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You are here: BAILII >> Databases >> The Judicial Committee of the Privy Council Decisions >> Attorney General of the Virgin Islands v Global Water Associates Ltd (British Virgin Islands) [2020] UKPC 18 (13 July 2020) URL: http://www.bailii.org/uk/cases/UKPC/2020/18.html Cite as: [2020] UKPC 18, [2021] AC 23, [2020] 3 WLR 584, [2020] WLR(D) 431 |
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Trinity Term
[2020] UKPC 18
Privy Council Appeal No 0107 of 2018
JUDGMENT
Attorney General of the Virgin Islands (Respondent) v Global Water Associates Ltd (Appellant) (British Virgin Islands)
From the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands) |
before
Lord Hodge Lord Wilson Lord Lloyd-Jones Lady Arden Lord Sales
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JUDGMENT GIVEN ON |
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13 July 2020 |
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Heard on 12 March 2020 |
Appellant |
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Respondent |
Benjamin Strong QC |
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Giselle Jackman-Lumy, |
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Principal Crown Counsel |
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Maya Barry, |
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Crown Counsel |
(Instructed by Sinclair Gibson LLP) |
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(Instructed by Charles Russell Speechlys LLP (London)) |
LORD HODGE:
2. The Government of the British Virgin Islands (“the Government”) entered into two contracts with Global Water Associates Ltd (“GWA”) on 19 September 2006 relating to a proposed water reclamation treatment plant at Paraquita Bay in Tortola (“the site”). The first contract is a Design Build Agreement (“the DBA”) under which GWA agreed to design and build a 250,000 US gallons per day water reclamation treatment plant (“the Plant”) at the site. The second contract is a Management, Operation and Maintenance Agreement (“the MOMA”) by which the Government engaged GWA to manage, operate and maintain the Plant at the site. Clause 3.1 of the MOMA provides that the agreement is for a period of 12 years from the commencement date, which, as is discussed below, is the date when the Plant is first capable of achieving the level of water processing for which the Government contracted in the DBA.
3. As the Board explains below, the dispute between the parties arises out of a breach of contract by the Government, which failed to provide a prepared project site at the site to enable the installation of the Plant as it was required to do under the DBA. This had the consequence that the Plant was not built. As a result of this breach of the DBA, GWA was not able to earn the profits which it would have made from managing, operating and maintaining the Plant during the 12-year term of the MOMA. GWA validly terminated the DBA after giving the Government contractual notice to remedy its default, to which the Government failed to respond. GWA then referred to arbitration its claim for damages for breach of the DBA. It also claimed a breach of an implied term of the MOMA to the effect that the Government would perform its obligation under the DBA to provide a prepared site.
The legal proceedings
9. GWA now appeals to the Board with final leave of the Court of Appeal.
The parties and the contractual provisions
10. GWA was the exclusive manufacturer’s representative for the British Virgin Islands (“BVI”) of the United States company, Purestream ES LLC (“Purestream”). Purestream was to manufacture and provide the plant to GWA for performance of the DBA.
“‘Commencement Date’ means the date on which the Treatment Plant is first capable of processing 250,000 US gallons per day of Influent for transfer to the Effluent Transfer Point, such date to be agreed in writing between the Government and the Company and shall become an integral part of this Agreement.”
Although, strangely, the term, “Commencement Date” was not used in the DBA as signed, it is clear that it must have been envisaged that the “commencement notice” which GWA was to issue after the Government took ownership of the Plant following substantial completion and which is otherwise undefined would be consistent with that definition.
13. Clause 9, which deals with substantial completion of the Plant, states:
“When the Company has completed the installation of the Treatment Plant, including the testing and commissioning thereof, such that it may be used for the purposes for which it is intended (‘Substantial Completion’) the Government shall issue a Taking over Certificate transferring ownership of the Treatment Plant to the Government. Thereafter, the Company [GWA] shall issue a ‘Commencement Notice’ no later than ten days after receipt of the Taking Over Certificate, indicating the commencement of the management, operation and maintenance phase of the Treatment Plant.” (Emphasis added)
“(1) A prepared project site suitable for installation of Water Reclamation Facility to include paved parking, fencing, lighting, landscaping and excavation.
(2) A boundary and topographic survey of the property. …”
The clause also obliged the Government to provide a paved access drive / roadway to the project site and to facilitate the provision of a temporary construction telephone and electrical supply within 60 days of the notice to proceed.
