CMS Guide to Consequential Loss in France

The notion of “consequential loss” does not belong to French law. Its use in contracts subject to French law often raises difficulties and uncertainties, as it does not correspond to any French law concept.

Indeed, article 1231-2 of the Civil Code only indicates in relation to damages for contractual liability that “damages due to the creditor are, in general, the loss he has made and the gain of which he has been deprived, subject to the exceptions and modifications set out below”.

The following two articles of the Civil Code then set out the two main principles governing contractual liability, distinguishing between (i) foreseeable and unforeseeable damages, and (ii) direct and indirect damages.

The distinction between foreseeable and unforeseeable damages

Pursuant to Article 1231-3 of the Civil Code, “the debtor is only liable for damages that were foreseen or could have been foreseen at the time the contract was concluded, unless the non-performance is due to gross negligence [“faute lourde”] or wilful misconduct [“faute dolosive”]”.

Foreseeability is assessed in a normative and concrete manner, i.e., by reference to a reasonably informed debtor in the same circumstances.

The criteria for assessing foreseeability combine:

• The interpretation of the contract (statements, omissions, nature and general economy, amount of the price);
• The specific circumstances preceding or surrounding the conclusion of the contract (statements, indications, information provided by the parties);
• The respective quality of the parties and applicable professional practices.

In addition, the doctrine distinguishes between intrinsic damage (related to the object of the obligation itself) and extrinsic damage (resulting from indirect effects of non-performance). Intrinsic damage is considered foreseeable. Under certain conditions, extrinsic damage can be considered as foreseeable if the debtor was aware of it or should have foreseen it in view of the circumstances.

As explained by the doctrine, "the idea is that, in committing himself, the contracting party must have been able to measure the consequences of his possible default: unforeseeable damage goes beyond the limits of his forecasts and what he could reasonably accept. The classic example in case law is that of a parcel accepted by a carrier and found to contain precious valuables: the loss of the parcel is foreseeable damage, but not the loss of precious valuables" (Droit des obligations, A. Bénabent, para. 429).

Article 1231-3 of the Civil Code however introduces an exception to this principle, being the gross negligence or wilful misconduct of the debtor. If so, all damage, even if unforeseeable, must be compensated, but only insofar as it is an immediate and direct consequence of the non-performance.

Gross negligence has been defined by case law, and is characterised by extremely serious conduct, bordering on wilful misconduct and demonstrating the debtor's inability to perform their contractual obligations

Wilful misconduct is also defined by case law, and is an intentional fault, which consists of the debtor deliberately refusing to perform his contractual obligations, even if this refusal is not dictated by the intention to harm its co-contractor.

Article 1231-4 of the Civil Code however introduces this limitation: “Even if the breach of contract is due to gross negligence or wilful misconduct, damages shall only include what is an immediate and direct consequence of the breach”.

The distinction between direct and indirect damage

The condition of “immediate and direct consequence” means that only damage that appears to be the necessary, direct and not too remote consequence of the non-performance can be compensated.

Under French contract law, the question of whether the prejudice is direct or indirect is a matter of causal link.

To demonstrate such causal link, the creditor must demonstrate:

• the existence of a breach of contract,
• the existence of damage,
• the existence of a direct causal link between the breach and the damage suffered.

Therefore, a prejudice directly caused to a party should be qualified as "direct" under the meaning of Article 1231-4 of the Civil Code. Conversely, indirect damages are the damages which are too far from the chain of the circumstances to be linked to the breach, as well as indirect victims which are damaged by rebound.

Even though the principle is rather simple, no objective definition allows to determine in advance, with absolute certainty, which prejudice shall be considered as direct or indirect by the courts: it depends on the context of the contract, on the parties, and on the breach itself.

The distinction between tangible and intangible damage

In addition to the categories of damages listed above, the insurance practice has established a difference between tangible and intangible damage which is unknown from traditional civil law.

Insurers indeed distinguishes between:

• bodily injury, consisting of harm to the physical or mental integrity of a person;
• tangible damage, consisting of the destruction or deterioration of an object or substance;
• intangible damages, which consists in any pecuniary loss resulting from the deprivation of the enjoyment of a right, the interruption of a service provided by a person or by property, or the loss of a benefit.

It is now more widely used in contractual practice, due to the use of clauses which are requested by insurers to be included in the contracts for which insurance policies are subscribed (e.g., construction contracts). Considering the strong influence of common law over insurance law, references to tangible and intangible damages usually results in list examples.

It should also be noted that under construction law, the terms "dommages consécutifs" are sometimes used by the doctrine, in order to designate the damage to equipment resulting from a defect affecting the solidity of the construction works and which are covered as accessory damage under the legal decennial guarantee. In this respect, both tangible and intangible damage may be indemnified, as damage accessory to the decennial guarantee, subject however to the demonstration of a direct link of causality between the disorder affecting the works and the damage. The damage resulting in disturbance of possession may also be included in this respect.

