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

The notion of “consequential loss” is unknown in the Italian legal system. There is, therefore, a degree of uncertainty around its meaning and over the legal consequences of its inclusion in limitation of liability clauses in commercial contracts.

Nonetheless, even though “consequential loss” is not recognised in the Italian Civil Code (“ICC”), its legal boundaries may be found in relation to the ICC’s legal provisions regarding damages for breach of contract.

In general, Article 1218 ICC provides that the party that does not fulfil its contractual obligations (either because it does not perform its obligation or its performance is not as agreed or unreasonably delayed), is liable for damages vis-à-vis the other party, unless it proves that the non-performance or delay was due to the impossibility of performance for a cause not imputable to it.

The ICC lays down the criteria for assessing monetary compensation for breach of contract. The compensation must take into account:

1. not only the “actual damage” borne by the party (danno emergente) but also the “loss of profit” (lucro cessante), insofar as they are a “direct and immediate consequence of the non-performance” or delay (Article 1223 ICC).
2. only the damages which were “foreseeable” when the relevant contract was executed, to the extent that the breaches are not due to wilful misconduct of the breaching-party (Article 1225 ICC).

The “direct and immediate” requirement laid down by Article 1223 ICC does also apply to determine the monetary compensation arising from tort liability.

Moving from the above distinction between “danno emergente” and “lucro cessante”, the Italian Supreme Court (Corte di Cassazione) has adopted an extensive interpretation of the above-mentioned “direct and immediate” requirement. 1 See, among others, Italian Supreme Court, no. 11609/2005. Specifically, with reference to damages arising from contractual and tort liability, the Supreme Court ruled that “compensable damage” includes both:

1. “direct damages”, meaning all those damages that are direct consequence from the unlawful event 
2. “indirect damages” meaning all those damages that are NOT direct consequences of the unlawful conduct, provided that they occur as a “normal effect” of said unlawful conduct according to the so-called “theory of causal regularity”. 2 See, among others, Italian Supreme Court, no. 12564/2018; Italian Supreme Court, no. 23719/2016; Italian Supreme Court, no. 15274/2006; Italian Supreme Court, no. 6474/2012; Italian Supreme Court, no. 4852/1999. See also Court of Treviso, 20/01/2009, whereby In other words, indirect damages can be compensated only if, according to the appreciation of the man of ordinary diligence, they are likely to occur as a consequence of the unlawful conduct.

Moreover, whilst the Supreme Court has acknowledged the compensability of the general category of indirect damages as long as they fall within the theory of causal regularity, the notion of “consequential loss” is very rare in Italian case-law and it usually refers to indirect damages in insurance claims. Therefore, most likely Italian courts will construe the term “consequential loss” as an “indirect damage/loss”.

Yes, agreements in the energy industry (as well as in other industries) often include exclusion of liability clauses that seek to exclude, among others, any liability related to loss of profit and/or indirect or consequential damages/loss.

Examples include:

Example 1 (Energy sector)

"Seller and Seller Affiliates shall not be liable to Buyer in any circumstances for any loss of profits, loss of contracts, loss of use, loss of data or consequential or indirect loss nor […] for any loss or damage of any kind whatsoever, howsoever arising, claimed against or suffered by Buyer."

Example 2 (Energy sector)

"Neither Party shall be liable to the other whether by way of indemnity or in contract or in tort (including negligence), for any loss of revenue, profit, anticipated profit, use, production, product, productivity, facility downtime, contract, business opportunity or indirect or consequential damages of any nature (excluding any Liquidated Damages) and each Party shall release, protect, defend, indemnify and hold the other Party harmless from and against such claims, demands and causes of action, irrespective of the cause."

Example 4 (Energy sector)

"Neither Party shall be liable to the other, whether in contract, tort, strict liability or otherwise, for loss of production, loss of use, loss of goodwill or reputation, loss of savings or profit, loss of revenue, loss of contract, or for any indirect loss or damage suffered by the other Party. For the avoidance of doubt, the foregoing is without prejudice to the Seller’s liability to pay pre-agreed liquidated damages and the foregoing exclusion of liability shall not apply to and shall therefore not serve as an exclusion or limitation of liability (i) in relation to any indemnity obligations of the Seller or (ii) in the event of gross negligence or wilful misconduct."

Example 5 (Energy sector)

"The Contractor shall not be liable in any respect to Enel for any indirect or consequential damages and in particular for damages resulting from the failure and/or delayed and/or defective production (including damages resulting from contracts between Enel and third parties) and for Enel's loss of profits."

