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

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

No, the words “consequential loss” have no given meaning in Ukrainian legislation.

Under Article 22 of the Ukrainian Civil Code and Article 225 of the Ukrainian Commercial Code the damages recoverable at law include:

  • “actual damages” (realni zbytky) – losses suffered due to destruction or damaging of property, as well as expenditures made to restore infringed rights.
  • “lost income” (upusschena vygoda) – income that would have been obtained under usual circumstances if the person’s right was not infringed.

To recover damages from the defaulting party the plaintiff needs to demonstrate that: (i) there has been a wrongdoing (e.g. breach of contract); (ii) the wrongdoing has led to the plaintiff suffering damages; (iii) there is a direct causal link between the wrongdoing and the damages; and (iv) the wrongdoing was the fault of the defaulting party. 1 Resolution of Supreme Court dated 21 May 2018 in case No 922/2310/17; Resolution of Supreme Court dated 27 March 2018 in case No 925/258/17.  There is a rebuttable presumption that the defaulting party is at fault, which means that the onus is on the defendant to show that he was not at fault for causing the damage.

There is no standalone concept of “consequential loss” in Ukrainian legislation. Some legal scholars sometimes refer to the concept of “indirect loss”. In this context “indirect loss” is understood as loss which is related to the wrongdoing in an indirect and secondary way. In other words, “indirect loss” is the loss that lacks a direct causal link with the wrongdoing. However, “indirect loss” remains a purely theoretical concept, since the legislation does not recognise it as a standalone category of damages.

Generally, “indirect loss” is unlikely to be recovered at law. The longstanding approach of Ukrainian courts is that the plaintiff can recover damages from the defaulting party only if the damages are directly caused by the contractual breach. Lack of a direct causal link between the damages and the contractual breach precludes recovery.

The recovery of “indirect loss” based on a breach of contract (i.e. where the contract expressly provides that it is recoverable) is largely an unexplored area in Ukrainian law. There is no court practice rebutting or confirming the possibility of its recovery.

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

Yes, as a matter of practice, contracts governed by Ukrainian law in energy, EPC and other industries sometimes incorporate clauses excluding liability for “consequential loss” or “indirect loss”. Lost income is sometimes excluded as well. Examples of contractual terms include:

Example 1

in no event shall any Party be liable for any […] consequential or indirect loss, cost, expense or damage.

Example 2

[…] the liability of each Party to the other Party under or in connection with this Contract shall exclude liability for loss of profit, goodwill, business opportunity or anticipated saving and for indirect or consequential Damages.

Example 3 2 These are examples of contracts upon which CMS Ukraine has advised.

Under no circumstances Party 1 shall be held liable for and shall be required to reimburse the indirect losses (including without the limitation lost profit and any consequential losses) as may be incurred by Party 2.

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

Ukrainian law contains no definition of the term “consequential loss” and there is no cogent court practice providing guidance on how its meaning should be interpreted.

In principle, freedom of contract means that the parties may attribute any agreed meaning to “consequential loss” by clearly defining the term in the contract.

However, there is no cogent court practice regarding the interpretation or enforcement of contractual clauses dealing with “consequential loss”, including clauses by which “consequential loss” is excluded from the scope of recoverable damages.

In theory, in a situation where the contract expressly excludes liability for “consequential loss”, a Ukrainian court would likely refuse recovery of such loss. To substantiate such a refusal, however, the court would most likely rely on the absence of a direct causal link between the breach and the loss (which we understand is the case with “consequential loss”) rather than on the exclusion of such a loss from the scope of recoverable damages under the contract.

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

The legislation does not provide for any special treatment of contractual clauses listing other heads of loss alongside “consequential loss”, including exclusion clauses.

Generally, under the principle of freedom of contract the parties can limit liability under the contract, by carving out certain categories of damages from the scope of recoverable damages, although there is no well-established court practice regarding the enforceability of such exclusion clauses under Ukrainian law.

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

There are no laws or court practice specifically suggesting that the exclusion of “consequential loss” in a contract would contribute to the Ukrainian court’s willingness to award any of the remedies typically available for non-damages claims.

In Ukrainian law there are several remedies that are broadly analogous to injunctions in the form that they are available in English law, such as:

  • cessation of contractual breach.
  • temporary injunctive relief from the court prohibiting the defendant from engaging in certain actions in breach of contract, pending the resolution of the dispute.
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Vitaliy Radchenko
Partner
Kyiv (CMS CMNO)
Portrait of Olga Shenk
Olga Shenk
Counsel
Kyiv (CMS CMNO)
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Maria Orlyk
Managing Partner Kyiv
Kyiv (CMS RRH)