There is therefore, no general theory of consequential loss or consequential damage under French law, neither from civil law which does not conceptualise these terms, nor from specific laws. The latter, even though they use these terms, do not define them — or they do so by reference or with different meanings, sometimes as a synonym for indirect damage, otherwise in order to designate a damage which, even though direct, is an accessory damage.

The energy sector uses the notions of consequential loss or consequential damage in contractual practice. This comes from common law practitioners, templates and from insurance companies, by habit more than as a result of a true analysis under French law, as seen above. Nonetheless, the practice is there and, when a contract is already executed with a reference to consequential loss, the will of the parties must be analysed in order to determine its meaning under French law in the context of this contract, according to the methods set out by the Civil Code for the interpretation of contracts, based upon the common intention of the parties, rather than on the wording of the clause (Article 1188 of the Civil Code).

Examples of contracts in French law using the words consequential loss include:

Example 1: Clause 1.15 of the Red Book of the 2017 FIDIC Suite.

"Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract (…)”

Example 2 – Maintenance and service agreement

“In no event shall Contractor or Owner or their respective successors, assigns, shareholders, partners, directors, officers, agents or employees be liable for any lost profits, special, exemplary, indirect or consequential losses or damage, including loss of use, lost production, cost of capital, loss of goodwill, lost revenues, loss of profit or loss of contracts even if such Party has been advised of the possibility of such damages, and each Party releases the other from any such liability”.

Example 3 – Front end engineering and design contract

“Neither party is liable to the other in any way for loss of use, loss of profit, loss of production or business interruption or for any kind of indirect or consequential loss or damage, which is connected with any claim arising under this Contract or the subject matter of this Contract”.

Example 4 – EPC Contract

“To the extent permitted by applicable law, neither Party shall be liable to the other under or in relation to this Contract (whether by way of indemnity or by reason of any breach of the Contract or of any statutory duty or in tort or otherwise (including but not limited to negligence) or howsoever arising) for any loss of profit, loss of revenue, loss of use, loss of production, loss of contracts nor for any form of indirect or consequential damage that may be suffered by the other”

The doctrine has tried to propose definitions of consequential damage in order to conceptualise and clarify its various uses under French law. Two main meanings have been identified.

First, a purely legal definition of consequential damage refers to "second degree" damage, i.e., which is directly even though not immediately connected to the causal event, as opposed to indirect (or "remote") damage. Pursuant to this definition, consequential damage would designate a damage which is directly the consequence of an event, and more specifically the necessary consequence of the first, immediate, damage, and which results from this first damage.

Second, under a more economic approach, the concept of consequential loss refers to economic losses. Legally, this economic definition means that a consequential loss is a specific kind of intangible damage (including for instance the lucrum cessans under Article 1231-2 of the Civil Code), notwithstanding the causality of the damage — direct or indirect. This is usually the meaning of the "consequential loss" in industrial contracts,' which are extensively used in the energy sector.

The FIDIC contract wording literally translates this reference to "indirect or consequential loss or damage", as "la perte ou le dommage indirect ou conséquent", which does not really help with an understanding of the term "consequential loss" under French law, since this wording amalgamates "indirect" and "consequential" damages.

The context is nevertheless important, since this clause refers to two types of damage: intangible damage, such as "loss of any Works, loss of profit, loss of any contract", and "indirect [...] loss or damage". Under French law, these concepts are, on the one hand, intangible economic damage, and, on the other hand, indirect damage.

Generally, the approach that prevails in industrial contracts, including in the energy sector, is the exclusion of both intangible and indirect damage, and the use of the term "consequential loss" must be understood in this context of exclusion. A case-by-case analysis is nevertheless necessary, in view of the drafting of the clause as a whole and subject to the interpretation that may be given based upon the common intention, that may often result from the minutes of the negotiations (especially when successive versions have been exchanged by email between the parties).

In any case, it makes sense to seek to avoid non-French law terms such as "consequential loss" in French law contracts. Instead, reference should be made to French legal terms, or at least to a list of examples, or ideally a comprehensive list of damages, rather than just importing common law concepts that might become confusing, or even ambiguous, since the parties may have different interpretations without having shared them before the execution of the contract.

Usually, the clauses excluding or limiting the liability of a party exclude both indirect damage/loss and intangible damage/loss.

In contracts where the indemnification of consequential loss is excluded, the indemnification of indirect damage is usually also excluded in the contract, even though this is already the principle under French civil law. The same exclusion is often provided for intangible damage and, in particular, for economic losses such as loss of profit or loss of the use of the works subject to the contract.

As to the approach to interpreting a contractual exclusion clause excluding "consequential loss" and other heads of damage/loss, as always under French law, a case-by-case analysis is necessary. What matters for the interpretation that shall be given by the courts is the common intention, which may often result from the minutes of the negotiations (especially when successive versions have been exchanged by email between the parties).

We are not aware of any impact, but the lessons learnt from the experience of consequential loss remains relatively scarce, since these terms are often avoided under French law, despite the influence of common law in industrial contracts, and may not be used in judgments.