Design Build Agreement was intended to lead seamlessly to operation under the management agreement. The Government therefore had the requisite special knowledge under the second limb of Hadley v Baxendale, and the lost management profits were within reasonable contemplation.
4. The use of two contracts did not itself imply a limitation of liability. Nor did the Government’s possible ability to procure construction by a third party make the loss too remote. The Board distinguished Burgundy Global Exploration Corpn v Transocean Offshore International Ventures Ltd [2014] SGCA 24 because, unlike that case, non-performance of the Design Build Agreement prevented GWA from obtaining the profits of the later agreement.
5. It was unnecessary to decide the alternative implied-term claim. The proposed implied term differed from the term pleaded before the arbitrators, so the arbitrators did not err in law by failing to uphold an argument that had not been pleaded.

• Privy Council: Appeal allowed; the Board advised that Her Majesty should allow the appeal.
• Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands): Appeal allowed on 13 February 2018. The Court held that the lost profits were too remote and rejected the alleged implied term.
• High Court: Leon J, on 1 February 2016, upheld GWA’s contentions concerning recoverability of the lost profits and the implied term, and remitted the award to the arbitrators.
• Arbitration: The arbitrators delivered their award on 18 August 2014, finding a breach of the Design Build Agreement but rejecting the lost-profit claim as too remote and finding no implied term in the management agreement.