Causation – Remoteness and Foreseeability Tests in Determining Eligibility of Claims

Causation – Remoteness and Foreseeability Tests in Determining Eligibility of Claims

There has to be a sufficient connection between the breach and the loss in order for a party to recover damages for the breach of a contract. Basically, the damage or loss itself must be caused by the breach of contract. This is referred to as causation. Also, the damage suffered by reason of an intervening act by a third-party which the other party to the contract could not have reasonably foreseen will not be recoverable from that other party.  This means that in the event the loss is sufficiently caused by the breach of contract, damages claims are also limited by the losses that the other party to the contract reasonably ought to have foreseen to have flowed from the breach. This is called foreseeability test that is judged in relation to the time the contract was formed, and not the time of the breach. If a defendant could not reasonably have foreseen that someone might be hurt by their actions, there may be no liability. This is known as remoteness.

Elaborating the tests, it is well-known amongst the heads of claim for loss and expense the loss of opportunity is always a disputed issue. A contractor may claim that, but for the delay in the project, the workforce in his head office would have had the opportunity of being employed on another contract which would have had the effect of contributing to the overheads during the overrun period. The next step would be in principle to prove that there was other work available which, but for the delay, he would have secured but which in fact, because of the delay, he could not secure. Apparently because of the remoteness in damage where a precise justification or evaluation is difficult, if not impossible, it is always prudent to put forward evidence alone with the prevalence of such causes through records in order to establish the issues are genuine before contesting on contractual eligibility. For example, if the Contractor encounters adverse physical conditions which he considers to have been unforeseeable, the Contractor shall give notice to the Engineer as soon as practicable. But it is essential to have the physical conditions clearly described in the notice so that it may be inspected by the Engineer, and shall set out the reasons why the Contractor considers them to be unforeseeable. However one would argue that the usual contract clauses are difficult to administer because they embody a subjective standard in the way the Engineer decides. The test of entitlement is still foreseeability. So that which was foreseeable by an experienced Contractor at tender does not qualify whereas that which is not, and which was not actually foreseen, does.

Under these circumstances, the most important thing is to make sure the Contractor had adequate opportunity to make a visual inspection of the site and considered all available geological and exploratory information. This means that the engineer should also take equal initiative to gather such information and give it to the contractors with explicit warnings of indicators of difficult conditions. Those who adhere to the foreseeability standard have no difficulty concluding that this risk should not be transferred to the contractor. However, those who prefer the ‘management standard’ argue that this risk belongs to the Employer because the Employer has the best opportunity to control or avoid the risk through adequate site exploration and investigation. It cannot seriously be argued that the Contractor has similar opportunity, and anyway Employers do not want multiple Contractors performing site explorations for a whole host of practical reasons.

Generally, for contractors seeking to prove a claim of lost profit due to omitted scope for instance, it is critical to demonstrate that his loss of profit by the omission of work is genuinely incurred because his inability to recover that loss elsewhere. It is not sufficient to simply argue that the lost profit is speculative on the basis of a profit allowance in tender. (For example: loss of profit = value of omitted work x 15% profit margin) However, this is can be a cumbersome exercise to be dealt with far remote factors, both for justification and evaluation. It could also be argued that the parties have entered into contract clauses together with their repercussions taken on board to have already agreed unless the contract expressly forbids or provides for, irrespective of whether they are reasonably foreseeable or not.

In a claim for unabsorbed overhead in a contract prolongation, it is impossible to accurately measure any under absorption of head office overheads whenever the damages become too remote and speculative. However, the contractor’s entitlement as to claim for additional overhead costs has been confirmed in case-law. But the burden of proof to demonstrate such lost opportunity or the under recovery of head office overheads entirely lies with the contractor. If the contractor is unable to show evidence to support this proposition, the claim would have to be based on actual costs through contemporary records.

MALCONLAW 2011

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