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

No. Under Mexican law, the term “consequential loss” has no meaning.

The Mexican Federal Civil Code (“the code”) outlines the legal position regarding damages. Article 2110 of the Code foresees awarding of both direct (daños) and incidental (perjuicios) damages for breach of contract.

The Mexican Supreme Court has stated that whilst the law does differentiate between the words “daños” and “perjuicios”, they both refer to a loss of profit for the affected party. The difference lies in their scope:

• Direct loss (daños) refers to the detriment, damage, loss or impairment on a thing or person infringed by a guilty party, either through wilful intent / deceit (dolo), gross negligence (culpa) or unforeseen circumstances (caso fortuito).
• Incidental loss (perjuicio) refers to loss of profit as a direct consequence of the breach or noncompliance with contractual obligations.

Damages claims are awarded by a judge and the aggrieved or injured party must prove: (i) the quantum of damages being sought for direct/incidental loss, and (ii) the direct causal link between the loss and the damage caused by the breach of contract.

Given that the Code and Mexican legislation is silent on “consequential loss” as a concept, there is no express prohibition against including such clauses in contracts. However, as clauses giving rise to damages for consequential/indirect loss may result in damages against a party that are not a direct and the immediate result of a breach, as stipulated by the Code, enforcement by Mexican courts is unlikely.

The term “consequential loss” is rarely used in contractual exclusion of liability clauses because, if included, the relevant provision may be deemed null and void by Mexican courts. The Code and Mexican jurisprudence establish that damages must be a direct and immediate consequence of the breach; any other type of clause regarding indirect loss is unlikely to be enforced by judges and therefore serves little purpose in contractual arrangements.

More commonly, “damages” is widely used either to explicitly state that damages will apply, or to exclude damages as judicial recourse for a breach of contract. 

It is common practice in Mexico to explicitly include in contractual agreements that damages will be awarded to an innocent party for any breach of contract. In some instances, the contract will provide for specific heads of loss that will give rise to damages. Therefore, the principle of “consequential loss” (or “special loss”) is not used in standard form contractual agreements. 

It is possible for parties to add an exclusion clause stipulating that there will be no damages awarded for the breach of contract. Contracts can also stipulate that certain specific damages will not be awarded in the event of breach of contract. 

In the energy sector, there are various template contracts (in force as of January 2019) issued by regulatory bodies which include general provisions on damages and provide for exclusion of damages.

Oil & Gas Industry

Example 1 – Production Sharing Contract with the National Hydrocarbons Commission

"1)    Failure to comply with their obligations under this Contract, in the event that in such cases there is a contractual penalty , the amount of damages and/or losses shall be limited to the amount of the contractual penalty concerned."

Example 2 – Licence Agreement with the National Hydrocarbons Commission

"1)    …the Contractor shall pay to the Nation, through the Fund, the corresponding contractual penalties or, if applicable, the losses and damages that the Nation incurs as a DIRECT OR PROXIMATE result of the noncompliance…"

Example 3 – LNG Purchase Contract with PEMEX

"The damages caused by either party to the other or to third parties as a result of negligence, wilful deceit or bad faith will be the responsibility of the party at fault… Under no circumstances shall the parties be liable for indirect damages of any nature, punitive damages or consequential damages that are not proximate/immediate."

Power Industry

Example – Electricity Transmission Management Contract

“Unless otherwise expressly stated elsewhere in this Contract, the Parties shall only be liable for Direct Damages, so that any other damage shall be, if applicable, the responsibility of the party which caused the damage.”

If no definition of “consequential loss” is provided, the courts will follow the rules of interpretation of the Mexican Commercial Code and the Code. If the relevant clause is drafted to explicitly include consequential loss as a head of damages, the courts are likely to: (1) interpret this as an incidental damage clause awarding only damages that arise as a direct and immediate consequence of the breach; or (2) consider the clause null and void because such consequential damages are not foreseen under Mexican law.

Article 78 of the Mexican Commercial Code and Article 1851 of the Code (of secondary application in this context) stipulate that:

1. in the first instance, contracts will be interpreted literally (strict interpretation) according to the ordinary meaning of the words or as defined by the dictionary.
2. if such interpretation fails or is unclear, a subjective interpretation applies by which the focus is on the subjective intention of the parties in executing the relevant contract.  

Article 1840 of the Code states that parties to a contract may stipulate a fixed penalty for certain breaches of contract (pena convencional). If the parties include such a stipulation, a party claiming for damages may only do so based on the agreed fixed penalties, as it is understood that the damages were already contemplated in the provisions  covering default penalties. The damages are pre-quantified to avoid costly and complex damages calculations at trial.

Fixed penalties can be claimed and awarded without having to prove any actual damages. A breach of contract that corresponds to an agreed fixed penalty is enough for the affected party to make a claim (Article 1842 of the Code).

It is important to note that there is a legal ceiling for fixed penalty clauses. According to Article 1843 of the Code, a fixed penalty cannot be higher either in value or quantity than the value or quantity of the contract’s principal subject matter or consideration.

If consequential loss is included along other heads of loss (i.e. a pena convencional or direct/incidental loss), the courts would deem the consequential loss clause null and void, because either: (i) a fixed contractual penalty was established, therefore making incidental loss unclaimable; or (ii) the Code explicitly states that the parties will be liable for incidental loss, thus making any other head of loss claim invalid.

Consequential loss exclusion (or inclusion) has no impact on non-damages claims under Mexican law.

Non-damages claims, such as injunctions and specific performance, are awarded in limited circumstances in commercial disputes. Even if such a judgment was awarded, it would not preclude a party from claiming one of the available heads of damages.

Article 1949 of the Code states that the affected party of a breach may choose between demanding the fulfilment of the contractual obligation or terminating the contract, along with any direct and immediate damages the breach may have caused the affected party. Furthermore, the affected party may opt for court-ordered termination if demanding fulfilment proves to be an ineffective remedy.