Law and regulation of consequential damages clauses in the energy sector in Hong Kong

Yes. The meaning of “consequential loss” under Hong Kong law is similar to that under English law, following the Hadley v Baxendale 1 (1854) 9 Exch 341  categories of recoverable loss for a breach of contract. 

As held in Hadley v Baxendale, recoverable losses for a breach of contract would be:

• direct losses, arising naturally as a result of a contractual breach (first limb of the rule in Hadley v Baxendale); and/or
• indirect or consequential losses, arising as may reasonably supposed to have been in the contemplation of both parties at the time they made the contract, as a probable result of the breach (second limb of the rule in Hadley v Baxendale).

In the second limb, the claimant must prove two things to recover consequential loss. First, he must prove that the party in breach had actual knowledge of the special circumstance that gave rise to the damage that did not arise in the usual course of things or that it was within his contemplation. Second, he must prove that it was reasonable to regard the party in breach as having assumed contractual responsibility for that type of loss 2 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48 . Hence, whether or not a particular loss would constitute “consequential loss” is highly fact specific and would be subject to remoteness of damage considerations. 

Recently in Hong Kong, the above principles of consequential loss decided by the English courts have been restated and adopted as representing the law in Hong Kong in the Court of Final Appeal case of Richly Bright International Ltd v De Monsa Investment Ltd. 3 (2015) 18 HKCFAR 232   

Yes. “Consequential loss” is a term frequently used in contractual exclusion of liability clauses, in many commercial sectors in Hong Kong, from land/property and construction to energy, oil and gas, shipping and other sectors. 

Example 1 4 General Terms and Conditions of Sea Trader International Ltd (a limited company registered in Hong Kong)   

“In any event, the Seller’s obligation hereunder shall not exceed the direct expenses incurred for the removal and replacement of the Products, and shall not include any consequential or indirect damages, including, without limitation, demurrage claims, loss of opportunity or loss of profit. Should the Buyer remove the Products without the prior consent of the Seller, all such costs incurred in doing so shall be for Buyer’s account.”

Example 2 5 Employees’ Compensation Insurance Policy and Contractors’ All Risks Insurance Policy

“The liability of Insurers shall be restricted to the cost of repair or replacement or reinstatement of such damaged services and shall not extend to cover any consequential loss resulting from the interruption of the service.” 

There is no official model form of contract for oil and gas projects subject to Hong Kong law. The forms of contract used are often the pro forma contracts of a particular company, or pro forma industry templates with riders and/or logical amendments.

In contractual exclusion clauses, the term “consequential loss” would generally be interpreted as the type of loss as defined in the second limb of the rule of Hadley v. Baxendale. There is no jurisprudence in any Hong Kong Court that questions this approach. 

What would constitute “consequential loss” would depend on factors such as:

1. the express definition of “consequential loss” in a relevant contract (if any). 
2. the wording of the relevant contractual exclusion clause. 
3. a prima facie assumption about what parties might be taken to have intended when the contract was entered into 6 Ibid 2 .

Under Hong Kong law, whether or not the exclusion clause would be considered valid or effective would also depend on the reasonableness of the clause, subject to the reasonableness requirement set out at section 3 of the Control of Exemption Clauses Ordinance (Cap. 71).

In determining the reasonableness of a standard exemption clause, the relevant considerations include the strengths of the parties’ bargaining positions, the other party’s knowledge of the clause and the reality of the other party’s consent to that clause 7 Annotated Ordinances of Hong Kong. LexisNexis Hong Kong . 

The reasonableness test is easier met when the parties have equal bargaining power. For example, for an exemption clause to be effective, the general rule is that the clause must be incorporated into the contract at the time the contract is made. It is insufficient to put forward the clause at a later stage. However, according to the commentary in the Annotated Ordinances of Hong Kong, if the parties are of equal bargaining power, in the same line of business and with knowledge that the exemption clauses are common in that business, those terms may be regarded as being incorporated into an oral contract. 

First, the law would construe the clause by reference to the natural and/or literal meaning of the words used. In line with the contra proferentem principle, a clause is to be construed strictly against the party who introduced it and seeks to rely on it. A party seeking to rely on an exclusion clause must show that it was incorporated as a term of the contract, which usually involves the taking of reasonable steps to bring it to the notice of the other party. Clear wording is necessary for a party to escape liability for breach of an obligation fundamental to the contract. 

Second, the law would consider the intention of the parties at the time the contract was made 8 Ibid 2 . In The Achilleas 9 Ibid 2, at 31 , it was held by Lord Hoffmann that liability for damages should be founded upon the objectively ascertained intention of the parties. 

In Richly Bright International Ltd v De Monsa Investment Ltd, Tang PJ agreed with Lord Hoffmann and held that “since all contractual liability is voluntarily undertaken, liability for damages must be founded upon the intention of the parties, gathered upon the construction of the contract as a whole, construed in its commercial background” 10 Ibid 2, at 126 .   

Generally, no. However, any English or Commonwealth case law precedents stating otherwise could be persuasive before the Court. Ultimately, each case would be decided on its merits.