Law and regulation of consequential damages clauses in the energy sector in Brazil

1. Do the words “consequential loss” have a given meaning in law?

No. The words “consequential loss” have no given or recognised meaning in Brazilian law. 

The Brazilian Civil Code (“the Code”) sets out the legal position regarding damages for breach of contract. 

According to Article 402 of the Code, a party causing loss or damage to another has the obligation to compensate the other party for its loss. Financial damages are split between actual damages (“danos emergentes”) and any loss of profits (“lucros cessantes”) which includes future loss that can reasonably be expected to flow from the breach. 

Under Article 403 of the Code, a party may only be compensated for losses and loss of profits caused by direct and immediate effect (“por efeito dela direto e imediato”) of the breach. This is not a reference to foreseeability as, under Brazilian law, there is no test for foreseeability to recover damages. The obligation on an offending party to compensate another for damages depends on: (i) conduct; (ii) the occurrence of the damage; and (iii) causation between the conduct and damage in question. 

Brazilian law has no independent concept of ‘consequential’ or ‘indirect’ loss when dealing with recoverable losses. There is some uncertainty around the meaning of indirect loss, as it is not defined in the Code. The general understanding is that indirect losses are those that are caused by a secondary circumstance, outside the responsibility of the party responsible for the damage. 

2. Are the words “consequential loss” used in contractual exclusion of liability clauses?

Yes. Contracts in the energy industry include exclusion of liability clauses that seek to exclude loss for “consequential loss”, and/or more usually, “indirect loss”. Indirect damages are excluded under Brazilian law. However, loss of profit is considered a “direct damage” which is why it is often also expressly excluded.   

Oil and gas industry

There is no official model form contract for oil and gas projects in Brazil. Some examples of typical clauses often included in FPSO charter agreements, offshore services contracts and other industry agreements include:

Example 1

None of the PARTIES shall be responsible before the other PARTY for indirect damages and/or loss of profit, whether totally or partially, which are the result or have any relationship with the AGREEMENT, including, without limitation, loss relating to the production, profits, advance of profit, ownership rights, mineral exploration rights, business.

However, the limitation provided for in clause 13.17 above is not applicable to the events of liability to any of the PARTIES for consequential damage and/or loss of profit caused to THIRD PARTIES.

Example 2

Notwithstanding any provision to the contrary of this AGREEMENT, the liability of the PARTIES or their affiliates shall be limited to direct damages according to the Brazilian Civil Code and applicable legislation, excluding loss of profit and indirect damages.

Example 3

Consequential Damages - Neither Party shall be liable to the other for any consequential damages whatsoever arising out of or in connection with the performance or non-performance of this Contract, and each party shall protect, defend and indemnify the other from and against all such Claims from any member of its Group as defined in Clause 14(a). “Consequential damages” shall include, but not be limited to, loss of use, loss of profits, shut-in or loss of production and cost of insurance whether direct or indirect and, whether or not foreseeable at the date of this Contract.

Example 4

Neither PARTY shall be responsible before the other for indirect damages and / or loss of profits, whole or in part, which result or is connected with this Agreement, including, but not limited to, production losses, profits losses, anticipation of profits, property rights, mineral rights or any business. This limitation shall not apply to wilful misconduct or fraudulent acts.

Example 5

Petrobras contracts include the following clause:

From the execution date of this AGREEMENT, the liability of PETROBRAS and the CONTRACTOR for losses and damage shall be limited to the direct damages according to the Brazilian Civil Code and applicable legislation, excluding loss of profits and indirect damage, and the direct damage shall be limited to US$ 20.000.000,00 (twenty million dollars) per event and consequences thereof, converted into Reais (R$) by PTAX for sale of US Dollars into national currency, published by the Central Bank of Brazil, on the last business day immediately preceding the day of the payment of such damage.

3. If so, what meaning is attributed to the words “consequential loss” in contractual exclusion clauses?

In Brazilian law there is no clear meaning attributed to “consequential loss” when used in a contractual context. In addition, the law does not attribute a clear meaning to “indirect loss” when used in a contract. 

When using “consequential loss” or “indirect damages” these terms should be clearly defined in the contract. The general understanding is that indirect losses are those that are not directly caused by the conduct of the party responsible for the damage, but are caused by a secondary circumstance. 

If no definition is provided, there is no clear jurisprudence on how a court or tribunal should approach attributing a meaning to the words. The general position is that indirect damages are not recoverable. 

4. Where a clause includes other heads of loss alongside consequential loss, how will the law approach such clauses?

There is no jurisprudence from the Brazilian courts that helps with the interpretation of consequential loss clauses. However, decisions concerning clauses dealing with limitation or exclusion of liability would be relevant. 

There are some decisions regarding general exclusion of liability clauses. The Brazilian Courts place importance on the contractual terms agreed between the parties, equality in the parties’ bargaining power, and freedom of contract. 

The Brazilian Courts have found that a contract is void if the limitation or exclusion of liability impairs the main object of the contract. 1 Apelação Cível Nº 28239, Segunda Câmara Cível, Tribunal de Alçada do RS, Relator: Adroaldo Furtado Fabrício, Julgado em 31/08/1982; 1º TACIVSP – Processo: 39082-9/00 – Proc. Princ.: 39.082-489.433-7/2 – Resp. – São Paulo – Rel. Min. Nilson Naves – 9-11-94 – Decisão: por maioria; Ac.: Resp. 29121/SP – Órgão Julgador: t. 3 – 3ª T. Rel. Min. Waldemar Zveiter – 16-12-92; TRF-3 - APELAÇÃO CÍVEL AC 5408 SP 0005408-29.2004.4.03.6105

5. Do consequential loss exclusion clauses have an impact on non-damages claims?

There is no jurisprudence that suggests that the existence of a consequential loss clause or a limitation of liability clause will mean that an application for injunction is more likely to succeed. Generally, Brazilian Courts can award an injunction to prevent a breach from occurring, including in relation to contracts containing limitation clauses (such as an “indirect damages” clause).

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Ted Rhodes
Partner
London
Madalena Houlihan