“for the purposes set forth in this Agreement, the right to use, occupy and have access to the Treatment Plant at all times during the performance of this Agreement, all without cost or charge to the Company, its subcontractors or agents.” (clause 8.1)
No rights of ownership of the Plant were given to GWA (clause 8.1).
Discussion
19. The arbitrators, while accepting that “[p]erformance of the MOMA was manifestly conditional upon completion of the DBA” and that there was a “vital interconnection” between the two contracts (para 17), held that the claim for loss of profits on the operation of the MOMA was too remote. The arbitrators referred to the classic cases of Hadley v Baxendale (1854) 9 Exch 341 and Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 for the general principles on remoteness of damage in contract and also to a judgment of the Singapore Court of Appeal in Burgundy Global Exploration Corpn v Transocean Offshore International Ventures Ltd [2014] SGCA 24, which the Board discusses below. They purported to apply the reasoning in the Burgundy case to the facts of this case, emphasising that the parties had chosen to enter into two separate contracts. They held that the natural and direct consequence of a breach by the Government of the DBA was that GWA would lose such monies (if any) as it was entitled to receive under the DBA. The arbitrators sought to distinguish the Victoria Laundry case on the basis that the claimant in that case was to be the owner of the boiler which it had contracted to purchase and which it would use to earn profits. By contrast, the Government were to own the Plant and GWA had no right, except under the MOMA, to operate the Plant. The arbitrators held (paras 42-44):
“Breach of the DBA prevented the fulfilment of a condition precedent to the performance of a distinct and separate contract; it prevented the MOMA from commencing. But there was no promise in the DBA to satisfy the requirement for commencement of the MOMA.
Without the MOMA commencing [GWA] did not have the opportunity or any right to make a profit. It could have these only under the MOMA. Damages for loss of profit from the MOMA would flow from breach of the MOMA. They did not flow from breach of the DBA.
It is, therefore, our conclusion that the loss of profits resulting from the failure to commence the MOMA, although the indirect consequence of the breach of the DBA, may not be recovered by way of an award of damages for breach of the DBA. They are too remote in law.”
21. In Hadley v Baxendale, as is well known, the owners of a flour mill in Gloucestershire sent a broken iron shaft of the mill to engineers in Greenwich for use as a template in the manufacture of a new shaft. The defendants, trading as Pickford & Co, who transported the shaft, knew, at the time when the contract of carriage was made, that they were transporting a broken shaft and that their customers were the owners of a mill. The delivery of the shaft to the engineers was delayed and the mill owners were not able to operate their mill until they received a new shaft. They claimed as damages for breach of contract the losses which they suffered as a result of the stoppage of their mill during the period of delay. Alderson B gave the judgment of the Court holding that the claim for loss of profits was too remote because the circumstances that the shaft was being transported to be a model for the manufacture of a new shaft and that the mill could not operate until the new shaft was delivered had not been communicated to the carriers. Famously, he stated the principle in these terms (p 354):
“[T]he proper rule in such a case as the present is this:- 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, ie, 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.” (Emphasis added)
The Board has emphasised the words “either” and “or” as the markers of what has long become known as the first and second limbs of the rule in Hadley v Baxendale. In relation to the second limb, which is relevant in this appeal, Alderson B continued (pp 354-355):
“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.”
Alderson B contrasted that with the operation of the first limb, in the absence of any communication that the shaft to be transported was a model for a new one and that the mill could not operate until the new shaft was delivered, when he went on to say (p 356):
“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.” (Emphasis added)
In the Board’s view, the underlined words gave further specification of the idea in the first limb of loss arising according to the usual course of things.
23. In Victoria Laundry (above) launderers and dyers who wished to extend their business by taking on profitable dyeing contracts purchased a large second-hand boiler from the defendants, who were engineers, with an agreed date of delivery. At the time of the contract, the defendants knew that the purchasers were launderers and dyers and that they wanted the boiler for use in their business. In the negotiations for the purchase, the purchasers had explained in a letter that they intended to put the boiler into use “in the shortest possible space of time”. When third parties, under a contract with the defendants, were dismantling the boiler for transportation, it fell on its side and was damaged. The purchasers refused to take delivery of the damaged boiler and took delivery of it only after the defendants had arranged for its repair, which involved a delay of five months. The purchasers 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 the purchasers wished to take on, the existence and details of which had not been communicated to the sellers. The Court of Appeal upheld the purchasers’ claim to the extent that it held 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” (p 543).
