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

The words “consequential loss” do not appear in the Japanese Civil Code (“Code”) or any other statutes. Therefore, these words do not have a specific given meaning under Japanese statutory law.

The relevant provision in the draft bill of the Code was initially drafted to incorporate the concept of “direct loss” and “consequential loss,” which originated in the English case of Hadley v. Baxendale (1854) 9 Exch. 341. Even at that point, the draft bill used the terms “ordinary loss” and “special loss.” During the legislative process, the draft bill relating to “special loss” was amended. Consequently, the Code provides as follows:

Article 416: (1) The purpose of the demand for the damages for failure to perform an obligation shall be to demand the compensation for damages which would ordinarily arise from such failure. (2) The obligee may also demand the compensation for damages which arise from any special circumstances if the party should have foreseen such circumstances.

Furthermore, after the enactment of the Code, the interpretation of that Article by jurists was strongly influenced by German law. In particular, Japanese jurisprudence was swayed by the concept of requiring reasonable causation between a breach of contractual obligations and the alleged damages. 

Therefore, one should be careful not to equate “special loss” with “consequential loss” without careful consideration. 

Under Japanese law, it is possible for parties to agree to exclude the parties’ liability for “consequential loss” and/or “special loss” via a contractual exclusion of liability clause. However, the specific terms “consequential loss” and “special loss” are not often utilised in various standard forms of contract used in the domestic energy sector. 

For example, the General Conditions for Construction Contracts, published by the Private Sector Standard Contract Form Committee, is widely used for domestic private sector projects. The General Conditions do not have a limitation or exclusion of liability clause, and therefore neither the words “consequential loss” nor “special loss” appear in this standard form of contract. 

On the other hand, the ENAA General Conditions for Domestic Plant Construction Work, published by the Engineering Advancement Association, is sometimes used for domestic plant construction projects. Whilst the ENAA General Conditions do not use the words “consequential loss” or “special loss”, there is an exclusion clause which excludes the parties’ liability for lost profits, business losses, losses for non-performance of the plant, losses of materials, indirect losses, and other similar losses. 

With regard to international energy projects, Japanese contractors tend to use (or incorporate clauses from) an international standard form contract such as the FIDIC forms of contract. In these contracts, the words “consequential loss” generally appear in the exclusion of liability clauses.

When interpreting a contract, Japanese courts seek to ascertain the real and actual intentions of parties to the contract. The courts are likely to construe the wording of the relevant provision in a rational way, taking into consideration relevant issues such as the plain meaning of the language of the provision, consistency with other provisions as a whole, and the context surrounding the creation of the contract. 

In light of this traditional approach taken by the courts, as well as the parallels between “special loss” versus “ordinary loss” in the Code and“consequential loss” versus “direct loss” in the original English case, it is likely that the words “consequential loss” in an exclusion clause will be construed in most cases as having the same meaning as “special loss” under the Code, unless there are special circumstances to support an alternative interpretation. 

In addition, it is worth noting that according to the case law, “special loss” can be compensated where the breaching party had knowledge of, or was reasonably able to foresee, circumstances that could cause such “special loss” as at the time of the breach of contractual obligation. 

However, the delineation of “ordinary loss” from “special loss” is highly dependent on the specific facts of each case. For example, an issue that has arisen previously in relation to “special loss” is where the price for the subject of the contract increases sharply for extraordinary reasons. In certain circumstances, the courts have categorised the loss that would ordinarily have arisen as a result of a breach (absent the extraordinary event) as “ordinary loss” and the additional loss attributable to the extraordinary event as “special loss”. 

Ultimately, the courts will look to the nature of the relationship of the contracting parties and the context around the creation of the contract, rather than on any strict rules or formulae. 

In light of these complexities, it is prudent for parties to clarify what kinds of losses will be classified as “special loss” or “consequential loss” in an exclusion clause, as the ENAA General Conditions enumerate several categories of losses that can be covered by an exclusion clause.

Whilst Japanese courts normally respect the wording of the relevant provision, as discussed in the response to question 3 above, when the courts find that the language of the relevant clause is ambiguous, contradictory, or unreasonable, they become more liberal in construing the clause apart from its language to find the actual and reasonable intention of the parties. In such cases, the courts are likely to attach additional meaning to the original language of the clause and/or to omit parts of the clause to make the clause work more reasonably and consistently as a whole.

Therefore, it is difficult to generalise about the courts’ attitude in deciding the meaning of other heads of loss stipulated alongside “consequential loss” in an exclusion clause. However, when it comes to commercial contracts entered into between parties having sufficient knowledge and experience in commercial activities, the courts are likely to put more weight on (among other issues) the exact wording of the relevant clause, as well as consistency with other clauses in the contract as a whole.

For instance, if other heads of loss are enumerated in a contract, but it is unclear what the parties intended for that enumeration to achieve, depending on the construction of the contract in question, a court might find that the other heads of loss are merely enumerated examples or sub-categories of loss to be included in “consequential loss.” In that case, the court will probably not expand the scope of the exclusion clause. On the other hand, if the language of the relevant clause clearly shows that the parties intended for other heads of loss to be added to the scope of exclusion of liability in addition to “consequential loss,” it is possible that the court will construe these other heads of loss as being covered in addition to “consequential loss” by the exclusion clause, thereby expanding the scope of the exclusion.

Under Japanese law, the courts may issue provisional injunction orders to preserve the status quo. The requirements for this type of order are to demonstrate a prima facie case, showing (1) the existence of a legitimate right and/or interest to be preserved and (2) the necessity for the issuance of the court’s order to protect that right. For the second requirement, the claimant must demonstrate prima facie that material damage will be caused if a provisional injunction order is not given. 

If the contract in question contains a consequential loss exclusion clause, it is likely that the party seeking the injunction will be prevented from using the “consequential loss” (which is attributed the meaning of “special loss” in most cases) to demonstrate that material damage would arise if the provisional injunction order is not issued.