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 over 30 jurisdictions.

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 [1854] EWHC J70. , 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 Although meanings attributed to the word ‘direct’ vary. 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.    

Authors

Madalena Houlihan
Picture of Phillip Ashley
Phillip Ashley
David Rutherford
David Rutherford
Picture of Assen Georgiev
Assen Georgiev
Head of Litigation, Arbitration, Insurance, Employment, CMS Sofia
Picture of Kostadin Sirleshtov
Kostadin Sirleshtov
CEE Head of Energy & Climate Change
Picture of Varinia Radu
Varinia Radu
Head of Oil & Gas, CEE and Deputy Head of EPC, CEE
Picture of Ramona Dulamea
Ramona Dulamea
Daniel Rodríguez
Daniel Rodríguez, LL.M.
Carolina Arenas
Carolina Arenas
Diana Moreno
Diana Moreno
Picture of Filipa Tavares Lima
Filipa Tavares de Lima
Lawyer
Rita_Gouveia
Rita Gouveia
Lawyer
Picture of Tiago Graca
Tiago Machado Graça
Lawyer
Picture of Carlos Hamann
Carlos Hamann
Picture of Marco Antonio Ortega
Marco Antonio Ortega
Image of Asya Jamaludin
Asya Jamaludin
Afaq Sindhu
Afaq Sindhu
Yuryev Sergey
Sergey Yuryev
Head of Dispute Resolution
Picture of Amur Al Rashdi
Dr. Amur Al Rashdi
Head of Litigation
Derek Woodhouse
Adam Beach
Adam Beach
Daniela Murer
Daniela Murer
Alessandra Cuni
Alessandra Cuni
Anand Ayyappan
Anand Ayyappan Udayakumar
Tim Elliott
Tim Elliott
Head of Finance, Registered Foreign Lawyer (England & Wales)
Dorothée Janzen
Dorothée Janzen, LL.M. (Ann Arbor)
Rechtsanwältin
Niklas Ganssauge
Dr. Niklas Ganssauge, LL.M. (Berkeley)
Rechtsanwalt
Picture of Hrvoje Bardek
Hrvoje Bardek
Zagreb
Roxie Meng
Felipe Arze Abogado Corporativo
Luis Felipe Arze, LL.M
Rodrigo Campero T.
Rodrigo Campero, LL.M.
Hugo Ojeda abogado CMS Carey & Allende Chile
Hugo Ojeda
Picture of Ted Rhodes
Ted Rhodes
Office Managing Partner
Picture of Olexander Martinenko
Olexander Martinenko
Head of Commercial, Regulatory and Dispute Resolution, CMS Cameron McKenna Nabarro Olswang
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Vitaliy Radchenko
Head of Energy & Projects, CMS Cameron McKenna Nabarro Olswang
Picture of Olga Shenk
Olga Shenk
Image of Vladyslav Kurylko
Vladyslav Kurylko
Laurie Carrette
Laurie Carrette
(England & Wales and France Qualified)
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