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

No. The term “consequential loss” has no given or recognised definition under Federal Iraqi law. 

In general, the legal position regarding damages is provided in the Iraqi Civil Code No. 40 of 1951 as amended (the “Civil Code”). Pursuant to the Civil Code, compensated damages are inclusive of lost profit and are the result of a liability in tort or contract. 

Liability depends on: (i) the contractual breach or the unacceptable/unlawful act; (ii) the occurrence of the damage; and (iii) the causal link between the breach/act and the damage in question (which is understood to be a direct link). The occurrence of the damage is an important leg in the determination of liability. For example, even in the case of contractually agreed compensation, the defaulting party can be released from this compensation obligation if no damage arose from the relevant default.

The Civil Code does not contain an explicit definition of what constitutes direct and indirect damages. However, it is understood that direct damages include damages (including lost profit) which naturally arise from the contractual breach or the unacceptable/unlawful act

As a statutory rule, unless otherwise agreed between the parties, contractual liability covers damages that are direct (i.e. occurring naturally) and normally foreseeable by the parties at the time of concluding the contract (even if such damages are not explicitly listed in the contract). In practice, the foreseeability of damages could be subject to the discretion of the court. Damages that are deemed normally unforeseeable at the time of concluding the contract are excluded from compensation, except where otherwise contractually agreed or where the damages – or lost profit – was caused by gross negligence and wilful misconduct.

The use of consequential loss exclusion clauses is mostly seen in the Iraqi oil and gas industry.

Government contracts awarding oil and gas exploration, development and production rights in Iraq mainly include the Federal government’s Technical Service Contracts and Development and Production Service Contracts (“Federal Services Contracts”), and the Kurdistan Region Government’s (“KRG”) Production Sharing Contracts (“PSCs”). In principle, both the Federal Service Contracts and PSCs include exclusion of liability clauses including “consequential loss” and/or “indirect loss”. The Federal Services Contracts are commonly governed by Iraqi law, whereas the KRG PSCs are governed by English law. 

Some examples include:

Example (Federal Services Contracts)

[U]nder no circumstances shall Contractor, its Affiliates or Operator be liable to [Regional Oil Company], its Affiliates or any third party, for consequential or indirect damages, losses, expenses or liabilities, loss of profit, loss of production, reservoir or formation damage or other losses whether or not similar to the foregoing and howsoever arising. (TSC, Article 24.4).

[U]nder no circumstances shall Contractor, its Affiliates or Operator be liable to [Regional Oil Company], its Affiliates or any third party, for consequential or indirect damages, losses, expenses or liabilities, loss of profit, loss of production, punitive damages, business interruption, reservoir or formation damage or other losses whether or not similar to the foregoing and howsoever arising whether under the Contract, in tort or at law.(TSC, Article 24.4).

The principle of freedom of contract prevails in Iraq, provided it does not apply to terms that are legally prohibited or prejudicial to public order and morals. Consequential loss (and exclusion thereof) could be recognised in principle in contracts concluded under Iraqi law provided the term is well defined in the contract. Proper drafting would be required to avoid any ambiguity around whether or not loss of profit is considered to be consequential loss in exclusion clauses. In principle, as mentioned under question 1, where loss of profit is naturally occurring and normally foreseeable by the parties at the time of contract, it is likely to be considered to be direct/non-consequential loss (unless otherwise contractually agreed).

Although this is not clearly settled under Iraqi courts’ jurisprudence, it is likely that the term “consequential loss” could be understood under Iraqi law to mean (unless otherwise contractually agreed) loss that:

1. does not arise naturally (in the usual course of things) from the contractual breach; or
2. was not normally foreseeable by the parties at the time of contract.

In contrast, direct loss recognised under Iraqi law includes naturally occurring damages and lost profit provided such loss was normally foreseeable by the parties at the time of entering into the contract. Therefore, in our opinion, the determination of whether or not loss of profit falls within the scope of indirect/consequential loss would be subject to whether such loss:

1. is naturally occurring; and
2. was normally foreseeable at the time of contract (unless otherwise contractually agreed).

If one of the foregoing two criteria is not met, then the relevant lost profit would be considered indirect/consequential loss.

In practice, based on the foregoing, a contractual exclusion which makes reference only to consequential loss is likely to be interpreted by local courts to be a mere reflection of the statutory exclusions (i.e. the contractual clause would likely do nothing more than what the Civil Code does). However, we are not aware of comprehensive Iraqi court precedents that could provide reliable guidance in this respect and regulate the right of contractual parties in agreeing to indirect loss provisions.

There is no clear jurisprudence from the Iraqi courts that assists with the interpretation of consequential loss clauses. In principle, the Iraqi courts place importance on the principle of freedom of contract and subsequently the contractual terms agreed between the parties would be accepted, provided they are not legally prohibited or prejudicial to public order and morals.

In interpreting the contract, Iraqi courts would seek to discern the intention of the parties and would rely on the meaning as relevant in the context of use, which should take precedence over the specific wording and sentence-structure used by the parties. Any contract ambiguity shall be interpreted in the interest of the innocent party, subject to any commonly accetped industry practice.

We believe that other heads of loss alongside consequential loss would be subject to the test described under question 3 above to determine whether such loss is direct or not; i.e. direct loss should be (i) naturally occurring and (ii) normally foreseeable by the parties at the time of making the contract. Unless otherwise contractually agreed, any loss that does not meet the foregoing test would be excluded from the scope of liability based on the Civil Code. However, clauses excluding liability for illegal acts are considered null. 

It is unlikely that consequential loss exclusion clauses have an impact on non-damages claims. There is no clear Iraqi jurisprudence in this respect. The innocent party to a contract could still be entitled to seek an order for specific performance of the contractual obligations by the party in breach of the contract. The Civil Code establishes a statutory obligation for the performance of obligations as agreed in the contract where this is possible. If performance cannot be possibly or suitably made by any party other than the relevant obligor, the court may impose a monetary penalty to force the obligor into performance. Monetary compensation may be paid to the innocent party in lieu of such performance if such performance would cause hardship to the obligor.