CMS Guide to Consequential Loss in Iraq

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

In general, the legal basis for damages is set out in the Iraqi Civil Code No. 40 of 1951 (as amended) (the “Civil Code”). Under the Civil Code, compensation for damages may include lost profits, and such compensation may arise from liability in either contract or tort.

Liability under the Civil Code is based on three cumulative elements: (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 actual damage is a key requirement for liability. For instance, even where compensation is contractually stipulated, the party in breach may be released from its obligation to pay compensation if no damage actually occurred.

The Civil Code does not provide an express distinction between direct and indirect damages. However, it is generally understood that direct damages - which may include lost profits - are those that naturally result from the breach or unlawful act.

As a statutory rule, and unless otherwise agreed by the parties, liability is limited to direct damages that were naturally and normally foreseeable by both parties at the time the contract was concluded (even if not expressly listed in the contract).

In practice, foreseeability is subject to the discretion of the courts. Damages that are deemed unforeseeable at the time of the contract was entered into are excluded from compensation, unless:

1. the parties have agreed otherwise, or
2. the damage or lost profit were caused by gross negligence or willful misconduct.

Yes - “consequential loss” exclusion clauses are most commonly seen in the Iraqi oil and gas industry.

Contracts awarded by government entities for oil and gas exploration, development, and production in Iraq generally fall under the Federal Government’s Technical Service Contracts (“TSCs”), Exploration, Development and Production Contracts (“EDPC”) or Development and Production Service Contracts (together, the “Federal Service Contracts”), or the Kurdistan Regional Government’s Production Sharing Contracts (“KRG PSCs”).

Both the Federal Service Contracts and the KRG PSCs typically contain exclusion of liability clauses covering “consequential” and / or “indirect” loss. Federal Service Contracts are commonly governed by Iraqi law, while KRG PSCs are generally governed by English law.

Examples include:

Example (Federal Services Contracts)

“…under 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.” (1^st Bid Round TSC (2010) Article 24.4)

“… neither Party shall be liable for consequential damages such as loss of profit or loss of production.”  (4^th Bid Round (2013) EDPC, Article 24.4)

The principle of freedom of contract prevails in Iraq, expect for terms that are legally prohibited or prejudicial to public order or morals.

The exclusion of consequential loss could, therefore, be recognised under Iraqi law provided the term is clearly defined in the contract. Precise drafting would be required to avoid ambiguity, particularly regarding whether loss of profit is included in the scope of “consequential loss.” As noted in response to question 1, loss of profits that arise naturally from a breach and are normally foreseeable at the time of contracting are likely to be considered direct (non-consequential) losses - unless the parties agree otherwise.

Although this area is not clearly settled in Iraqi jurisprudence, it is likely that the term “consequential loss” would be interpreted to mean:

1. losses that do not arise naturally in the usual course of events from the breach; or
2. losses that were not normally foreseeable by the parties at the time of contracting.

In contrast, direct losses under Iraqi law include naturally occurring and normally foreseeable losses (at the time of contracting), which could include certain lost profits.

Therefore, in our view, whether lost profit falls within the definition of indirect/consequential loss will depend on:

1. whether the loss arose naturally; and
2. whether it was normally foreseeable at the time of contracting.

If either of these two criteria is not met, then the lost profit would likely be characterised as an indirect or consequential loss.

In practice, a clause excluding only “consequential loss” may be interpreted by Iraqi courts as merely reiterating the Civil Code position on recoverable damages. However, due to the absence of detailed Iraqi case law, this interpretation remains somewhat uncertain.

There is no clear jurisprudence from the Iraqi courts on the interpretation of the words “consequential loss”.

In general, Iraqi courts uphold the principle of freedom of, provided the agreed terms are not contrary to law or public policy.

In interpreting exclusion clauses, Iraqi courts are likely to seek to determine the intent of the parties, placing greater emphasis on the context and purpose of the clause rather than the literal wording alone. Where ambiguity exists, it will be construed against the drafting party, in line with the principle of protecting the “innocent” or non-breaching party. Industry practice may also influence interpretation in certain sectors such as oil and gas.

Where multiple heads of loss are listed in addition to “consequential loss” (for example, in the definition of “Consequential Loss” in the AIEN model form JOA), each will be assessed to determine whether it constitutes direct or indirect loss based on the two-part test described in question 3 (i.e. naturally arising and normally foreseeable).

Losses resulting from illegal acts cannot be contractually excluded and any clause attempting to do so would be considered null and void.

It is unlikely that clauses excluding “consequential loss” would affect non-damages claims. There is no specific Iraqi jurisprudence addressing this issue, however, an exclusion clause related to damages does not generally preclude a party from seeking non-monetary remedies, such as specific performance.

The Civil Code establishes a statutory obligation for the performance of contractual obligations as agreed in a contract, where such performance is possible. If such performance is not possible, the court may impose a monetary penalty to compel performance by the obligor. Damages may also be awarded if performance would cause undue hardship to the obligor.