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

1. Do the words “consequential loss” have a given meaning in law?

No. The words “consequential loss” have no given or recognised meaning in Peruvian law. However, “indirect loss” does have a recognised meaning, as explained below. 
 
The general rule in contractual civil liability is that damages arising “directly and immediately” from the breach of obligations, are claimable. 1 However, it is necessary to differentiate the “foreseeable damages”, which can be envisaged when entering into certain contracts, from the non-foreseeable damages, generated by the aforementioned causality. The “foreseeable damages” apply when the breach is caused by minor negligence, while “non-foreseeable” damages may be awarded when gross (or inexcusable) negligence or wilful misconduct is proven. Therefore, by fundamental causality, in accordance with article 1321 of the Peruvian Civil Code, the only claimable damages are “direct damages”. 

Conversely, “indirect damages” are considered as those that do not arise from the non-compliance of contractual obligations, meaning there is an absence of causality, which makes indirect damages not recoverable.

There are two other ways to consider “indirect damages”: first, by identifying them as “moral damages”; second, as non-contractual damages by rebound. The first case does not have a given meaning under Peruvian Law, as it expressly distinguishes property damages from extra-patrimonial or moral damages. In the second case, in the field of non-contractual civil liability (torts) – as inferred from a combined and interpretative reading of articles 1984 and 1985 of the Peruvian Civil Code – the term “indirect damages” is related to the case of indirect or rebound victims, which were affected by the damage of a legally protected interest due, not having immediate participation in the events (unlike direct victims). However, it should be noted that this is a conceptual classification rather than a legal one, and the rule of contractual relativity renders indirect damages inapplicable to the contractual sphere .

2. Are the words “consequential loss” used in contractual exclusion of liability clauses?

Yes. Peruvian law has been influenced by common law, and hence, many common law expressions and concepts are invoked when structuring and drafting contracts. 

It is common for certain contracts, especially those entered into with major foreign service providers, or referring to the purchase and sale of stock, joint operation agreements (“JOAs”), operation and maintenance, among others, to include an exclusion for “consequential damages”.

Some JOAs entered into between two companies regarding the operation of a certain hydrocarbons block in Peru include a clause by which consequential damages are expressly excluded. For example:

“(e)  The provisions of this Section constitute the exclusive resources or remedies available to the Parties regarding the breach of any declaration, guarantee, agreement and covenant; and of any other obligation or responsibility of the Parties to this Contract, as well as to demand their compliance. In no case will there be liability for Excluded Damages”. 

According to the Definitions Clause Section, “Excluded Damages” means: all consequential, punitive, exemplary, special or indirect damages. 

3. If so, what meaning is attributed to the words “consequential loss” in contractual exclusion clauses?

If the expression “indirect damages” is used, in principle it has an innocuous or no effect as, according to Peruvian law, liability for damages arises from direct and immediate causality due to a certain breach.

“Consequential damages” can be associated with: (a) “indirect damages”, which are not claimable under Peruvian law; or (b) with “remote damages”, which are damages which were not reasonably envisaged when entering into the contract and also are not claimable under Peruvian law. 

If indirect damages are excluded from a contract or included in a limitation of liability clause, as a synonym of “consequential damages” or “remote damages”, that limitation or exclusion would be void if the breach is caused by gross negligence or wilful misconduct. 

4. Where a clause includes other heads of loss alongside consequential loss, how will the law approach such clauses?

Beyond the names that the parties may give to certain concepts through the contract, it is necessary to compare the assigned meanings with the appropriate legal regime.

Civil liability for non-performance of obligations is structured under two major premises: 

  1. Gravity of the negligent act or omission, in the sense that the level of recoverable damages depends on whether the breach is due to minor negligence, gross negligence or wilful misconduct:
    1. In the first case (minor negligence), the defaulting party is only liable for the foreseeable damages which could be anticipated at the moment of entering into the contract, either by the declarations in the agreement itself, by the nature of the contract or in response to what is reasonable under the circumstances. The liability then may be limited and even exonerated;
    2. In the second case (gross negligence or wilful misconduct), there is unlimited liability for all damages, foreseeable or not, representable or not. Any agreement which seeks to exclude liability for gross negligence or wilful misconduct will be null. 
  2. Compensatory damages are estimated on the basis of predictability: in minor negligence, the defaulting party must compensate for the foreseeable damages. However, if there has been gross negligence or wilful misconduct, the defaulting party must legally compensate the injured party for all damages caused, regardless of whether or not they could have been foreseen.

In view of the above, an agreement that limits or exonerates liability will be valid and enforceable if the breach is merely culpable (a minor negligence). If the breach is due to gross negligence or wilful misconduct, any limitation would be contrary to the mandatory rule of unlimited liability, structured on causality as opposed to predictability. 

We must also note that, as only damages arising “directly and immediately” from the breach of obligations are claimable under Peruvian law, damages that constitute a “loss of profit” must comply with fundamental causality in order to be recovered. In that sense, consequential or indirect loss of profits are not recoverable.

Other than the above there are no other rules of interpretation regarding civil contracts.

5. Do consequential loss exclusion clauses have an impact on non-damages claims?

Consequential loss exclusion clauses do not have an impact on non-damages claims under Peruvian law. 

Non-damages claims are based on other considerations and are subject to the discretion of the judge who will consider:

  • likelihood of the invoked right;
  • need for a precautionary measure to delay a process or danger which would have serious impact on the interest of the applicant; and
  • reasonableness of the precautionary measure.

These requirements are stablished by Title IV of the Peruvian Code Civil Procedures, and article 15 of the Peruvian Code of Constitutional Procedures, and have been widely developed both judicially and constitutionally. An example of this may be Resolution No. 00002-2013-PCC / TC, issued by the Constitutional Court.

Portrait of Carlos Hamann
Carlos Hamann
Partner
Lima
Portrait of Marco Antonio Ortega
Marco Antonio Ortega
Counsel
Lima