Summary
In Sahara Energy Resource Ltd v Société Nationale de Raffinage S.A. (Sonara) [2024] EWHC 3163 (Comm), the Commercial Court provided guidance of the meaning of “directly consequential losses” in a clause that sought to define and exclude liabilities between the parties. Whilst the words “directly consequential losses” were unusual, ‘consequential loss’ clauses are commonly used in the industry, so the approach of the Court will be of interest to energy practitioners.
Facts
Sahara Energy Resource Ltd (“Sahara”) trades crude oil. Société Nationale de Raffinage S.A. (“Sonara”) is a Cameroonian state-owned crude oil refinery. Sahara supplied multiple cargos of crude oil to Sonara between 2013 and 2016, financed by major banks. The case concerned claims by Sahara against Sonara for breach of a contract dated 14 January 2013 and various further crude oil contracts concluded in 2014, 2015, and 2016.
Sonara repeatedly delayed payment for several crude oil cargos, in some cases by up to six years. Sahara brought claims to recover not only the principal and contractual interest (which were eventually paid), but also additional losses: incremental interest, excess interest and penal charges imposed by its banks, penalties for late payment under letters of credit, and FX losses due to currency fluctuations, resulting from Sonara’s delayed payments in relation to various crude oil cargoes. The parties held a series of reconciliation meetings, culminating in a detailed ‘Joint Report’ in 2019 which summarised agreed and disputed claims, but did not resolve all issues (the “Joint Report”). Disputes remained between the parties over the status of certain claims and the effect of the Joint Report.
Sonara disputed Sahara’s claims on several grounds including: (a) that the limitation period started running for each cargo when the payment fell due, making all relevant causes of action time-barred; and (b) that the losses were excluded by the contract.
Decision
Were losses excluded as “directly consequential losses”?
The contractual framework for compensation for late payment was built around three (3) main clauses: Clause 8 (payment and interest), Clause 18 (liability) and Clause 26 (event of default/ indemnity). Clause 18 stated:
“Neither seller nor buyer shall in any event be liable, whether in tort or contract, for any more than the normal measure of damages provided for by the Sale of Goods Act 1979 together with any proven additional directly consequential losses. Neither party shall be liable for indirect, unforeseen or special losses of any kind.”
In Hadley v Baxendale, the court defined recoverable losses as:
“either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or 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.”
Sahara contended that Sonara’s case misunderstands the law, and that in the context of exemption clauses, “consequential” losses are generally understood to be losses falling within the second limb of Hadley v Baxendale, i.e., losses which do not arise naturally (or in the usual course of things) from the breach but which would have been in contemplation of the parties as the probable result of breach on the basis of particular circumstances known to the parties.
However, the Commercial Court considered that, although not orthodox, the words “directly consequential losses” were not inapt to cover first limb Hadley v Baxendale losses; “arising naturally from” was not a great distance from “directly consequential”. Further the meaning to be ascertained for the recoverable losses covered by that phrase can properly be tested against the concept of “indirect, unforeseen or special losses of any kind” which was irrecoverable. Doing that, the mention of indirect and special losses provides a nod in the direction of the Victoria Laundry approach to the second limb of Hadley v Baxendale.
As such the Commercial Court interpreted Clause 18 to mean that only losses falling within the first limb of Hadley v Baxendale (i.e., losses naturally flowing from the breach) were recoverable, while losses falling within the second limb, which are frequently characterised as “indirect” (i.e., losses which do not arise naturally but were in contemplation of the parties as a “probable result of breach”), were excluded.
Against that interpretation, the Commercial Court concluded that the incremental interest, excess interest and penal charges claimed by Sahara “fall squarely” within the recoverable losses under Clause 18 as such losses arose naturally from the breach. However, the Commercial Court was not persuaded that FX losses, being a result of FX fluctuations, were recoverable, as such risks are commonly hedged in the industry and would not necessarily be expected to fall on the buyer.
Limitation: were the claims time-barred?
The Commercial Court undertook a detailed analysis of the limitation defence raised by Sonara, focusing on whether Sahara’s claims for losses arising from late payment were time-barred under the Limitation Act 1980. The key findings were as follows:
- Accrual of cause of action: The Commercial Court held that the limitation period for Sahara’s claims began to run when payment for each cargo became due—specifically, 120 days after the bill of lading date. As Sahara issued the Claim Form on 21 April 2021, relevant causes of action accruing before 21 April 2015 were prima facie time-barred.
- No effective acknowledgment or suspension: Sahara argued that the Joint Report amounted to an acknowledgement of the debt or an agreement to suspend the limitation period. The Commercial Court rejected this, finding that the Joint Report did not constitute an unequivocal admission of legal liability by Sonara, nor did it amount to an agreement to suspend or extend the limitation period. The Commercial Court highlighted that, for an acknowledgment to reset the limitation period under s. 29(5) of the Limitation Act, the debtor must admit both the indebtedness and its legal liability to pay the claim. In this case, whilst Sonara firmly rejected, and agreed to jointly contest the penal charges, it had clearly denied liability for the incremental interest and FX losses, both before, during and after the reconciliation meeting.
It followed that Sahara’s claims are time barred.
Comment
The decision of the Commercial Court highlights the relevance of two important issues for energy law practitioners (i) first, the importance of clear drafting of ‘consequential loss’ clauses and (ii) second, the factors needed to stop a debt or claim becoming time-barred.
In relation to ‘consequential loss’ clauses, clauses seeking to deal with ‘consequential loss’, ‘indirect loss’ and or ‘special losses’ are widely used in the energy sector. However, they are not necessarily widely understood.
In English law, the proper construction and interpretation of each contract will turn on its own terms. Lewison, Interpretation of Contract (8th Ed) explains that where a contract excepts one party for “liability for consequential loss, it will normally be interpreted as exempting him only from such loss as is recoverable under the second limb of the rule in Hadley v Baxendale”. However, that is just the general position.
Here there was an interesting clause that allowed claims for “directly consequential loss”, and excluded liability for “indirect, unforeseen or special losses of any kind”. As such, the Commercial Court was required to seek to ascertain what was meant by these terms. In reaching the conclusion that “directly consequential” was not far from the first limb (“arising naturally from”), the Court cited Lewison at paragraph 12.133L "[d]amage occurring naturally or directly is said to be within the first limb of the rule".
For those with an interest in the drafting of consequential loss clauses, additional information can be found here.
In relation to time-bars, extending a limitation (absent the express agreement of the other party), requires the debtor must admit both the indebtedness and its legal liability to pay the claim. As such, the Courts will usually require clear written material establishing these facts. Anything less is unlikely to be enough.
Article co-authored by Lucy Delamere, Trainee Solicitor at CMS.
