Law and regulation of consequential damages clauses in the energy sector in the Czech Republic

Czech law does not recognize the term “consequential loss” or any similar term such as “indirect loss”. 

Under Section 2913(1) of the Civil Code, a party in breach of contract shall compensate the other party for losses resulting from the breach of contract. In other words, the obligation to compensate losses only arises if there is a causal link between the breach of contract and the damage caused by the breach. Unless agreed otherwise, compensation for losses shall also cover so called loss of profit. In case of a dispute, the injured party carries the burden of proof and the courts usually require that the causal link is proven beyond reasonable doubt.

The Czech legal doctrine adds that losses may only be recovered to the extent that they have been foreseeable for the party in breach at the date of the contract. According to one of the underlying theories, the reason is that a party should be able to evaluate the relevant risks before it concludes a contract and to adequately prepare for such risks (e.g., by arranging for insurance). Consequently, the obligation to pay damages resulting from a breach of contract should be limited by what the party in breach could foresee when the contract was made (and what it could have protected itself against by exercising the appropriate level of diligence). 1 Hulmak and others: The Civil Code: Commentary VI. Obligations law. Special part (Sec. 2055-3014). C. H. Beck 1st ed., 2014, pages 1565 – 1576. Several cases of unforeseeability have been described in case law, including a loss resulting from an extraordinarily high contractual penalty or a bonus payable to the claimant upon completion of works. In this context it is generally recommended that parties to a contract notify to each other of all extraordinary circumstances which may lead to losses that would normally be unforeseeable for the other party. 

English terms “indirect loss” and “consequential loss” are generally used rarely in legal documents governed by Czech law. 

However, in Czech law contracts where the template has been taken from an English law document, the use of “indirect loss” and “consequential loss” is not unusual. Therefore, the terms “indirect loss” or “consequential loss” are sometimes taken over into the Czech contracts governing local transactions. 

Since the terms “indirect loss” and “consequential loss” are not recognized by Czech law (see above), it is generally recommended to either refrain from using them altogether, or to include a precise and descriptive definition of the relevant term in the given legal document. Not doing so may create significant interpretational problems and room for dispute over the recoverability of a particular damage.

“Consequential loss” is rarely used in Czech law governed contractual documents (see above). Legal literature and case law do not often use the term as both rather work with the general foreseeability concept (see above). Without a precise definition of the term included in the contract, its interpretation is unclear. 

The meaning attributed to the words “consequential loss” would depend on the interpretation of the particular contractual clause within the broader context of the contract in which the clause is used. 

General principles of interpretation set out in the Civil Code would need to be used. In particular, expressions of will should be interpreted according to the intention of the acting party if the other party was aware or must have known of such an intention. If the party’s intention cannot be ascertained, the typical interpretation of a hypothetical person in the position of the person against whom the intention was expressed is decisive. Past dealings between the parties, circumstances preceding the conclusion of the contract as well as subsequent behaviour of the parties would be taken into account when interpreting the words of the particular contract. 

Importantly, unless agreed otherwise, if a term is used which allows for various interpretations, in the case of doubt it is to be interpreted to the detriment of the person who used the term first. If, for example, one of the parties comes up with a first draft of a contract which includes an undefined term “consequential loss”, it would likely be interpreted to its detriment in a later dispute.

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

There is no generally accepted definition or concept of consequential loss in Czech law or case law apart from the phrase “lost profit” which is sometimes used alongside “consequential loss”. “Lost profit” is defined in the Civil Code as “what a party has lost” as a result of the breach. According to case law, lost profit may only be recovered if it is proven that, without the breach, the value of the assets of the injured party would have been increased. A mere probability of future increase of the value of assets is not enough. 2 Decision of the Czech Supreme Court No. 25 Cdo 3586/2006.

The above principles of contractual interpretation would apply to interpreting words used alongside “consequential loss” where their meaning is not defined in Czech law. 

Generally, we would not see a clear link between the exclusion clauses and non-damages claims (such as the court granting preliminary injunctions intended to prevent a breach of contract, which could lead to excluded consequential losses from happening in the first place). However, this is not specifically governed by Czech law and no relevant case law exists. Czech courts have a high level of discretion when awarding preliminary injunctions (they can do so whenever the relations between the parties need to be preliminarily regulated in advance of the main decision). It is therefore conceivable that the courts would take into account the general context of the contract, including exclusion clauses, when awarding preliminary injunctions.