24. In delivering the judgment of the Court of Appeal Asquith LJ set out six principles or propositions which the Court derived from the case law but the House of Lords later reviewed them in the speeches in Koufos v C Czarnikow Ltd (“The Heron II”) [1969] 1 AC 350.
26. The Board is not concerned in this appeal with the recoverability of damages caused by unusual volatility in the market or questions of market understanding, which the House of Lords addressed in Transfield Shipping Inc v Mercator Shipping Inc (“The Achilleas”) [2008] UKHL 48; [2009] AC 61, and in which Lord Hoffmann and Lord Hope of Craighead sought to bring into play the concept of assumption of responsibility as a further limitation on contractual damages. It suffices in this appeal to consider what the House of Lords in The Heron II stated more generally about the principles governing remoteness of damage.
27. In The Heron II the House of Lords considered Asquith LJ’s six principles in Victoria Laundry and in general endorsed them. The principal focus of the debate in the House of Lords was on his sixth principle which was concerned with the likelihood of the result. Asquith LJ stated in his sixth principle (p 540) that it was not necessary that the defendant could as a reasonable person “foresee that a breach must necessarily result in that loss”. It was sufficient that he could foresee that it was likely so to result and he favoured the expression that the loss was “liable” to result. In reaching this view Asquith LJ referred to the language of Lord Du Parcq in Monarch Steamship Co Ltd v Karlshamns Oljefabriker A/B [1949] AC 196 and borrowed from him expressions such as “serious possibility” and a “real danger”. He referred also to the colloquialism “on the cards”. Lord Reid (p 383) preferred the words “not unlikely”, which denoted “a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable”. Lord Morris of Borth-y-Gest re-affirmed the role of Hadley v Baxendale as enshrining the guiding rules on remoteness of damage in contract (p 393). He hoped that undue emphasis would not be placed upon any one word or phrase in applying that guidance and stated that under the first limb of the rule in Hadley v Baxendale it is “very largely a question of fact as to whether in any particular case a loss can ‘fairly and reasonably’ be considered as arising in the normal course of things” (pp 396-397). Lord Hodson stated that he could not improve on the phrase “liable to result” and thought that the repeated use of the expression “in the great multitude of cases” in Hadley v Baxendale gave guidance as to meaning (pp 410-411). Lord Pearce emphasised the voluntary nature of the contractual obligations which parties undertook and saw the role of the court as being to determine what the parties reasonably contemplated as the scope of their liability if it was not expressly stated or implied into their contract. He was content with each of the expressions used in Victoria Laundry except the phrase “on the cards” (pp 414-415). Lord Upjohn (pp 424-425) agreed that Victoria Laundry had not altered the law set out in Hadley v Baxendale and was content to adopt the test of a “real danger” or a “serious possibility”.
28. In the common law tradition the phrases and expressions used by judges do not have and should not be accorded the status of the words of a statute. In the Board’s view it is more important to identify what it is that judges have been trying to encapsulate in their choice of language. And that is whether as a question of fact the parties to a contract, or at least the defendant, reasonably contemplated, if they applied their minds to the possibility of breach when formulating the terms of the contract, that breach might cause a particular type of loss. In the context of contractual liability, the court is not concerned solely with the percentage chance of such an event occurring, although that is not irrelevant. Thus Lord Reid in The Heron II considered that the 51:1 chance of drawing the nine of diamonds from the top of a well-shuffled pack of cards was too low to meet his “not unlikely” test (p 390) and Lord Upjohn rejected as too unlikely the chance of winning a prize on a premium bond on any given drawing (p 425), both rejecting the expression “on the cards” for that reason. Lord Pearce (pp 416-417) in his discussion of the first limb of the rule in Hadley v Baxendale gave the example of a contractor employed to repair the ceiling in a courtroom who carried out the job without due care with the result that the roof fell on the heads of people in the room. Taking account of nights, weekends and court vacations, he estimated that the chance of the roof falling when the court was occupied was almost 10:1 but it was a natural and obvious result of the breach of contract. That is clearly correct. Lord Walker of Gestingthorpe in The Achilleas (para 78) stated that their Lordships in Victoria Laundry had well in mind that it was not simply a question of probability. He continued:
“It is also a question of what the contracting parties must be taken to have had in mind, having regard to the nature and object of their business transaction. If a manufacturer of lightning conductors sells a defective conductor and the customer’s house burns down as a result, the manufacturer will not escape liability by proving that only one in a hundred of his customers’ buildings had actually been struck by lightning. …
Arguably a vague expression (such as ‘real possibility’) is actually preferable, because it is more flexible, once it is understood that what is most important is the common expectation, objectively assessed, on the basis of which the parties are entering into their contract.”
