Consequential loss in the energy sector in Hong Kong

Yes. The Hong Kong Court of Final Appeal in Richly Bright International Ltd v De Monsa Investment Ltd 1  (“De Monsa”) adopted the tests for the principle of remoteness of damage for breach of agreement as laid down in the landmark English case of Hadley v Baxendale, 2  being:

• direct losses, arising naturally as a result of a contractual breach (“first limb”); and/or
• indirect or consequential losses, arising as may reasonably supposed to have been in the contemplation of both parties at the time they made the contract, as a probable result of the breach (“second limb”).

For consequential losses, as explained in De Monsa, the claimant must prove:-

1. the party in breach had actual knowledge of the special circumstance that gave rise to the damage that did not arise in the usual course of things; and
2. it was reasonable to regard the party in breach as having assumed contractual responsibility for that type of loss. This is decided by viewing the nature and object of the contract against its commercial background.

The contemplation of the parties that falls for consideration is the contemplation as at the time of making of the contract.

Hence, whether or not a particular loss would constitute “consequential loss” is highly fact-specific. For example, in the recent case of Yinggao Resources Ltd & anor v The Hongkong and Shanghai Banking Corp Ltd, 3  the Plaintiffs claimed against the Defendant bank for, among others, loss of opportunities to invest in certain gold mines which they suffered as a result of the bank's breach of mandates and negligence for failing to execute transfer instructions. The Court held that such loss was too remote, as the Defendant bank had no knowledge of the gold mining agreements entered into by the Plaintiffs, and the Defendant bank’s knowledge of the general nature of the plaintiffs’ trading operations could not be translated into actual knowledge of the special circumstances giving rise to damage, that is, the loss of the exploiting and operating rights of the gold mine.

Yes. “Consequential loss” is a term frequently used in contractual exclusion of liability clauses, in many commercial sectors in Hong Kong, from land/property and construction to energy, oil and gas, shipping and other sectors.

Example 1 4    
“In any event, the Seller’s obligation hereunder shall not exceed the direct expenses incurred for the removal and replacement of the Products, and shall not include any consequential or indirect damages, including, without limitation, demurrage claims, loss of opportunity or loss of profit. Should the Buyer remove the Products without the prior consent of the Seller, all such costs incurred in doing so shall be for Buyer’s account.”

Example 2 5
“The Company shall not indemnify the Insured in respect of … loss of use, liquidated damages, penalties, performance gi1arantees or other consequential losses.”

There is no official model form of contract for oil and gas projects subject to Hong Kong law. The forms of contract used are often the pro forma contracts of a particular company, or pro forma industry templates with riders and/or logical amendments.

Unless the contract expressly provides otherwise (e.g. having a definition for “consequential loss”), the term “consequential loss” would generally be interpreted as the type of loss under the second limb of the rule of Hadley v. Baxendale as explained in Question 1 above. 

For clauses attempting to exclude liabilities for other heads of losses in addition to consequential loss, the Court will examine it as follows:

1.  whether the exclusion clause has been incorporated into the contract;
2. whether the heads of loss cover the claims of the case; and
3. whether the exclusion clause satisfies the reasonableness test of the Control of Exemption Clauses Ordinance (Cap. 71) (“CECO”).

Generally, no. Non-damages claims, such as injunctive relief, have their own requirements to be established. Subject to the specific circumstances of the case, it is unlikely for consequential loss exclusion clauses to have a direct impact on non-damages claims.