Foreseeability is a key concept of contract law : damages caused by a contractual breach are indemnifiable only if foreseeable by the party guilty of the breach.
A fire broke out on a construction site and delayed the delivery of the project. The fire was caused by the combined faults of a subcontractor, its own subcontractor and the latter’s supplier. The owner sued the main contractor and was awarded damages for delays on the basis of a penalty clause. The amount of awarded penalties was six times the real damage resulting from the delays.
The main contractor sought to recover the penalties from its subcontractor. In turn, the subcontractor sought indemnification from the second subcontractor and the latter’s supplier.
The contract between the main contractor and the subcontractor provided that penalties assessed against the contractor would be passed on to the subcontractor. There were no pass-on provisions in the next two levels of contracts between the first and second subcontractors and between the latter and its supplier.
The supplier and subcontractor n°2 had nonetheless been held liable to indemnify the first subcontractor for the whole amount of penalties, not the real damages.
Both had argued that the penalties were not foreseeable.
The Supreme Court held that being liable for the fire did not make them automatically liable for all damages suffered by the first subcontractor. It instructed the lower court to consider whether because of their quantum the penalties were foreseeable by them.
In a chain of contracts, damages do not pass automatically from one level of contract to the next. Unless there is a contractual provision, the test for passage is foreseeability. This would sound like common sense. It nevertheless took a decision of the Supreme Court to say so.