29. More recently, Professor Andrew Burrows (now Lord Burrows) in “A Restatement of the English Law of Contract” (2016), in which he was assisted by an advisory board of academics, judges and practitioners, described the general rule on remoteness of damage in contract in these terms (p 20):
“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.” (Emphasis added)
Drawing on The Achilleas, the text went on to state a further restriction on recoverability based on whether the defendant had assumed responsibility for the loss. But, as the Board has stated, the question of such a restriction does not arise on this appeal.
30. From this brief review of the main authorities, the position may be summarised as follows.
36. Applying those principles to the facts of the case, it is 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. First, the contracts were entered into between the same parties on the same day and they both related to the same Plant on the same site, giving rise to special knowledge under the second limb of the rule in Hadley v Baxendale. Secondly, the Government when it entered into the DBA knew and intended that the performance of each party’s obligations under the DBA would lead to the commencement of the MOMA as clause 9 of the DBA (para 13 above) envisaged the commencement of the “management, operation and maintenance phase” of the Plant. Thirdly, the Design Build Documents which were incorporated into the DBA were the same documents as were incorporated into the MOMA, identifying Purestream as the manufacturer of the Plant and GWA as its exclusive representative in the BVI (para 12 above). Fourthly, there is no express term in the DBA which limits the Government’s liability in damages to GWA’s loss of earnings under the DBA and no finding by the arbitrators that such a term was to be implied into the DBA.
“Breach of the DBA prevented the fulfilment of a condition precedent to the performance of a distinct and separate contract; it prevented the MOMA from commencing.”
38. The arbitrators, while recognising the vital interconnection between the DBA and the MOMA, relied on the Burgundy case (above) to hold that damages for loss of profit on the MOMA flowed only from the MOMA. This is untenable because, as Leon J found, the circumstances in Burgundy are clearly distinguishable. In that case Burgundy entered into a drilling contract with Transocean under which Transocean would provide a drilling rig and drilling services to Burgundy. The parties 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 Court of Appeal held (para 45) that the damage caused by Burgundy’s breach of the escrow agreement was the loss of the security. Transocean’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 separate 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, in this case the failure to perform the DBA prevented GWA from obtaining profit from its performance of the MOMA.
39. The arbitrators in this case made no finding as to why GWA and the Government created two separate contracts for the two phases of their arrangement. There may have been several reasons for splitting the arrangement into the two contracts, not least that the obligations under the DBA would be spent after the commencement notice on the expiry of the defects liability period and the payment of the 10% retention under clause 12. In any event the existence of two contracts cannot by itself support the view that the DBA contains an implicit contractual limitation on liability for breach of contract.
40. There is also no tenable basis for distinguishing the Victoria Laundry case on the basis that GWA would not have owned the Plant when operating it under the MOMA.
“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, the Court of Appeal held that the claim for loss of profits from the MOMA was too remote because the Government could have employed another contractor to build the Plant. The Board is unable to accept this reasoning. When one has regard to the incorporation of the same Design Build Documents into both the DBA and the MOMA (para 12 above) it is clear as a matter of law that the Government had contracted in the MOMA for GWA to manage, operate and maintain the Plant which it had designed and constructed, using Purestream as manufacturers. It is also clear from clause 9 of the DBA (para 13 above) when read alongside the definition of “Commencement Date” in both contracts that the parties envisaged the completion of the DBA to lead seamlessly into the operation of the MOMA. Contrary to the view of the Court of Appeal, the Board is satisfied that there was no error of law in the findings of the arbitrators in para 17 of the award (para 37 above) that the MOMA could only commence if the DBA was performed.
43. The appeal therefore must succeed.
Conclusion
45. The Board will humbly advise Her Majesty that the appeal should be allowed.