In a case that may have significant ramifications for engineering projects, the Privy Council has concluded that a claim for damages for breach of a Design and Build contract can include the lost profit which a contractor would have made under a related Operation and Maintenance agreement.
In Attorney General of the Virgin Islands -v- Global Water Associates Limited  UKPC18, the government of the Virgin Islands engaged Global Water Associates under two separate contracts relating to a water treatment plant. The first was a design and build agreement, under which GWA were to construct the water treatment plant. The second was a maintenance, operation and management agreement, under which GWA was to operate and manage the water treatment plant for a specified term. By the time the case reached the Privy Council, it was common ground that the Virgin Islands government had breached the design and build agreement by failing to provide a site for the water treatment plant. GWA thus had a claim for damages arising from the breach of the design and build agreement and what was in dispute was whether the damages claim could include the profit which GWA had lost by not being able to run the plant under the O&M contract for the term set out in that contract.
When the case first came in front of an arbitrator, the arbitrator held that the lost profit under the O&M contract was too remote to be recoverable in a claim for damages for breach of the design and build contract.
However, the Privy Council held that the lost profit on the O&M contract was a loss within the reasonable contemplation of the parties to the design and build contract when that contract was entered into.
The judgment is of practical interest because it applies existing legal principles of remoteness of damage to engineering contracts, which commonly provide for construction and operation phases in separate contracts involving the same parties.
There were a number of factors in the case which the Privy Council considered of particular significance, many of which are common in this field, including the fact that both contracts were entered into on the same day and that they both related to the same water treatment plant. The Privy Council concluded that this gave rise to special knowledge on the part of the Virgin Islands government that, if it committed a breach of contract under the design and build contract, such that the operation and maintenance contract became impossible to operate, GWA would lose any profit on that O&M contract.
It was also significant that the design and build contract did not contain an express term excluding liability for lost profit under the O&M contract in the event of a breach of the design and build contract. The Privy Council found no basis on which to imply a limitation of liability either. Moving forward, parties procuring engineering contracts of a similar nature may well want to ensure that limitation of liability clauses are inserted in the design and build contract, to ensure that any losses arising from a breach of that contract can be sensibly limited.
If you would like to know more about procuring design and build or operation and maintenance contracts, please contact Ian Seeley on 01473 794484 or 07773 073885.