CMS Expert Guide to consequential loss in the energy sector

The CMS Expert Guide to consequential loss in the energy sector (the “Guide”) provides a summary of the approach to consequential loss in 39 jurisdictions.

Download the latest update of the CMS Expert Guide to Consequential Loss Clauses in the Energy Sector.

The Guide approaches this complex area in the form of responses to a set series of questions:

1. Do the words “consequential loss” have a given meaning in law?
2. Are the words “consequential loss” used in contractual exclusion of liability clauses?
3. If so, what meaning is attributed to the words “consequential loss” in contractual exclusion clauses?
4. Where a clause includes other heads of loss alongside “consequential loss”, how will the law approach such clauses?
5. Do consequential loss exclusion clauses have an impact on non-damages claims?

The Guide contains copies of finalised jurisdictional responses, as shown in the index. 

The key trends that we have observed are as follows:

• Despite the variety of approaches, all jurisdictions share one common theme: the approach to consequential loss is not straightforward and few jurisdictions attribute it a clear-cut, unambiguous meaning.
• At law, not every jurisdiction has the concept of consequential loss. The concept seems to be strongest in common law (Anglo-Saxon) countries that base their approach to damages on a dichotomy between: (i) arising naturally, i.e. according to the usual course of things, from such breach of contract itself (direct loss); and (ii) 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 (consequential loss). The common law approach is traditionally based on the English case of Hadley v. Baxendale 1 , which is a foreseeability approach to “consequential loss”.
• In addition to England, Hadley v. Baxendale has made – and continues to make – its presence felt in New York, Australia, India, Singapore, South Korea (via Japan) and Scotland.
• That said, although not every jurisdiction recognises “consequential loss” at law, when it comes to contractual exclusion clauses the concept of “consequential loss” exclusion was encountered in almost every jurisdiction in energy contracts.  
• All jurisdictions recognise a form of “direct” 2  loss, but the approach to the meaning of consequential loss in exclusion clauses varies. Broadly speaking, there is a line of demarcation between common law countries that use a knowledge-based (or foreseeability-based) definition of “consequential loss” and civil law countries, which use a causation, or “domino effect” definition. However, there are notable exceptions: Australia, being a prime example, and even England itself might be moving away from the traditional common law foreseeability-based approach.
• The Latinate countries (including Mexico, Romania, Colombia, Portugal, Italy and Angola) and Russia share an approach in recognising direct loss (as the impairment of a thing or person) and, separately, “loss of profits” or “loss of benefit”. In this sense the loss of benefit is seen as being “indirect” in the sense of a chain of causation from the direct loss.
• In the Middle East, neither Iraq, nor Iran have a definition of consequential loss.  Saudi Arabia recognises consequential loss as loss that is not directly caused by a breach but arises indirectly as part of a chain of causation.
• Some jurisdictions, e.g. Ukraine and Bulgaria, will not allow damages other than direct damages, unless the contract expressly provides otherwise.

It is apparent that many (if not most) energy sector contracts, for significant scale transactions, seek to exclude ”consequential loss”, whatever the governing law. It is likely that this approach has been imported from international model contracts that were often drafted to work in English and/or United States law. However, the concept does not necessarily translate with ease across jurisdictions.

In fact, the courts in common law (Anglo-Saxon) jurisdictions are questioning whether the approach traditionally taken in the jurisdictions from where the contract originates is correct.

Against this background, the clear message for all working in the sector is that care must be taken in the approach to the exclusion or inclusion of consequential loss as a part of the risk make-up of the contract in question. Further, when using the words ‘consequential loss’ it is critical to understand how this might be impacted by the choice of governing law.