Download Hadley v Baxendale: A Modern Perspective on Lost Profits in Contract Law and more Study notes Construction in PDF only on Docsity! Authors/PresentersSummary From time to time, those seminal cases we all studied during the early parts of our career pop up in practice. We’re all familiar with them: the snail in the bottle in Donoghue v Stevenson; the spurious sounding flu remedy in Carlill v Carbolic Smoke Ball Co — the list goes on. Of these key cases, one that has us continually reaching for the textbooks and considering in increasingly varied circumstances is the Court of Exchequer’s 1854 decision in Hadley v Baxendale. The scope of recoverability for damages arising from a breach of contract laid down in that case — or the test for “remoteness“— is well-known: Now we think the 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, i.e., according to the usual course of things, from such breach of contract itself, or such as may Simon Thompson Senior Associate London simon.thompson@bclplaw.com October 1, 2020 Global Water Associates: applying Hadley v Baxendale Page 1 of 5 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. The proper application of the two limbs to commercial contracts has remained a hot topic ever since, with the Privy Council’s decision in Attorney General of the Virgin Islands v Global Water Associates Ltd being the most recent addition to a long line of such cases. In this case, the Privy Council upheld a contractor’s claim for damages for breach of a construction contract that included the profits that the contractor would have made on both the design and construction phase of the project and its subsequent operation and maintenance under a separate agreement on the basis that the loss of profits under the separate contract fell within the second limb. Identifying whether lost profits are recoverable is a confusing exercise at best. The simple limbs cited above in theory should lead to clear results, but the reality is that they have led to 170 years of uncertainty with cases turning on their facts. Therefore any judicial guidance on the operation of the limbs is always welcome. This blog takes a closer look at this case and considers what we can learn from it. The facts – a quick recap In September 2006, the Government of the British Virgin Islands engaged Global Water Associates Ltd (GWA) under the following two contracts: a Design and Build Agreement (DBA) for GWA to design and build a water treatment plant; and a Management, Operation and Maintenance Agreement (MOMA) for GWA to manage, operate and maintain the plant. The Government substantially breached the DBA by failing to deliver a prepared site to GWA, and the water treatment plant was not built. GWA terminated the DBA after issuing a notice to remedy, to which the Government did not respond, and pursued its claims in an arbitration. The dispute weaved its way up to the Privy Council for final determination. GWA’s two claims that were relevant to the appeal were: Page 2 of 5
