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

The words “consequential loss” are found in Omani law, but they are not given a clear definition. 

The legal position regarding harmful acts is addressed in the Omani Civil Code (as promulgated by Royal Decree 29/2013) (the Code). 

According to Article 176 of the Code, 1 Article 176 of the Code states the following: “1. A party causing loss to another party shall compensate the other party for its loss, even if the party causing loss is lacking discretion. 2. If the loss is direct, it shall be compensated even in the absence of recklessness, and if the loss is consequential then compensation shall be subject to the presence of reckless conduct.”  a party causing loss or damage to another has the obligation to compensate the other party for its loss, even if the party causing loss or damage is “lacking discretion” (i.e. not a reasonable person). If the loss is direct then compensation is required, even in the absence of reckless conduct. However, if the loss is consequential, then compensation shall be subject to the presence of reckless conduct. Hence, parties can recover for consequential loss, as long as the conduct which caused the loss is reckless and can be linked to the loss or damage.   

Although the Code differentiates between direct and consequential loss, there is some uncertainty and disagreement around the meaning of “consequential”, as it is not defined in the Code itself. 

Yes. Exclusions for “consequential loss” are widely used in many sectors in Oman, including the power, energy and other sectors.

Oil and gas

The concession granting instrument for upstream activities in Oman is an exploration and production sharing agreement (EPSA). Although EPSAs are not standardised, usually they include a gas sales agreement in agreed form (appended to the EPSA), which defines “Consequential Loss” and includes exclusion of liability clauses that seek to exclude loss for “Consequential Loss”. The definition of consequential loss is agreed amongst the parties and usually one of the losses listed in such definition is “consequential loss” (undefined). For example:

"10.2   Notwithstanding any other provision of the GSA [Gas Sale Agreement], neither Party (“Initial Party”) shall be liable to the other for any Consequential Loss suffered howsoever caused and even where the same is caused by Wilful Misconduct or Gross Negligence, negligence or breach of duty (statutory or otherwise) on the part of the Initial Party.

‘Consequential Loss’ shall mean any special indirect or consequential loss or damage and any loss of income or profits or business opportunity."

Power

Usually in Omani power and water purchase agreements, the term ”Direct Loss” is defined and “Consequential Loss” is defined as any loss that does not constitute a direct loss.

Example 1

“Consequential Loss means any loss or damages suffered or incurred by a party which does not constitute Direct Loss.

Direct Loss means:

• for the Generator:
  • any loss of Electrical Energy Charges and/or Deemed Electrical Energy Charges properly due to it pursuant to the terms of this Agreement; and/or
  • any loss or damage sustained or incurred by it as a direct result of damage to property or personal injury; and
• for the Buyer:
  • any excess Electrical Energy Charges and/or Deemed Electrical Energy Charges paid by it to the Generator hereunder; and/or
  • any loss or damage sustained or incurred by it as a direct result of damage to property or personal injury.

30 Liability

Save to the extent specifically provided otherwise in this Agreement, neither party shall be liable to the other party for any Consequential Loss suffered by such other party as a result of the first party’s breach of this Agreement, save to the extent that such Consequential Loss was suffered or caused by the Wilful Default of such first party.

Each party shall indemnify the other party (and its Affiliates and Contractors and its and their respective directors, officers, employees and agents) from and against any and all Direct Loss suffered by the other party which is a direct result of the first party’s failure to perform or breach of this Agreement.”

Example 2:

“Direct Loss means:

•  for the Project Company:
  • any loss of Water Output Charges and/or Capacity Charges properly due to it pursuant to the terms of this Agreement; and/or
  • any loss or damage sustained or incurred by it as a direct result of damage to property or personal injury; and
• for the Buyer:
  • any excess Capacity Charges and/or Water Output Charges paid by it to the Project Company hereunder; and/or
  • any loss or damage sustained or incurred by it as a direct result of damage to property or personal injury.

29 Liability

29.1 Save to the extent specifically provided otherwise in this Agreement, neither party shall be liable to the other party for any Consequential Loss suffered by such other party as a result of the first party’s breach of this Agreement, save to the extent that such Consequential Loss was suffered or caused by the Wilful Default of such first party.”

Although the Code refers to consequential loss, there is no clear meaning attributed to the words when used in a contractual context and left undefined. Therefore, when using terms such as “consequential loss” or “indirect damages” they should be clearly defined in the contract.

The general understanding is that consequential losses are those that are not directly caused by the conduct of the party responsible for the damage but that are caused by a secondary circumstance (i.e. indirectly caused). In other words, it is an issue of causation. Usually damage or loss that does not fall within the defined scope of a “Direct Loss”, will be construed as ‘consequential loss’.

Given that the Code is relatively new (from 2013), there have been no claims for consequential loss under Article 176 to date. However, in the event that no contractual definition or exclusion is provided, the court is likely to require a nexus between the conduct and the loss/damage in question, in accordance with Article 176 of the Code.

There is no jurisprudence from the Omani courts that assists with the interpretation of consequential loss clauses, as no such claims have been made to date. However, Omani courts are generally given judicial discretion to construe each clause on its own merits, so the approach to such a clause could potentially differ from case to case.

Article 155 of the Code states the following:

"The contract must be executed in accordance with its content and not restricted to the obligation of the contracting party as specified therein, but it may also involve whatever is deemed of its requisites according to the law, the custom and justice, and pursuant to the nature of the disposition."

On this basis, Omani courts are likely to place emphasis on the binding nature of the contract, when interpreting the relevant clause.

There is no jurisprudence that suggests that the existence of a consequential loss clause or a limitation of liability clause could have an impact on non-damages claims. Although it is possible, Omani Courts are usually reluctant to award an injunction to prevent a breach from occurring, including in relation to contracts containing limitation clauses (such as a ‘consequential loss’ clause).