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

The words “consequential loss” do not have a given meaning in Croatian law. 

The Croatian Civil Obligations Act (“the COA”) provides for three types of damage that are recoverable in contractual and non-contractual relations: 

1. ordinary damage (obična šteta)
2. loss of profit (izmakla korist)
3. non-pecuniary damage (neimovinska šteta). 

Ordinary damage and loss of profit are sometimes jointly referred to as “pecuniary damage”. 

Although all three types of damage are recoverable,  contractual claims have an additional requirement of foreseeability of the damage at the time of entering into an agreement. The court will consider whether the damage was foreseeable as a possible consequence of the breach, taking into account the facts that the party in breach knew or should have known .

In the event of fraud,  intentional non-performance, or non-performance as a result of one of the party’s gross negligence, the innocent party is entitled to recover the total damage (i.e. not only foreseeable damage), notwithstanding the special circumstances that caused the damage.

Since the term “consequential loss” has no given meaning in Croatian law, its use in contractual exclusion of liability clauses in agreements governed by Croatian law could lead to legal uncertainty. Nevertheless, “consequential loss” is sometimes used in contractual exclusion of liability clauses. The terms “indirect damage/loss” and “loss of profit” are usually used in contractual exclusion of liability clauses. 

For example, the draft Production Sharing Agreement (PSA) proposed by the Croatian Government as a part of the bidding documentation for granting licences for onshore exploration and production of hydrocarbons, contains the following provisions: 

• “Except for Environmental Damage, the Investor or its Affiliates shall in no event be liable to the Government under this Agreement for indirect damage, including, but not limited to the loss of opportunity, i.e. loss of profit.
• For the avoidance of any doubt, the Republic of Croatia shall in no event be liable to the Investor under this Agreement for indirect damage, including, but not limited to the loss of opportunity, i.e. loss of profit.”

The meaning attributed to the words “consequential loss” depends on the interpretation of those words in a contractual exclusion clause. 

There is no clear jurisprudence regarding the interpretation of the words “consequential loss” as this term is not commonly used in Croatian law. It would most likely be regarded as a type of “indirect loss”, but there are also no clear guidelines on the interpretation of “indirect loss”. 

The term “indirect loss” has been encountered in: 

• jurisprudence concerning product liability cases prior to the implementation of the Product Liability Directive 85/374 in the COA (i.e. prior to 1 January 2006). The courts distinguished between the “direct” loss (on the defective product) and “indirect” loss on buyer’s goods, other than the product itself, caused by the defect in the product.
• jurisprudence concerning the contracts in which the parties defined direct and indirect loss.
• articles by legal scholars who discuss whether “loss of profit” should be considered “direct” or “indirect” loss – there are different opinions in the legal literature.

Consequently, parties should define “consequential loss” or “indirect loss” in the contract if those terms are to be used in exclusion clauses.

The COA defines “loss of profit” (Croatian: izmakla korist) as a type of damage recoverable under Croatian law. The term ‘loss of profit’ is also not defined, but, unlike “consequential loss”, there is some helpful jurisprudence for this term.

On a general note, parties cannot exclude or limit liability when acting with intent or gross negligence (namjera ili krajnja nepažnja). Exclusion or limitation of liability clauses for negligence (obična nepažnja) can be contested if these clauses result from a monopoly position exercised by the breaching party or from unequal relations (bargaining power) between the contractual parties.

Each clause is construed in accordance with the rules on interpretation of contracts provided by the COA. If a provision is clear – i.e. if there is no ambiguity as to its meaning – there is no need for interpretation and the provision applies as it reads. If a provision is unclear, the following criteria are taken into account:

• the common intention of the parties.
• principles of the law of obligations.
• fair balance of parties’ performances.
• if the provision is part of the terms and conditions drafted by one of the parties to the agreement, the rule of contra proferentem will apply and it will be construed in favour of the other party. 

The COA outlines the principles governing contractual relations – for example freedom of contract, good faith, the duty to fulfil one’s contractual obligation (pacta sunt servanda). These principles are deemed mandatory by Croatian jurisprudence, therefore the courts consider those principles on their own motion, in parallel with the examination of the contractual and statutory provisions governing certain contracts. 

According to the Enforcement Act 2012 (“EA”), when seeking an interim measure (privremena mjera) for securing non-monetary claims, besides the requirement to establish a credible non-monetary claim, the applicant must also show (i) the existence of threat that the debtor would otherwise prevent or significantly deter the settlement of the claim; or (ii) that the measure is necessary to prevent threatened violence or irreparable damage. 

If a court considers the consequential loss exclusion clause (or other limitation/exclusion clause) to be evidence of potential irreparable damage that would occur as a result of breach of a contract, this clause might have an impact on the non-monetary claim for performance of a contractual obligation. Nevertheless, there is currently no jurisprudence that illustrates this position.