Example 6 (Energy sector)

"In no event shall either Party be liable to other Party for any of special consequential or liquidated damages, whether such damages arise out or are a result of breach of this Agreement, tort (including negligence), strict liability or otherwise."

Example 7 (Industrial sector)

"In any event, the Supplier will not be liable vis-à-vis the Buyer for any indirect or consequential losses, loss of profit, costs or damages (whether or not foreseeable), such as, but not limited to, loss of contracts and business opportunities."

Example 8 (Industrial sector)

"Except for death or personal injury caused by it and its Affiliates and for its and its Affiliates’ willful misconduct or gross negligence, neither party nor its Affiliates will ever be liable for (a) damages for loss or corruption of data or Cyber Attacks, (b) loss of anticipated profits, production, use and contracts and costs incurred including without limitation for capital, fuel, power and replacement product, or (c) incidental, consequential, indirect or punitive damages."

Example 9 (Energy sector)

"The Purchaser shall not be liable to the Supplier for damages such as loss of profit, loss of profits, loss of products, loss of contracts suffered by the other party for any reason, consequential damages and indirect damages."

If no express definition is provided, Italian courts are most likely to construe the term “consequential loss” as an “indirect damage/loss”.

The general understanding is that:

1. indirect damages/losses are those that are indirectly caused by the conduct of the party responsible for the damage (as explained in 1 above).
2. indirect damages/losses are recoverable as long as they fall within the theory of causal regularity – i.e. they qualify as a normal/probable consequence of the unlawful conduct (see par. 1 above).
3. clauses excluding indirect damages/losses are valid only in relation to damages caused by negligence (colpa lieve), while, according to Article 1229 ICC, any limitation of liability for damage caused by wilful misconduct (dolo) or gross negligence (colpa grave) is null and void and, therefore, unenforceable by Italian courts. In addition, the exclusion of indirect/consequential damages is not effective in case of death or personal injury.

The approach of Italian Courts vis-à-vis any contractual exclusions of heads of loss is based on the following reasoning:

1. as described in 1 above, both direct and indirect damages that are consequences of the breach, on the basis of a judgment of probable verification, can be compensated.
2. the parties might agree on a limitation of liability clause excluding the compensation of certain categories of losses.
3. limitations of liability clauses are, nonetheless, effective and enforceable in case of death or personal injuries and/or if they exclude the party’s liability for damages caused by wilful misconduct or gross negligence.
4. as a general principle, limitations of liability clauses may never be construed in a way to endanger fundamental rights or public order provisions. In this regard, there has been controversy regarding so-called ‘punitive damages’, which are typical in the US contract law system and are awarded in addition to actual damages, in certain circumstances, when the party’s behaviour is found to be especially harmful. Indeed, the Italian Supreme Court recently overturned settled case-law that was against punitive damages, stating that – even though they cannot be awarded in the first place by an Italian Court – under certain conditions a judgment issued by foreign Courts granting the payment of punitive damages may be enforceable in Italy. 3 See Italian Supreme Court, no. 16601/2017, where the Court stated that the Italian legal framework already provides for remedies that have a punishing function (such as Article 96(3) ICC) and that punitive damages may not harm Italian public order as long as: (i) the foreign legal provisions applied by the court entrust the latter with the power to award punitive damages based only on typical and predictable circumstances; (ii) the amount due is not attributed to the complete discretion of the court; and (iii) the ruling itself sets general requirements of legality, typicality, and predictability.

If the limitation of liability clause complies with the above requirements and limitations, the courts are likely to enforce it.

The provision of limitation of liability clauses may be relevant in relation to the option of asking a court for a preservation seizure order (sequestro conservativo), which has the effect of freezing the defendant’s assets up until a decision on the merits has been reached by the court.

The claimant seeking a preservation seizure order needs to prove that (i) a title for the monetary claim vis-à-vis the defendant exists (fumus boni iuris), and that (ii) there is a concern that the claimant will be unable to or will have substantial difficulties in the enforcement of its claim – at a later stage – if such order is not made (periculum in mora).

If there is no entitlement to damages due to a limitation on liability, it may not be appropriate to preserve assets to cover that non-existent liability. As such, a clause excluding the liability of the party for indirect/consequential damages could, in fact, have the effect of preventing a party from obtaining such a measure in relation to consequential/indirect damages because of the lack of title for claiming a monetary compensation for this head of loss.